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Transcript of Bateman Snell
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Bateman Snell
Management
5thEdition
Competingin theNew Era
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Part FiveChapter 16 - Managerial Control
Chapter OutlineBureaucratic Control SystemsThe Other Controls: Markets and Clans
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning ObjectivesLearning Objectives
After studying Chapter 16, you will know: why companies develop control systems for employees how to design a basic bureaucratic control system the purpose for using budgets as a control device how to interpret financial ratios and other financial controls the procedures for implementing effective control systems the different ways that market control mechanisms are used
by organizations how clan control can be approached in an empowered
organization
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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IntroductionIntroduction
Control process of measuring progress toward planned performance
and applying corrective measures to ensure that performance is in line with managers’ objectives
planning and controlling are interdependenteffective planning facilitates controlcontrol facilitates planning
three broad strategies for organizational controlbureaucratic - use of rules, regulations, and formal authoritymarket - use of pricing mechanisms to regulate activities clan - employees share organizational values and act in accordance with them
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Blind optimism
Setting a poor example
An eye to the past
Misplaced confidence
Blame deflection
Avoidance
Leadership Symptoms Of An Out-Of-Control Company
Leadership Symptoms Of An Out-Of-Control Company
Isolation
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Bureaucratic Control SystemsBureaucratic Control SystemsThe control cycle
Step 1: Setting performance standardsstandard - expected performance for a given goal
target that establishes a desired performance level, motivates performance, and serves as a benchmark against which actual performance is assessed
can be set for any activity typically is derived from job requirements set with respect to quantity, quality, time, and cost
Step 2: Measuring performanceperformance data obtained from three sources
written reports personal observation oral reports
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Bureaucratic Control Systems (cont.)
Bureaucratic Control Systems (cont.)
The control cycle (cont.) Step 3: Comparing performance with the standard
evaluation of the performancefor some activities, small deviations from the standard are acceptable
for other activities, a slight deviation may be serious principle of exception - control is enhanced by concentrating on the
significant deviations from the standard only exceptional cases require corrective action
Step 4: Taking corrective actionensures that operations are adjusted where necessarytype of corrective action depends on the nature of the problem
specialist control operator control
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Control ProcessThe Control Process
Setperformance
standards
Measureperformance
CompareDeterminedeviation
Withinlimits
Standards
No
Continuework
progress
YesTake
correctiveaction
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Bureaucratic Control Systems (cont.)
Bureaucratic Control Systems (cont.)
Approaches to bureaucratic control Feedforward (preliminary) control - control process used before
operations beginfuture orientedprevent problems before they occurincludes policies, procedures, and rules
Concurrent control - control process used while plans are being carried out
the heart of any control systemincludes directing, monitoring, and fine-tuning activities as they are performed
advances in information technology have created powerful concurrent controls
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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10 Bureaucratic Control Systems
(cont.)Bureaucratic Control Systems
(cont.)Approaches to bureaucratic control (cont.)
Feedback control - control that focuses on the use of information about previous results to correct deviations from the acceptable standard
implies that performance data were gathered and analyzedresults used to make correctionstiming is an important aspect of feedback control
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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11 Bureaucratic Control Systems
(cont.)Bureaucratic Control Systems
(cont.)Management audits
evaluation of the effectiveness and efficiency of various systems within an organization
External audit - evaluation conducted by one organization, such as a CPA firm, on another
may conduct external audit of a competitor for strategic decision-making purposes
useful for feedback and feedforward control Internal audit - periodic assessment of a company’s own
planning, organizing, leading, and controlling processesassess what the company has done for itself and its customersreviews the company’s past, present, and future
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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12 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Budgetary control
most widely recognized and commonly used method of managerial control
budgeting - process of investigating what is being done and comparing the results with the corresponding budget data
used to verify accomplishments or remedy differences Fundamental budgetary considerations - begin with an
estimate of sales and expected incomebudgeting information is supplied to the entire company or any of its units
not confined to financial mattersbudgets prepared for a definite time period
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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13 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Budgetary control (cont.)
Fundamental budgetary considerations (cont.)budgetary control proceeds through several stages
establishing expectancies - starts with the broad company plan and sales estimates
ends with budget approval and publication budgetary operations - find out what is being accomplished and
compare the results with expectancies taking corrective action (if necessary)
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Cost production(compare costs
with sales price)Cash
Sales
Budgetfocuses
on:
Production(expressed in
physical units)
Master(all major business
activities)
Types Of BudgetsTypes Of Budgets
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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15 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Accounting audits
procedures used to verify accounting reports and statements performed by an outside firm of public accountants
Activity-based costing (ABC) cost accounting method that identifies streams of activity employees break down what they do to define basic activities total expenses computed by traditional accounting total amounts spread over the activities according to time
spent on each provides an accurate picture of how costs should be charged highlights where wasted activities are occurring
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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16 How Dana Discovers What Its
True Costs AreHow Dana Discovers What Its
True Costs Are
Sala
ries
Fring
esSu
pplie
sFix
ed C
osts
Process sales orders $144,846Source parts $136,320Expedite supplier orders $ 72,143Expedite internal processing $ 49,945Receive supplier quality $ 47,599Reissue purchase orders $ 45,235Expedite customer orders $ 27,747Schedule intracompany sales $ 17,768Request engineering change $ 16,704Resolve problems $ 16,648Schedule parts $ 15,390
Total $590,345
Newway
Activity-basedcosting
Salaries$371,917
Fringes$118,069
Supplies $76,745
Fixed costs $23,614
Total $590,345
Old way
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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17 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Financial controls
Balance sheet - report that shows the financial picture of a company at a given time
itemizes: assets - the values of various items the corporation owns liabilities - the amounts the corporation owes to various creditors stockholders’ equity - amount accruing the corporation’s owners
shows trends over timegives managers insight into overall performanceidentifies areas which require adjustments
Assets = Liabilities + Stockholders’ equity
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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18 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Financial controls (cont.)
Profit and loss statement - itemized financial statement of the income and expenses of a company’s operations
comparisons of profits and losses can identify trouble areasa common control for the enterprise as a whole
may be used at the division and department level
Financial ratios - indicate possible strengths and weaknesses calculated from selected items on the profit and loss statement and the balance sheet
Liquidity ratios - indicate the ability to pay short-term debts current ratio - indicates the extent to which short-term assets can
decline and still be adequate to pay short-term liabilities
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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19 Comparative P&L Statements For
The Years Ending June 30Comparative P&L Statements For
The Years Ending June 30Income: Net sales $253,218 $257,636 $ 4,418 Dividends from investments 480 430 50 Other 1,741 1,773 32 Total 255,439 259,839 4,400
Deductions: Cost of goods sold 180,481 178,866 1,615 Selling and administrative expenses 39,218 34,019 5,199 Interest expense 2,483 2,604 121* Other 1,941 1,139 802 Total 224,123 216,628 7,495
Income before taxes 31,316 43,211 11,895*
Provision for taxes 3,300 9,500 6,200*
Net income $28,016 $33,711 $5,695**Decrease
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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20 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Financial controls (cont.)
Financial ratios (cont.)Leverage ratios - show the relative amount of funds in the business supplied by creditors and shareholders
debt-equity ratio - indicates the company’s ability to meet its long-term financial obligations
Profitability ratios - indicate management’s ability to generate a financial return on sales or investment
return on investment (ROI) - ratio of profit to capital used rate of return from capital
Using financial ratios - can have negative consequencesmanagement myopia - focus on short-term earnings and profits at the expense of longer-term strategic obligations
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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21 Bureaucratic Control System
(cont.) Bureaucratic Control System
(cont.)Downside of bureaucratic control
Rigid bureaucratic behavior - acting in ways that make one look good on the control system’s measures
may result in rigid, inflexible behavior geared toward doing only what the system requires
Tactical behavior - behavior aimed at “beating the system”manipulate or falsify performance dataconcern about individual rather than organizational performance
Resistance to control - people don’t like being accountablecontrol system can change expertise and power structurescontrol system can change the social structurecontrol system may be perceived as an invasion of privacy
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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22 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Designing effective control systems
Establish valid performance standards - most effective standards expressed in quantitative terms
measures are not easily faked or sabotagedsystem incorporates all important aspects of performancetoo many measures create overcontrol and employee resistancehave stated tolerance ranges
Provide adequate information - employees must understand the importance and nature of the control system
people need feedback about performance enables them to correct deviations from the standards
information should be accessible
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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23 Bureaucratic Control System
(cont.)Bureaucratic Control System
(cont.)Designing effective control systems (cont.)
Ensure acceptability to employees - more likely to accept systems that have useful performance standards
overcontrol is not an issuebelieve the standards are possible to achieveemphasize positive behavior rather than focusing on controlling negative behavior alone
standards are established participatively Use multiple approaches
include both financial and nonfinancial performance goalsincorporate aspects of feedforward, concurrent, and feedback control
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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24 The Other Controls: Markets And
ClansThe Other Controls: Markets And
ClansMarket control
involves the use of economic forces and the pricing mechanisms that accompany them
where output from any organizational unit has value to others, a price can be negotiated for its exchange
as a market for these transactions becomes established:price becomes an indicator of the value of the product or serviceprice competition effectively controls performance
Market controls at the corporate levelused to regulate independent business unitsbusiness units treated as competing profit centers profit and loss data used to evaluate performance
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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25 The Other Controls: Markets And
Clans (cont.)The Other Controls: Markets And
Clans (cont.)Market control
Market controls at the business unit levelregulates exchange among departments and functionstransfer price - price charged by one unit in the organization for a product or service that it supplies to another unit of the same organization
provide natural incentives to keep costs down Market controls at the individual level
market rate is a good indicator of an employee’s potential worthprovide a natural incentive for employees to enhance their skillsboards of directors use market controls to manage CEOs
incentives on top of base salary
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Examples Of Market ControlExamples Of Market Control
CEO uses marketcontrols to evaluate
performance of businessunit heads
Managers use transferpricing to establishvalues for internaltransactions among
units
Market rates determinethe base wage/salary formanagers and employees
CEO/President
Businessunit
manager
Businessunit
manager
Businessunit
manager
Businessunit
manager
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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27 The Other Controls: Markets And
Clans (cont.)The Other Controls: Markets And
Clans (cont.)Clan control: the role of empowerment and culture
bureaucratic and market controls are no longer sufficient because:
employees’ jobs have changedthe nature of management has changedthe employment relationship has changed
empowerment - has become a necessary aspect of a manager’s repertoire of control
does not mean giving up control clan control - create relationships built on mutual respect
encourage each individual to take responsibility for her/his job
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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28 Management Control In An
Empowered SettingManagement Control In An
Empowered Setting
1. Put control where the operation is2. Use “real time” rather than after-the-fact controls3. Rebuild the assumptions underlying management
control to build on trust rather than distrust4. Move to control based on peer norms5. Rebuild the incentive systems to reinforce responsiveness and teamwork
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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29 The Other Controls: Markets And
Clans (cont.)The Other Controls: Markets And
Clans (cont.)Clan control (cont.)
Understanding culture’s role in controlorganization culture - set of important assumptions about the organization and its goals and practices that members of the company share
strong culture - everyone understands and believes in the firms’ goals, priorities, and practices
weak culture - different people hold different values confusion about corporate goals
Diagnosing culture - clues about culture corporate mission statements and official goals business practices symbols, rites and ceremonies the stories people tell
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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30 Competing Values Model Of
CultureCompeting Values Model Of
Culture
Group
Hierarchy
Adhocracy
Rational
ExternalPositioning
InternalMaintenance
FlexibleProcesses
Control-OrientedProcesses
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31 The Other Controls: Markets And
Clans (cont.)The Other Controls: Markets And
Clans (cont.)Clan control (cont.)
Diagnosing culture (cont.) general cultures can be categorized
Group Culture Dominant Attribute: cohesiveness, participation, teamwork, sense
of family Leadership Style: mentor, facilitator, parent-figure Bonding: loyalty, tradition, interpersonal cohesion Strategic Emphasis: toward developing human resources,
commitment, and morale
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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32 The Other Controls: Markets And
Clans (cont.)The Other Controls: Markets And
Clans (cont.)Clan control (cont.)
Diagnosing culture (cont.)Adhocracy
Dominant Attribute: entrepreneurship, creativity, adaptability, dynamism
Leadership Style: innovator, entrepreneur, risk taker Bonding: flexibility, risk, entrepreneur Strategic Emphasis: toward innovation, growth, new resources
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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33 The Other Controls: Markets And
Clans (cont.)The Other Controls: Markets And
Clans (cont.)Clan control (cont.)
Diagnosing culture (cont.)Hierarchy
Dominant Attribute: order, rules and regulations, uniformity, efficiency
Leadership Style: coordinator, organizer, administrator Bonding: rules, policies and procedures, clear expectations Strategic Emphasis: toward stability, predictability, smooth
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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34 The Other Controls: Markets And
Clans (cont.)The Other Controls: Markets And
Clans (cont.)Clan control (cont.)
Diagnosing culture (cont.)Rational
Dominant Attribute: goal achievement, environment exchange, competitiveness
Leadership Style: production and achievement-oriented, decisive Bonding: goal orientation, production, competition Strategic Emphasis: toward competitive advantage and market
superiority
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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Clan control (cont.) Managing culture to reinforce clan control
approaches to managing culture corporate leadership should espouse lofty ideals and visions for the
company executives must be attentive to the details of daily affairs top management must behave appropriately during moments of
truth when hard choices have to be made top management must celebrate and reward those who exemplify
the new valuesclan control is a “double edged sword”
takes a long time to develop and even longer to change employees must unlearn old values and embrace the new
The Other Controls: Markets And Clans (cont.)
The Other Controls: Markets And Clans (cont.)