Chapter 7 Control Management 2 e by Chuck

2 What Would You Do? Ø Movie theaters have changed greatly in the last 20 years Ø Should Regal build its own megaplexes? Ø What resources would be needed for this expansion? Ø Would fast expansion threaten their business model? Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

3 Learning Objectives Basics of Control After discussing this section you should be able to: 1. describe the basic control process 2. be able to answer the question: Is control necessary or possible? Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

4 The Control Process Establish clear standards Compare actual to desired performance Take corrective action, if needed Is a dynamic process Consists of three basic methods Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

5 Setting Standards Ø Determine what should be benchmarked Ø Identify companies against which to benchmark standards Ø Collect data on other companies’ performance standards Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

6 Cybernetic Control Process Actual Performance Measure Performance Compare with Standard Desired Performance Implement Program for Corrections Develop Program for Corrections Adapted from Exhibit 7. 1 Identify Deviations Analyze Deviations Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

7 Basic Control Methods Ø Feedback control gather information about performance deficiencies after they occur Ø Concurrent control gather information about performance deficiencies as they occur Ø Feedforward control gather information about performance deficiencies before they occur Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

8 Is Control Necessary or Possible? Is more control necessary? Is more control possible? What should be done if more control is necessary but not possible? Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

9 Is More Control Necessary? Ø Degree of dependence the extent to which a company needs a particular resource to accomplish its goals Ø Resource flow the extent to which a company has easy access to critical resources Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

10 Is More Control Possible? Ø Cost of control direct costs of the control unintended costs Ø Cybernetic feasibility the extent to which it is possible to implement each step in the control process if a step cannot be implemented, then control may not be possible Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

Quasi-Control: When Control Isn’t Possible 11 Ø Reducing dependence choose to abandon or change goals when control over a critical resource is not possible Ø Restructure dependence exchange dependence on one critical resource for dependence on another Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

12 Is Control Necessary or Possible? Expected Regulation Dependence resource Goods Cybernetics cost sufficiently flows acceptable? fixed? high? unacceptable? feasible? yes no no yes Regulate Dependence no no Response: yes Restructure Dependence Do Nothing no Reduce Dependence S. G. Green & M. A. Welsh, “Cybernetics and Dependence: Adapted from Exhibit 7. 3 Reframing the Control Concept, “ Academy of Management Review, 13 (1988): 287 -301 Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

13 Learning Objectives How and What to Control After discussing this section you should be able to: 3. discuss the various methods that managers can use to maintain control 4. describe the behaviors, processes, and outcomes that managers are choosing to control in today’s organizations Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

14 Blast From The Past From 1870 to the Present—Five Eras of Management Control Ø Industrial Betterment, 1870 -1900 Ø Scientific Management, 1900 -1922 Ø Human Relations, 1925 -1955 Ø Systems Rationalism, 1955 -1980 Ø Organizational Culture and Quality, 1980 Present Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

15 Control Methods Bureaucratic Objective Normative Concertive Self-Control Management, 2 e by Chuck Williams

16 Bureaucratic Ø Top-down control Ø Use rewards and punishment to influence employee behaviors Ø Use polices and rules to control employees Ø Often inefficient and resistant to change Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

17 Objective Ø The use of observable measures Ø Behavioral control regulate employee behaviors and actions managers monitor and shape employee behaviors Ø Output control measure employee outputs focus is on outcomes not behaviors Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

18 Normative Control Ø Company values and beliefs guide employee behavior and decisions Ø Cultural norms not rules, guide employees Ø Created by: careful selection of employees role-modeling and retelling of stories Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

19 Concertive Controls Ø Employees are guided by the beliefs of work groups Ø Autonomous work groups operate without managers group members control processes, output, and behaviors Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

20 Self-Control Ø Employees control their own behavior Ø Employees make decisions within wellestablished boundaries Ø Management and employees set goals and monitor their own progress Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

21 What to Control Balanced Scorecard Financial Perspective Customer Perspective Internal Business Perspective Innovation & Learning Perspective Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

22 Example of a Balanced Scorecard Financial Customer • EVA • Defections • Ratios and Budgets • Partnerships Internal Business Innovation/Learning • Quality • Waste minimization • Productivity • Time to market Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

23 Balanced Scorecard Ø Managers look beyond traditional financial measures Ø Managers set specific goals in each of four areas Ø Helps minimize the chances of suboptimization Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

Controlling Economic Value Added 24 (Financial Perspective) Ø The amount by which profits exceed the cost of capital in a given year Ø Important because: shows if a profit center is paying for itself focuses attention on specific departments encourages creative ways to improve organizational performance Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

25 Basic Accounting Tools Ø Basic Cash Flow Analysis Steps Forecast sales Project changes in anticipated cash flows Project anticipated cash outflows Project net cash flows by combining anticipated cash inflows and outflows Adapted from Exhibit 7. 6 Ø Parts of a Basic Balance Sheet Assets ªCurrent assets ªFixed assets Liabilities ªCurrent liabilities ªLong-term liabilities Owner’s equity ªStock ªAdditional paid in capital ªRetained earnings Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

26 Basic Accounting Tools (cont’d) Ø Basic Income Statement + = = = SALES REVENUE sales returns and allowances other income NET REVENUE cost of goods sold GROSS PROFIT total operating expenses INCOME FROM OPERATIONS interest expense PRETAX INCOME income tax NET INCOME Adapted from Exhibit 7. 6 Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

27 Common Financial Ratios Liquidity Ratios Leverage Ratios • Current Ratio • Debt to Equity • Quick Ratio • Debt Coverage Efficiency Ratios • Inventory Turnover • Average Collections Period Adapted from Exhibit 7. 7 Profitability Ratios • Gross Profit Margin • Return on Equity Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

28 Common Kinds of Budgets Revenue Expense Profit Cash Capital Expenditure Variable Management, 2

29 Been There, Done That EVA at Armstrong World Industries Ø It allows them to more closely align them with shareholders’ interests Ø Augments traditional measures Ø Reinforced with long-term incentives Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

Controlling Customer Defections 30 (Customer Perspective) Ø The rate by which customers are leaving the company Ø Don’t rely completely on customer satisfaction surveys Ø Easier to retain a customer, than get new ones Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

Controlling Quality 31 (Internal Business Perspective) Ø Internal perspective Ø Quality is usually measured three ways: excellence value conformance to expectations Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

Controlling Waste and Pollution 32 (Innovation & Learning Perspective) Ø Often an over-looked area Ø Three strategies for waste prevention and reduction good housekeeping material/product substitution process modification Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

33 Four Levels of Waste Minimization Waste Prevention & Reduction Recycle & Reuse Waste Treatment Waste Disposal Adapted from Exhibit 7. 14 Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003

34 What Really Happened? Ø Regal built 111 new theaters Ø Late to the megaplex market, competitors already had the best locations Ø Regal uses its information system to control costs, but that may not be enough Ø Losses and debt are mounting Management, 2 e by Chuck Williams South-Western/Thompson Learning Copyright © 2003