Bateman Snell

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

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Bateman Snell

Management

5thEdition

Competingin theNew Era


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Part FiveChapter 16 - Managerial Control

Chapter OutlineBureaucratic Control SystemsThe Other Controls: Markets and Clans


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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


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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


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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


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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


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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


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The Control ProcessThe Control Process

Setperformance

standards

Measureperformance

CompareDeterminedeviation

Withinlimits

Standards

No

Continuework

progress

YesTake

correctiveaction


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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


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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


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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


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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


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(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)


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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


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(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


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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


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(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


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(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


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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


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(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


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(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


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(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


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(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


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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


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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


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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


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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


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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


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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


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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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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


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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


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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


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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


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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.)

Bateman Snell

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