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Transcript of CHAPTER 20 Basic Elements of Control Basic Elements of Control Copyright © by Houghton Mifflin...
CHAPTERCHAPTER
2020
Basic Elementsof ControlBasic Elementsof Control
Copyright Copyright © by Houghton Mifflin Company.© by Houghton Mifflin Company.All rights reserved.All rights reserved.
PowerPoint PresentationPowerPoint Presentation by Charlie Cook by Charlie Cook
Copyright © by Houghton Mifflin Company. All rights reserved. 20–2
Learning ObjectivesLearning 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.
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. 20–3
Chapter OutlineChapter 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
• 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
• 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
• 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
Copyright © by Houghton Mifflin Company. All rights reserved. 20–4
The Nature of Control in The Nature of Control in OrganizationsOrganizations
• Control– 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.
• Control– 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. 20–5
The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)
• The Purpose of Control– Control is one of the four basic management functions. The
control function, in turn, has four basic purposes.
• The Purpose of Control– Control is one of the four basic management functions. The
control function, in turn, has four basic purposes.
Adapt to environmental change Limit the accumulation of error
Control helps the organization
Cope with organizational complexity Minimize costs
Figure 20.1
Copyright © by Houghton Mifflin Company. All rights reserved. 20–6
The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)
• Types of Controls– 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.
• Types of Controls– 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. 20–7
The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)
• Types of Controls (cont’d)– Levels of Control
• Types of Controls (cont’d)– Levels of Control
Strategiccontrol
Structuralcontrol
Operationscontrol
Financialcontrol
Figure 20.2
Copyright © by Houghton Mifflin Company. All rights reserved. 20–8
The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)
• Types of Controls (cont’d)– Responsibilities for Control
• Controller—a position in organizations that helps line managers with their control activities.
• 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 inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)
• Steps in the Control Process• Steps in the Control Process
Establishstandards
Measureperformance
Compareperformanceagainst standards
Maintain thestatus quo
Correct thedeviation
Changestandards
Determine needfor correctiveaction
21 43
Figure 20.3
Copyright © by Houghton Mifflin Company. All rights reserved. 20–10
The Nature of Control inThe Nature of Control inOrganizations (cont’d)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.
• 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 inThe Nature of Control inOrganizations (cont’d)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.
• 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 inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)
• Operations Control• Operations Control
Preliminary control
Focus is on inputs
to the organizational
system
Inputs Transformation Outputs
Screening control
Focus is on how
inputs are being
transformed into
outputs
Postaction control
Focus is on outputs
from the organiza-
tional system
Feedback
Figure 20.4
Copyright © by Houghton Mifflin Company. All rights reserved. 20–13
Financial ControlFinancial 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).
• 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. 20–14
Financial Control (cont’d)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.
• 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. 20–15
Financial Control (cont’d)Financial Control (cont’d)
• Types of Budgets• Types of Budgets
Type of Budget What Budget Shows
Financial budget Sources and uses of cash
Cash-flow or cash budget All sources of cash income and cash expenditures in monthly, weekly, or daily periods
Capital-expenditures budget Costs of major assets such as a new plant, machinery, or land
Balance-sheet budget Forecast of the organization’s assets and liabilities in the event that all other budgets are met
Table 20.1a
Copyright © by Houghton Mifflin Company. All rights reserved. 20–16
Financial Control (cont’d)Financial Control (cont’d)
• Types of Budgets (cont’d)• Types of Budgets (cont’d)
Type of Budget What Budget Shows
Operating budget Planned operations in financial terms
Sales or revenue budget Income the organization expects to receive from normal operations
Expense budget Anticipated expenses for the organization during the coming time period
Profit budget Anticipated differences between sales or revenues and expenses
Table 20.1b
Copyright © by Houghton Mifflin Company. All rights reserved. 20–17
Financial Control (cont’d)Financial Control (cont’d)
• Types of Budgets (cont’d)• Types of Budgets (cont’d)
Type of Budget What Budget Shows
Nonmonetary budget Planned operations in nonfinancial terms
Labor budget Hours of direct labor available for use
Space budget Square feet or meters of space available for various functions
Production budget Number of units to be produced during the coming time period
Table 20.1c
Copyright © by Houghton Mifflin Company. All rights reserved. 20–18
FinanciaFinancial Control l Control (cont’d)(cont’d)
• Developing Budgets in Organizations
• Developing Budgets in Organizations
Operating unitbudget requests
Division budgetrequests
Organizational budget• Prepared by budget
committee• Approved by budget
committee, controller,and CEO
Figure 20.5
Copyright © by Houghton Mifflin Company. All rights reserved. 20–19
Financial Control (cont’d)Financial Control (cont’d)
Strengths–Budgets facilitate effective
operational controls.–Budgets facilitate
coordination and communication between departments.
–Budgets establish records of organizational performance, which can enhance planning.
Strengths–Budgets facilitate effective
operational controls.–Budgets facilitate
coordination and communication between departments.
–Budgets establish records of organizational performance, which can enhance planning.
Weaknesses–Budgets can hamper
operations if applied too rigidly.
–Budgets can be time consuming to develop.
–Budgets can limit innovation and change.
Weaknesses–Budgets can hamper
operations if applied too rigidly.
–Budgets can be time consuming to develop.
–Budgets can limit innovation and change.
Strengths and Weaknesses of Budgeting
Copyright © by Houghton Mifflin Company. All rights reserved. 20–20
Other Tools of Financial ControlOther 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 long-term), 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.
• 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 long-term), 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. 20–21
Other Tools of Financial Control Other Tools of Financial Control (cont’d)(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.
• 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. 20–22
Structural ControlStructural Control
• Bureaucratic Control– A form of organizational control characterized by formal and
mechanistic structural arrangements.
• Clan Control– An approach to organizational
control characterized by informal and organic structural arrangements.
• Bureaucratic Control– A form of organizational control characterized by formal and
mechanistic structural arrangements.
• Clan Control– An approach to organizational
control characterized by informal and organic structural arrangements.
Copyright © by Houghton Mifflin Company. All rights reserved. 20–23
Structural Control (cont’d)Structural Control (cont’d)
• Organizational Control• Organizational Control
Dimension
Employee complianceGoal of control approach
Strict rules, formal controls,rigid hierarchy
Directed toward minimum levels of acceptable performance
Tall structure, top-down influence
Directed at individualperformance
Limited and formal
Employee commitment
Group norms, culture, self-control
Directed toward enhancedperformance above andbeyond the minimum
Flat structure, shared influence
Directed at group performance
Extended and informal
Performance expectations
Degree of formality
Organization design
Reward system
Participation
Bureaucratic Control Clan Control
Figure 20.6
Copyright © by Houghton Mifflin Company. All rights reserved. 20–24
Strategic ControlStrategic 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.
• 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. 20–25
Managing Control in Managing Control in OrganizationsOrganizations
• Characteristics of Effective Control– Integration with Planning
• The more explicitly 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.
• Characteristics of Effective Control– Integration with Planning
• The more explicitly 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. 20–26
Managing Control inManaging Control inOrganizations (cont’d)Organizations (cont’d)
• Resistance to Control– Overcontrol
• 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.
• Resistance to Control– Overcontrol
• 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. 20–27
Overcoming Resistance to ControlOvercoming 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.
• 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.