Chapter Fourteen

Managing the Control Process

Copyright 2005 Houghton Mifflin Company. All rights reserved. PowerPoint Presentation by Charlie Cook.

Chapter Outline
The Nature of Control
The Purpose of Control Types of Control Steps in the Control Process

Operations Control
Preliminary Control Screening Control Postaction Control

Financial Control
Budgetary Control Other Tools of Financial Control

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Chapter Outline (contd)

Structural Control
Bureaucratic Control Decentralized 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

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Learning 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 strategic control.

Identify characteristics of effective control, why people resist control, and how managers can overcome this resistance.

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The Nature of Control

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. Provides a mechanism for adjusting performance to keep organizations moving in the right direction.

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The PlanningControlling Link

Source: Van Fleet, David D., and Tim Peterson, Contemporary Management, Third Edition. Copyright 1994 by Houghton Mifflin Company. Used with permission.

Copyright 2005 by Houghton Mifflin Company. All rights reserved.

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Figure 14.1
Adapting to Environmental Change

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Types of Controls
Areas of Control
Physical resourcesinventory management, quality control, and equipment control. Human resourcesselection and placement, training and development, performance appraisal, and compensation. Information resourcessales and marketing forecasts, environmental analysis, public relations, production scheduling, and economic forecasting.

Financial resourcesmanaging capital funds and cash flow, collection and payment of debts.

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Figure 14.2 Levels of Control

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Types of Controls (contd)

Responsibilities for Control
Managers are accountable for and involved in activities for which control is their responsibility. Controllera position in organizations that helps line managers with their control activities.

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Managing Finances

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Responsibility for Control

Source: Van Fleet, David D., and Tim Peterson, Contemporary Management, Second Edition. Copyright 1991 by Houghton Mifflin Company. Used with permission.

Copyright 2005 by Houghton Mifflin Company. All rights reserved.

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Figure 14.3 Steps in the Control Process

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Steps in the Control Process

Establish Standards
Control standarda 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 an ongoing process. Performance measures must be valid indicators (e.g., sales, costs, units produced) of performance.

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Steps in the Control Process (contd)

Compare Performance Against Standards
Define what is a permissible deviation from the performance standard. Utilize the appropriate timetable for measurement.

Consider 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.

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Figure 14.4 Forms of Operations Control

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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).

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Financial Control (contd)

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.

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Financial Control (contd)

Budgets serve four purposes:
Help managers coordinate resources and projects. Help define the established standards for control. Provide guidelines about the organizations resources and expectations. Enable the organization to evaluate the performance of managers and organizational units.

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Table 14.1 Developing Budgets in Organizations

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Table 14.1 Developing Budgets in Organizations (contd)

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Figure 14.5 Developing Budgets in Organizations

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Strengths and Weaknesses of Budgeting

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.

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Other Tools of Financial Control

Financial Statements
A financial statement is a profile of some aspect of an organizations 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 performancerevenues less expenses as net income (i.e., profit or loss)over a period of time, usually one year.

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Other Tools of Financial Control (contd)

Ratio Analysis
The calculation of financial ratios to assess some aspect of the organizations financial health.
Liquidity ratios show how readily the firms assets can be converted to cash. Debt ratios reflect the firms ability to meet long-term financial obligations. Return ratios show how much investment return the firm is generating relative to the value of its assets. Coverage ratios estimate the ability of the firm to pay the interest expenses on money it has borrowed. Operating ratios demonstrate the efficiency of the firms functional operations.

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Other Tools of Financial Control (contd)

Financial Audits
An audits is an independent appraisal of an organizations accounting, financial, and operational systems.
External auditsfinancial appraisals conducted by experts who are not employees of the organization. Internal auditsappraisals conducted by employees of the organization.

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Structural Control
Bureaucratic Control
A form of organizational control characterized by formal and mechanistic structural arrangements.

Decentralized Control
An approach to organizational control characterized by informal and organic structural arrangements.

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Figure 14.6 Organizational Control

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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 an implemented strategy achieves the organizations goals.

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Integrating Strategy and Control (contd)

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.

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Characteristics of Effective Control

Integration with Planning
the more 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.

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Characteristics of Effective Control (contd)

Timeliness
A control system should provide information as often as necessary.

Objectivity
A control system must be free from bias and distortion.

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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.

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Resistance to Control (contd)

Rewards for Inefficiency
Rewarding operational inefficiency 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.

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Overcoming 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.

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Overcoming Resistance to Control (contd)

Resistance to control can be overcome by (contd):
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.

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