Chapter 16

1. Chapter 16 Hitt Black Porter Control m a n a g e m e n t

2. Learning Objectives • Discuss the effects of too much or too little control in an organization. • Describe the four basic elements of the control process and the issues involved in each. After studying this chapter, you should be able to:

3. Learning Objectives • Differentiate between the different levels of control and compare their implications for managers. • Explain the concept of standards and why they are so important in organizations. After studying this chapter, you should be able to:

4. Learning Objectives • Compare bureaucratic and clan controls. • Identify the important qualities required for information to be useful in the control process. After studying this chapter, you should be able to:

5. Control Function in Management • Control • Regulation of activities and behaviors within organizations • Adjustment or conformity to specifications or objectives • Effective control depends heavily on other functions that precede it and feeds back to them • Planning • Organizing • Leading

6. Control Function in Management Ensures adjustment or conformity to objectives Ensures adjustment or conformity to specifications Control Regulates activities Regulates behavior Adapted from Exhibit 16.1: The Control Function in Management

7. Control’s Feedback Loop Planning Control Changes in Feedback Organizing Adapted from Exhibit 16.2: Control’s Feedback Loop

8. Basic Elements in Control Process Establish standards • Establish standards • Specification starts at the top of the organization and involves every level of employee • Standards are the targets of performance • Involving employees in setting standards • Commits the employees to achieving the standards • Results in more appropriate standards Adapted from Exhibit 16.3: The Basic Elements in the Control Process

9. Specificity of Standards and Performance Measurement High Level of confusion in performance measurement Low Concrete Abstract Specificity of standards Adapted from Exhibit 16.4: The Effect of Specificity of Standards on Performance Measurement

10. Establishing Standards Standards How specific should they be? Who should set them? How difficult should they be to reach? Adapted from Exhibit 16.5: Issues in Establishing Standards

11. Basic Elements in Control Process Establish standards • Measure performance • Obtain consensus about how to assess performance • If performance involves multiple activities, measure must be comprehensive • Measurement is costly and hence usefulness of the information must justify the costs Measure performance Adapted from Exhibit 16.3: The Basic Elements in the Control Process

12. Measurement of Performance Is there consensus among those involved as to how performance will be measured? Can measurement criteria be quantified? Performance Measurement Are all necessary aspects of actions contributing to performance being measured? Can expensive, but noncritical, controls be eliminated? Adapted from Exhibit 16.6: Issues in the Measurement of Performance

13. Basic Elements in Control Process Establish standards • Compare performance against standards • Comparisons are affected b the kinds of measurements available • Managers must interpret the patterns of comparisons (some negative/some positive) • Comparisons often involve subjective and objective measures Measure performance Compare performance against standards Adapted from Exhibit 16.3: The Basic Elements in the Control Process

14. Basic Elements in Control Process Establish standards • Evaluate results/take necessary corrective action • Not all results require action • Evaluate importance and magnitude of the deviation • Determine what action to take if necessary • Diagnosis skills of managers • Level of expertise • Evaluate the standards and the measures • Employees performing better than “standard” should be recognized and rewarded Measure performance Compare performance against standards Evaluate results and take any necessary corrective action Adapted from Exhibit 16.3: The Basic Elements in the Control Process

15. Outcomes of Performance Measurement Actual performance better than expected performance + Reinforcing Action Taken (e.g., increase rewards and recognition, consider increasing production targets, add new product lines) Actual performance measured against standard for performance Gap Detected Corrective Action Taken (e.g., increase training, modify supervision, invest in newer equipment) - Actual performance worse than expected performance Adapted from Exhibit 16.7: Outcomes of Performance Measurement

16. Scope of Control Strategic Control • Assess and regulate how the organization fits its external environment and meets its long-range objectives and goals • Control becomes less efficient in uncertain or changing environments

17. Types and Scope of Control Strategic Controls Tactical Controls Operational Controls (Narrow) (Broad) Scope Adapted from Exhibit 16.8: Types and Scope of Control

18. Centralization of Control and Environmental Stability Decentralized Degree of centralization Centralized Stable Turbulent Environmental stability Adapted from Exhibit 16.9: Degree of Centralization of Control in Relation to Environmental Stability

19. Approaches to Strategic Control High Environmental turbulence Low Easy Difficult Ability to specify and measure precise strategic objectives Adapted from Exhibit 16.10: Approaches to Strategic Control

20. Scope of Control Tactical Control • Assess and regulate day-to-day functions of the organization and its major units in implementing its strategy • Financial controls • Budgetary controls • Supervisory structure controls • Human resource controls • Contrasting approaches to using tactical controls • Bureaucratic control • Commitment, or clan, control

21. Strategic and Tactical Controls Tactical Controls Strategic Controls Time Frame Limited Long, unspecific Objective Controls relate to specific, functional areas Controls relate to organization as a whole Types of Comparisons Comparisons made within organization Comparisons made to other organization Focus Implementation of strategy Determination of overall organizational strategy Adapted from Exhibit 16.11: Characteristics of Strategic and Tactical Controls

22. Current Assets Net Profit before taxes 3,044 904 241 2,525 1,975 2,682 Total Assets Current Liabilities 2,056 4,719 7,591 1,319 7,591 4,719 Total Debts Total Assets Company Financial Ratios The GAP, Inc. 2001 in $ millions The Limited, Inc. 2001 in $ millions Ratio Formula Company Profit Return on Investment 0.19 0.03 Liquidity Current Ratio 2.0 1.4 Liabilities Leverage Debt to Assets 0.42 0.33 Adapted from exhibit 16.12: Examples of Company Financial Ratios

23. Sales 13,847 9,363 Inventory 1,677 966 Company Financial Ratios The GAP, Inc. 2001 in $ millions The Limited, Inc. 2001 in $ millions Ratio Formula Company Activity Inventory Turnover 9.7 8.3 Adapted from exhibit 16.12: Examples of Company Financial Ratios

24. Budgetary Control Rolling budgets and revision Should the budget period be for 12 months followed by another 12-month budget a year later, or should a calendar quarter be added each time a new calendar quarter begins? Should the budget remain fixed for the budget period or should it be revised periodically during the period? Issue Questions Fixed or flexible budgets Should performance be evaluated against the original budget or against a budget that incorporates the actual activity level of the business? Bonuses based on budgets Should incentive compensation, if any, be based on actual versus budgeted performance, or on actual performance against some other standard? Adapted from exhibit 16.13: Issues in Budgetary Control

25. Budgetary Control Evaluation criteria Should the budget used to evaluate performance include only those items over which the evaluated manager has control, or should it include all unit costs and revenues appropriate to the managerial unit? Issue Questions Tightness of the budget What degree of “stretch” should there be in the budget? Source: Adapted from N. C. Churchill, “Budget Choices: Planning vs. Control,” Harvard Business Review 62, no. 4 (1984), pp. 150–164, (p. 151). Adapted from exhibit 16.13: Issues in Budgetary Control

26. Control in the Human Resource Function Appraisal and evaluation Selection Human Resource Function Controls Compensation Training Adapted from Exhibit 16.14: Opportunities for Control in the Human Resource Function

27. Control in Bureaucracy and Clan Structures Type of Social Control Informational Control Requirementsa Approach Requirements Bureaucracy Norm of reciprocity Legitimate authority Adherence to rules and regulations Formal and impersonal Emphasis on detecting deviance Imposed on the individual Rules Clan Norm of reciprocity Legitimate authority Shared values, beliefs Stresses group consensus on goals and their measurement Mutual assistance in meeting performance standards Uses deviations as guidelines in diagnosing problems Control comes from the individuals or groups Traditions aSocial requirements are the basic agreements between people that, at a minimum, are necessary for a form of control to be employed. Source: Adapted from William G. Ouchi, “A Conceptual Framework for the Design or Organizational Control Mechanisms,” Management Science 25, no. 9 (1980), pp. 833–847 (p. 838). Adapted from exhibit 16.15: Control in Bureaucracy and Clan Structures

28. Scope of Control Operational Control • Assess and regulate specific activities and methods used to produce goods and services • Precontrol of operations • Concurrent control of operations • Postcontrol of operations

29. Operational Controls • Precontrol • Controls the quality, quantity, and other characteristics of the inputs to the process • Concurrent • Control • Evaluates the conversion process as it occurs • Provides immediate feedback, which impacts worker motivation • Postcontrol • Traditionally, quality control • Many of these controls are being changed to pre- and concurrent controls Adapted from Exhibit 16.16: Operational Controls

30. Control Effectiveness • Focus of control • Balanced scorecard • Financial perspective • Customer perspective • Internal business perspective • Innovation and learning perspective • Amount of control

31. Control Effectiveness • Quality of information • Usefulness • Accuracy • Timeliness • Objectivity • Flexibility • Favorable cost-benefit ratio • Source of control

32. Effectiveness of Controls Focus of control What will be controlled? Where should controls be located in the organizational structure? Who is responsible for which controls? Key Factor Concerns Amount of control Is there a balance between over- and undercontrol? Quality of information collected by the controls Is the information useful? Is the information accurate? Is the information timely? Is the information objective? Flexibility of controls Are the controls able to respond to varying conditions? Favorable cost-benefit ratio Is the information being gathered worth the cost of gathering it? Source of control Is control imposed by others? Is control decided by those who are affected? Adapted from exhibit 16.17: Key Factors in Determining the Effectiveness of Controls