McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 16 Chapter Management Control Management Control McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives After reading this chapter, you should be able to: z Understand the importance of control systems. z Distinguish between system- and person-based control systems. z Distinguish between process- and outcome-based control systems. z Evaluate various control approaches. z Understand why measurement is necessary for control. z Develop measures that support effective control systems. z Develop and implement a balanced scorecard. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. The Importance of Control z Control is the process of comparing performance to standards and taking corrective action. z It ensures that: ¾ standards are met ¾ errors are limited ¾ quality is acceptable ¾ products are safe ¾ the company is performing at the highest possible level z Control is closely associated with planning. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. Categorization of Control Approaches Control approaches can be categorized according to two factors - type and focus: z Type - divided into formal and informal approaches ¾ Formal control systems consist of written rules ¾ Informal control systems rely on unwritten expectations z Focus – directed at the outcome or the process ¾ Outcome approach focuses on the results of a business process ¾ Process approach focuses on how the work is performed McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. Control Approaches Model Subjective Control Clan Control Marketing Control Financial Controls Operations Management Bureaucratic Control Balanced Scorecard Outcomes Focus Process Formal Informal Type McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. Informal and Outcome-Focused Control z Characterized by subjective control -an informal approach based on global assessment of outcomes z Subjective control: ¾ does not typically utilize explicit standards ¾ does not specify how deviations from an acceptable level should be handled ¾ is common in smaller businesses and service settings ¾ is the “no news is good news” approach McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. Formal and Process-Focused Control: Bureaucratic Control z Bureaucratic control is a formal control approach that operates in a cycle and is characterized by written guidelines and controls. z Involves: ¾ the application of standards to assess performance ¾ the application of corrective actions to regulate performance and bring it back to the level of the standards. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. The Bureaucratic Control Process 1. Establishing Standards 2. Performance Measurement 3. Identifying Gaps 4. Corrective Action McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. The Bureaucratic Control Process (continued) z Establishing Standards ¾ Standards should be participative rather than simply implemented from the top down so that employees understand and are committed to them. ¾ Standards come from: 9 goals 9 statistical analysis 9 benchmarking z Performance Measurement ¾ Use of objective data, which is free from error or bias ¾ Use of subjective data, which involves human judgement McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. [...]... Financial controls - the use of various monetary measures to regulate performance McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Types of Financial Controls Budgetary Control Financial Ratios McGraw-Hill Financial Statements Activity-Based Costing © 2004 The McGraw-Hill Companies, Inc All rights reserved Types of Financial Controls (cont.) Budgetary control - used to specify... Internal Business Processes - what we need to do to have world class processes Learning and Growth - how to change and increase our potential and effectiveness McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Formal and Outcome-Focused Control The regulation of performance by applying the standards or guidelines to the outcomes of a process through: Market control - the use of indicators... events Can help managers control and predict costs Financial Statements - tools that are used to assess and control the financial health of an organization Balance sheets Profit and loss (income) statements McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Types of Financial Controls (cont.) Financial Ratios - provide an overall check of performance Liquidity ratios - an organization’s... pay short-term debt Leverage ratios - the amount of funds available in an organization from shareholders and creditors Profitability ratios - indicate the amount of financial return from an investment Activity-Based Costing - associates costs with tasks calculated for: receiving and processing sales orders expediting supplies and production distribution resolving errors and problems McGraw-Hill © 2004... unacceptable variations Corrective Action What should management do? Nothing Take action Change standards McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Types of Bureaucratic Control Feedforward Control Concurrent Control Feedback Control McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Types of Bureaucratic Control (cont.) Feedforward control Designed to... completed McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved The Balanced Scorecard A balanced scorecard is a technique designed to control and improve: customer service learning and growth finance internal business processes Links strategy to action Is more broad than bureaucratic control Focus on: priorities the work process how things are done McGraw-Hill © 2004 The McGraw-Hill Companies,... problems McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Informal and Process-Focused Control Emphasizes an implicit sense and common understanding of how things should be done Does not rely on explicit guidelines and standards Assumes that people have an internal set of standards that will guide how they perform McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved... organization has a strong culture McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Management Control Revisited Should control be directed at people, systems, or some other aspect of the company? Emphasis should be on systems and performance rather than people Focusing on people can result in resistance and negative reactions McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights... approach McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Applications: Management is Everyone’s Business—For Managing Teams Teams of workers often employ formal and process-focused control Team roles and contributions to team efforts are often controlled with the culture and norms Understanding how control mechanisms work is to the benefit of all of the team members McGraw-Hill © 2004... McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights reserved Applications: Management is Everyone’s Business—For Individuals Understanding control mechanisms can clarify why they are needed and how they contribute to the effectiveness of the organization Many control techniques discussed in this chapter can be applied to one’s own work McGraw-Hill © 2004 The McGraw-Hill Companies, Inc All rights . McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 16 Chapter Management Control Management Control McGraw-Hill © 2004 The McGraw-Hill. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved. Informal and Outcome-Focused Control z Characterized by subjective control -an informal