Basic Elements elements of Control of control Copyright

Learning Objectives After studying this chapter, you should be able to: – Explain the purpose of control, identify different types of control, and describe the steps in the control process. – Identify and explain the three forms of operations control. – Describe budgets and other tools of financial control. – Identify and distinguish between two opposing forms of structural control. – Discuss the relationship between strategy and control, including international control. – Identify characteristics of effective control, why people resist control, and how managers can overcome this resistance. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 2

Chapter Outline • The Nature of Control in Organizations – The Purpose of Control – Types of Control – Steps in Control • Operations Control – Preliminary Control – Screening Control – Postaction Control • Financial Control – Budgetary Control – Other Tools of Financial Control Copyright © by Houghton Mifflin Company. All rights reserved. • Structural Control – Bureaucratic Control – Clan Control • Strategic Control – Integrating Strategy and Control – International Strategic Control • Managing Control in Organizations – Characteristics of Effective Control – Resistance to Control – Overcoming Resistance to Control 20– 3

The Nature of Control in Organizations • Control – The regulation of organizational activities in such a way as to facilitate goal attainment. – The regulation of organizational activities so that some targeted element of performance remains within acceptable limits. – Provides organizations with indications of how well they are performing in relation to their goals. – Control provides a mechanism for adjusting performance to keep organizations moving in the right direction. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 4

The Nature of Control in Organizations (cont’d) • The Purpose of Control – Control is one of the four basic management functions in organizations. The control function, in turn, has four basic purposes. Properly designed control systems can fulfill each of these purposes. Adapt to environmental change Limit the accumulation of error Control helps the organization Cope with organizational complexity Copyright © by Houghton Mifflin Company. All rights reserved. Minimize costs Figure 20. 1 20– 5

The Nature of Control in Organizations (cont’d) • Types of Controls • 1. Areas of control • 2. Levels of control • 3. Responsibilities for control – Areas of Control • Physical resources—inventory management, quality control, and equipment control. • Human resources—selection and placement, training and development, performance appraisal, and compensation. • Information resources—sales and marketing forecasts, environmental analysis, public relations, production scheduling, and economic forecasting. • Financial resources—managing capital funds and cash flow, collection and payment of debts. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 6

The Nature of Control in Organizations (cont’d) • Types of Controls (cont’d) – Levels of Control Strategic control Structural control Operations control Financial control Figure 20. 2 Copyright © by Houghton Mifflin Company. All rights reserved. 20– 7

1. Operation control focuses on the processes the organization uses to transform resources into products or services. 2. Financial control concerned with the organizations financial resources. 3. Structural control concerned with how the elements of the organization’s structure are serving their intended purpose. 4. Strategic control focuses on how effectively the organization’s strategies are succeeding in helping the organization meet its goals. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 8

The Nature of Control in Organizations (cont’d) • Types of Controls (cont’d) – Responsibilities for Control • Controller—a position in organizations that helps line managers with their control activities. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 9

The Nature of Control in Organizations (cont’d) • Steps in the Control Process 1 Establish standards 2 Measure performance 3 Compare performance against standards Maintain the status quo Correct the deviation Determine need for corrective action 4 Change standards Figure 20. 3 Copyright © by Houghton Mifflin Company. All rights reserved. 20– 10

The Nature of Control in Organizations (cont’d) • Steps in the Control Process (cont’d) – Establish Standards • Control standard—a target against which subsequent performance will be compared. – Control standards should be expressed in measurable terms. – Control standards should be consistent with organizational goals. – Control standards should be identifiable indicators of performance. – Measure Performance • Performance measurement is a constant, ongoing process. • Performance measures must be valid indicators (e. g. , sales, costs, units produced) of performance. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 11

The Nature of Control in Organizations (cont’d) • Steps in the Control Process (cont’d) – Compare Performance Against Standards • Define what is a permissible deviation from the performance standard. • Utilize the appropriate timetable for measurement. – Determine the Need for Corrective Action • Maintain the status quo (do nothing). • Correct the deviation to bring operations into compliance with the standard. • Change the standard if it was set too high or too low. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 12

The Nature of Control in Organizations (cont’d) • Operations Control Feedback Inputs Transformation Outputs Preliminary control Screening control Postaction control Focus is on inputs Focus is on how Focus is on outputs to the organizational inputs are being from the organiza- system transformed into tional system outputs Figure 20. 4 Copyright © by Houghton Mifflin Company. All rights reserved. 20– 13

• Operations control focuses on the processes the organization uses to transform resources into products or services. – Preliminary control attempts to monitor the quality or quantity of financial, physical, human and information resources before they actually become part of the system. – Screening control relies heavily on feedback processes during the transformation process. – Post action control monitors the outputs or results of the organization after the transformation process is complete. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 14

Financial Control • Financial Control – Control of financial resources (i. e. , revenues, shareholder investment) as they flow into the organization, are held by the organization (i. e. , working capital, retained earnings), and flow out of the organization (i. e. , payment of expenses). Copyright © by Houghton Mifflin Company. All rights reserved. 20– 15

Financial Control (cont’d) • Financial Control – Budgetary Control • Budgets may be established at any organizational level. • Budgets are typically for one year or less. • Budgets may be expressed in financial terms, units of output, or other quantifiable factors. • Budgets serve four purposes: – Help managers coordinate resources and projects. – Help define the established standards for control. – Provide guidelines about the organization’s resources and expectations. – Enable the organization to evaluate the performance of managers and organizational units. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 16

Financial Control (cont’d) • Types of Budgets Table 20. 1 a Copyright © by

Financial Control (cont’d) • Types of Budgets (cont’d) Table 20. 1 b Copyright ©

Financial Control (cont’d) • Types of Budgets (cont’d) Table 20. 1 c Copyright ©

Operating unit budget requests Division budget requests Organizational budget • Prepared by budget committee • Approved by budget committee, controller, and CEO Financial Control (cont’d) • Developing Budgets in Organizations Figure 20. 5 Copyright © by Houghton Mifflin Company. All rights reserved. 20– 20

Financial Control (cont’d) Strengths and Weaknesses of Budgeting Strengths – Budgets facilitate effective operational controls. – Budgets facilitate coordination and communication between departments. – Budgets establish records of organizational performance, which can enhance planning. Copyright © by Houghton Mifflin Company. All rights reserved. Weaknesses – Budgets can hamper operations if applied too rigidly. – Budgets can be time consuming to develop. – Budgets can limit innovation and change. 20– 21

Other Tools of Financial Control • Financial Statements – Financial statement is a profile of some aspect of an organization’s financial circumstances. – Balance sheet • A listing of assets (current and fixed), liabilities (short- and longterm), and stockholders’ equity at a specific point in time (typically, year-ending) that summarizes the financial condition of the organization. – Income statement • Summary of financial performance—revenues less expenses as net income (i. e. , profit or loss)—over a period of time, usually one year. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 22

Other Tools of Financial Control (cont’d) • Ratio Analysis – The calculation of of one or more financial ratios to assess some aspect of the organization’s financial health. • Financial Audits – Audit—an independent appraisal of an organization’s accounting, financial, and operational systems. • External audits—financial appraisals conducted by experts who are not employees of the organization to verify to external parties that the organization’s financial and accounting procedures are legal and proper. • Internal audits—appraisals conducted by employees of the organization to determine the accuracy, efficiency, and appropriateness of financial and accounting procedures. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 23

Structural Control • Bureaucratic Control – A form of organizational control characterized by formal and mechanistic structural arrangements. • Clan (Family) Control – An approach to organizational control characterized by informal and organic structural arrangements. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 24

Structural Control (cont’d) • Organizational Control Bureaucratic Control Employee compliance Dimension Goal of control approach Strict rules, formal controls, rigid hierarchy Degree of formality Directed toward minimum levels of acceptable performance Performance expectations Tall structure, top-down influence Directed at individual performance Organization design Reward system Limited and formal Participation Clan Control Employee commitment Group norms, culture, self-control Directed toward enhanced performance above and beyond the minimum Flat structure, shared influence Directed at group performance Extended and informal Figure 20. 6 Copyright © by Houghton Mifflin Company. All rights reserved. 20– 25

Strategic Control • Integrating Strategy and Control – Strategic control • Control aimed at ensuring that the organization is maintaining an effective alignment with its environment and moving toward achieving its strategic plan. • Focuses on structure, leadership, technology, human resources, and informational and operational systems. • Focuses on the extent to which implemented strategy achieves the organization’s goals. – International Strategic Control • Focuses on whether to manage the global organization from a centralized or decentralized perspective. – Centralization creates more control and coordination, whereas decentralization fosters adaptability and innovation. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 26

Managing Control in Organizations • Characteristics of Effective Control – Integration with Planning • The more explicitly (clearly) and precisely control is linked to planning, the more effective the control system. – Flexibility • The control system must be flexible enough to accommodate change. – Accuracy • Inaccurate information results in bad decision making and inappropriate managerial actions. – Timeliness • A control system should provide information as often as necessary. – Objectivity • A control system must be free from bias and distortion. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 27

Managing Control in Organizations (cont’d) • Resistance (Conflict) to Control – Over control • Trying to control too many details becomes problematic when control affects employee behavior and employees perceive control attempts as unreasonable. – Inappropriate Focus • The control system may be too narrow or it may focus too much on quantifiable variables and leave no room for analysis or interpretation. – Rewards for Inefficiency • Rewarding operational efficiency can lead employees to behave in ways that are not in the best interests of the organization. – Too much accountability • Efficient controls are resisted by poorly performing employees. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 28

Overcoming Resistance to Control • Resistance to control can be overcome by: – Designing effective controls that are properly integrated with organizational planning and aligned with organizational goals and standards. – Creating controls that are flexible, accurate, timely, and objective. – Avoiding overcontrol in the implementation of controls. – Guarding against creating controls that reward inefficiencies. – Encouraging employee participation in the planning and implementing of control systems. – Developing a system of checks and balances in the control systems through the use of multiple standards and information systems that allow the organization to verify the accuracy of performance indicators. Copyright © by Houghton Mifflin Company. All rights reserved. 20– 29