The Control Process Begins with establishment of clear

The Control Process Begins with establishment of clear standards of performance Involves a comparison of actual performance to desired performance Takes corrective action to repair performance deficiencies Is a dynamic, cybernetic process 1 Consists of feedback control, concurrent control, feedforward control Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved But… control isn’t always worthwhile or possible 1

Setting Standards 1. A good standard must enable goal achievement. 2. Listening to customers or observing competitors. 3. Benchmarking other companies. § § § Determine what to benchmark. Identify the companies against which to benchmark. Collect data to determine other companies’ performance standards. 1. 1 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 2

Comparison to Standards 1. Compare actual performance to performance standards. The use of “secret shoppers” helps verify that performance standards are being met. 1. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 3

Corrective Action § Identify performance deviations § Analyze those deviations § Develop and implement programs to correct them Identify Control Process Correct 1. 3 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Analyz e 4

Dynamic, Cybernetic Process Set Standards Develop & Implement Program for Corrective Action Measure Performance Compare with Standards 1. 4 Analyze Deviations Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Identify Deviations Adapted from Exhibit 16. 1 5

Feedback, Concurrent, and Feedforward Control Feedback Control Gather information about performance deficiencies after they occur Concurrent Control Gather information about performance deficiencies as they occur Feedforward Control Monitor performance inputs rather than outputs to prevent or minimize performance deficiencies before they occur 1. 5 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 6

Feedforward Control Guidelines for Using Feedforward Control 1. Thorough planning and analysis are required. 2. Careful discrimination must be applied in selecting input variables. 3. The feedforward system must be kept dynamic. 4. A model of the control system should be developed. 5. Data on input variables must be regularly collected. 6. Data on input variables must be regularly assessed. 7. Feedforward control requires action. 1. 5 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 2 7

Control Loss Is control worthwhile? Maybe, maybe not. Managers must assess the regulation costs and the cybernetic feasibility. Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 8

Bureaucratic Control § § Top-down control § Use policies and rules to control employees § Often inefficient and highly resistant to change Use rewards and punishment to influence employee behaviors 2. 1 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 9

Objective Control Use of observable measures of worker behavior or outputs to assess performance and influence behavior Behavior Control Regulation of the behaviors and actions that workers perform on the job Output Control Regulation of workers’ results or outputs through rewards and incentives 2. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 10

Doing the Right Thing Don’t Cheat on Travel Expense Reports § Workers are often tempted to pad their travel expense reports § It’s often justified by feeling that they are entitled § If you can’t trust an employee to be truthful on an expense report, how can you trust them with decisions involving millions of dollars? 2. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 11

Effective Output Control 1. Output control measures must be reliable, fair, and accurate. 2. Employees and managers must believe that they can produce the desired results. 3. The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance. 2. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 12

Normative Control § Normative Control Created by: § careful selection of employees § observing experienced employees & listening to stories about the company 2. 3 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 13

Concertive Control § Regulation of workers’ behavior and decisions through work group values and beliefs Autonomous work groups § operate without managers § group members control processes, output, and behaviors 2. 4 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 14

Self-Control § § § Also known as self-management Employees control their own behavior Employees make decisions within well-established boundaries Managers teach others the skills they need to maximize work effectiveness Employees set goals and monitor their own progress 2. 5 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 15

What to Control? Budgets, Cash Flow, EVA Balanced Scorecard Customer Defections Quality Waste and Pollution 3 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 16

The Balanced Scorecard Customer Perspective Innovation and Learning Perspective Internal Perspective Financial Perspective 3. 1 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 17

Advantages of the Balanced Scorecard 1. Forces managers to set goals and measure performance in each of the four areas 2. Minimizes the chances of suboptimization § performance improves in one area, but at the expense of others 3. 1 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 18

The Balanced Scorecard: Southwest Airlines 3. 1 Chapter 16 Copyright © 2007 by South-Western,

The Financial Perspective Cash flow analysis Predicts how changes in a business will affect its ability to take in more cash than it pays out Balance sheets Provide a snapshot of a company’s financial position at a particular time Income statements Financial ratios 3. 2 Show what has happened to an organization’s income, expenses, and net profit over a period of time Used to track liquidity, efficiency, and profitability over time compared to other businesses in its industry Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 20

Basic Accounting Tools Steps for a Basic Cash Flow Analysis 1. Forecast sales 2. Project changes in anticipated cash flows 3. Project anticipated cash outflows 4. Project net cash flows by combining anticipated cash inflows and outflows 3. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 5 21

Basic Accounting Tools Parts of a Basic Balance Sheet 3. 2 1. Assets • Current assets • Fixed assets 2. Liabilities • Current liabilities • Long-term liabilities 3. Owner’s equity • Stock • Additional paid in capital • Retained earnings Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 5 22

Basic Accounting Tools Basic Income Statement 3. 2 + = = = 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 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 5 23

Financial Ratios LIQUIDITY RATIOS LEVERAGE RATIOS Current Ratio Debt to Equity Quick (Acid Test) Ratio Debt Coverage EFFICIENCY RATIOS PROFITABILITY RATIOS Inventory Turnover Gross Profit Margin Average Collections Period Return on Equity 3. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 6 24

Common Kinds of Budgets 3. 2 Revenue Budgets Used to project or forecast future sales Expense Budgets Used to determine spending on supplies, projects, or activities Profit Budgets Used by profit centers, which have “profit and loss” responsibility Cash Budgets Used to forecast the cash a company will have for expenses Capital Expenditure Budgets Used to forecast large, long-lasting investments Variable Budgets Used to project costs across varying levels of sales/revenues Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 7 25

Economic Value Added (EVA) Economic Value Added The amount by which company profits exceed the cost of capital in a given year Common Costs of Capital § Long-term bank loans § Interest paid to bondholders § Dividends and growth in stock value that accrue to shareholders 3. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 26

Economic Value Added (EVA) 3. 2 1. Calculate net operating profit after tax $3, 500, 000 2. Identify how much capital the company has invested $16, 800, 000 3. Determine the cost paid for capital 10% 4. Multiply capital used (step 2) times cost of capital (step 3) (10% x $16, 800, 000) = $1, 680, 000 5. Subtract total dollar cost of capital from net profit after taxes $3, 500, 000 net profit -$1, 680, 000 cost of capital $1, 820, 000 EVA Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 8 27

Why Is EVA Important? § Shows whether a business, division, department, profit center, or product is paying for itself § Makes managers at all levels pay closer attention to their segment of the business § Encourages managers and workers to be creative in looking for ways to improve EVA performance 3. 2 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 28

The Customer Perspective Controlling Customer Defections § Monitoring customer defections: § identify which customers are leaving the company § measuring the rate at which they are leaving 3. 3 § Obtaining a new customer costs five times as much as keeping a current one § Customers who have left are likely to tell you what you are doing wrong § Understanding why a customer leaves can help fix problems and make changes Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 29

The Internal Perspective Controlling Quality Excellence Value Conformance to Expectations 3. 4 Chapter 16

The Internal Perspective Controlling Quality 3. 4 Chapter 16 Copyright © 2007 by South-Western,

Controlling Waste and Pollution Good housekeeping Material/product substitution Process modification 3. 5 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved 32

Controlling Waste and Pollution Waste Prevention & Reduction Recycle & Reuse Waste Treatment Waste Disposal 3. 5 Chapter 16 Copyright © 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16. 13 33