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Mgmt 371Chapter Twenty

Basic Elements of Control

Much of the slide content was created by Dr, Charlie Cook, Houghton Mifflin, Co.©

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The Nature of Control in Organizations Control

The regulation of organizational activities so that some targeted element of performance remains within acceptable limits.

Comparing actual results to intended results and determining the cause of any substantial deviation.

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The Benefits of Control in Organizations 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 Purpose of Control

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The Nature of Control in Organizations (Areas of Control) Types of Controls

Physical resources

inventory management

quality control

equipment [usage] control.

Human resources

selection and placement

training and development

performance appraisal

compensation.

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The Nature of Control in Organizations (Areas of Control) Types of Controls

Information resources sales and marketing forecasts

environmental analysis

public relations

production scheduling

economic forecasting.

Financial resources managing capital funds and cash flow

collection and payment of debts.

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Levels of Control

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Levels of Control

Strategic- ensures the organization is maintaining acceptable progress to its strategic goals.

Structural-ensures that the organization’s structure serves its intended purpose.

Operations- ensures that the process the firm uses to produce goods and services is efficient.

Financial-ensures that the organization is operating within financial resource constraints.

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The Nature of Control in Organizations Responsibilities for

Control Controller—a position

in organizations that helps line managers with their control activities.

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Steps in the Control Process

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Steps in the Control Process

Establish standards Control standard—a target against which

subsequent performance will be compared. Should be expressed in measurable

terms. Should be consistent with organizational

goals. Should be identifiable indicators of

performance.

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Steps in the Control Process

Measure performance

Performance measurement is a constant, 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

Compare performance against standards Define what is a permissible deviation from the

performance standard.

Identify the cause of any impermissible deviation.

You cannot correct the deviation unless you know what caused it.

Utilize the appropriate timetable for measurement.

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Steps in the Control Process

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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Forms of Operations Control

a.k.a., Concurrent Control

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Financial Control

Financial Control Control of financial resources

(revenues, shareholder investments) as they:

Flow into the organization revenues

Are held by the organization as working capital, retained earnings

Flow out of the organization as payment of expenses

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Financial Control

Budgetary Control Budgets

May be established at any organizational level. Are typically for one year or less. May be expressed in financial terms, units of output,

or other quantifiable factors. Purposes of budgets

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.

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Developing Budgets in Organizations

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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.

Budgets link plans and control as part of plans and then serving as part of control

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 Financial statement

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.

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Other Tools of Financial Control

Ratio Analysis The calculation of one or more financial ratios to

assess some aspect of the organization’s financial health.

Liquidity ratios Debt ratios Operating ratios

Financial Audit An independent appraisal of an organization’s

accounting, financial, and operational systems. External audits Internal audits

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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 based on informal and organic structural arrangements.

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Organizational Control

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Strategic Control: Integrating Strategy & Control Strategic control

Is aimed maintaining an effective alignment with the environment and moving toward achieving strategic goals.

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.

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Strategic Control: Integrating Strategy & Control 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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Managing Control in Organizations

The Five Characteristics of Effective Control Integration with planning Flexibility Accuracy Timeliness Objectivity

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Managing Control in Organizations (Resistance) Resistance to Control Due To:

Overcontrol Inappropriate Focus Rewards for Inefficiency Too much accountability

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Overcoming Resistance to Control

Designing controls integrated with organizational planning and aligned with goals and standards.

Creating flexible, accurate, timely, and objective controls.

Avoiding overcontrol in the implementation of controls.

Guarding against controls that reward inefficiencies.

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Overcoming Resistance to Control

Encouraging employee participation in the planning and implementing of control systems.

Developing a system of checks and balances that can verify the accuracy of performance indicators.