Chapter 7

Control

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What Would You Do?

Movie theaters have changed greatly in the last 20 years

Should Regal build its own megaplexes? What resources would be needed for this

expansion? Would fast expansion threaten their business

model?

3

After discussing this section you should be able to:

Learning ObjectivesBasics of Control

1. describe the basic control process

2. be able to answer the question: Is control necessary or possible?

4

The Control Process

Compare actual to desired performance

Establish clear standards

Take corrective action, if needed

Is a dynamic process

Consists of three basic methods

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Setting Standards

Determine what should be benchmarked Identify companies against which to

benchmark standards Collect data on other companies’

performance standards

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Cybernetic Control Process

ActualPerformance

MeasurePerformance

Comparewith

Standard

IdentifyDeviations

DesiredPerformance

ImplementProgram

forCorrections

DevelopProgram

forCorrections

AnalyzeDeviations

Adapted from Exhibit 7.1

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Basic Control Methods

Feedback control gather information about performance deficiencies

after they occur Concurrent control

gather information about performance deficiencies as they occur

Feedforward control gather information about performance deficiencies

before they occur

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Is Control Necessary or Possible?

What should be doneif more control is

necessary but not possible?

Is more control necessary?

Is more control possible?

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Is More Control Necessary?

Degree of dependence the extent to which a company needs a particular

resource to accomplish its goals Resource flow

the extent to which a company has easy access to critical resources

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Is More Control Possible?

Cost of control direct costs of the control unintended costs

Cybernetic feasibility the extent to which it is possible to implement

each step in the control process if a step cannot be implemented, then control may

not be possible

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Quasi-Control: When Control Isn’t Possible Reducing dependence

choose to abandon or change goals when control over a critical resource is not

possible Restructure dependence

exchange dependence on one critical resource for dependence on another

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Is Control Necessary or Possible?

Dependencesufficientlyhigh?

Expectedresourceflowsunacceptable?

Cyberneticsfeasible?

Regulationcostacceptable?

Goodsfixed?

Response:

RegulateDependence

RestructureDependence

ReduceDependence

Do Nothing

yes yes yes yes

yesno

no no

no

no

Adapted from Exhibit 7.3

S.G. Green & M.A. Welsh, “Cybernetics and Dependence:

Reframing the Control Concept, “ Academy of Management

Review, 13 (1988): 287-301

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After discussing this section you should be able to:

Learning ObjectivesHow and What to Control

3. discuss the various methods that managers can use to maintain control

4. describe the behaviors, processes, and outcomes that managers are choosing to control in today’s organizations

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Blast From The PastFrom 1870 to the Present—Five Eras of Management Control

Industrial Betterment, 1870-1900 Scientific Management, 1900-1922 Human Relations, 1925-1955 Systems Rationalism, 1955-1980 Organizational Culture and Quality, 1980-

Present

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Control Methods

Bureaucratic

Objective

Normative

Concertive

Self-Control

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Bureaucratic

Top-down control Use rewards and punishment to influence

employee behaviors Use polices and rules to control employees Often inefficient and resistant to change

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Objective

The use of observable measures Behavioral control

regulate employee behaviors and actions managers monitor and shape employee behaviors

Output control measure employee outputs focus is on outcomes not behaviors

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Normative Control

Company values and beliefs guide employee behavior and decisions

Cultural norms not rules, guide employees Created by:

careful selection of employees role-modeling and retelling of stories

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Concertive Controls

Employees are guided by the beliefs of work groups

Autonomous work groups operate without managers group members control processes, output, and

behaviors

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Self-Control

Employees control their own behavior Employees make decisions within well-

established boundaries Management and employees set goals and

monitor their own progress

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What to Control

Balanced Scorecard

Financial Perspective

Customer Perspective

Internal Business Perspective

Innovation & Learning Perspective

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Example of a Balanced Scorecard

Financial•EVA

•Ratios and Budgets

Innovation/Learning

•Waste minimization

•Time to market

Customer•Defections

•Partnerships

Internal Business•Quality

•Productivity

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Balanced Scorecard

Managers look beyond traditional financial measures

Managers set specific goals in each of four areas

Helps minimize the chances of suboptimization

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Controlling Economic Value Added

(Financial Perspective) The amount by which profits exceed the cost of capital in a given year

Important because: shows if a profit center is paying for itself focuses attention on specific departments encourages creative ways to improve

organizational performance

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Basic Accounting Tools Basic Cash Flow

Analysis Steps Forecast sales Project changes in

anticipated cash flows Project anticipated cash

outflows Project net cash flows by

combining anticipated cash inflows and outflows

Parts of a Basic Balance Sheet Assets

Current assets Fixed assets

Liabilities Current liabilities Long-term liabilities

Owner’s equity Stock Additional paid in capital Retained earnings

Adapted from Exhibit 7.6

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Basic Accounting Tools (cont’d) Basic Income Statement

SALES REVENUE- sales returns and allowances+ other income= NET REVENUE- cost of goods sold= GROSS PROFIT- total operating expenses= INCOME FROM OPERATIONS- interest expense= PRETAX INCOME- income tax= NET INCOME

Adapted from Exhibit 7.6

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Common Financial Ratios

Liquidity Ratios•Current Ratio

•Quick Ratio

Profitability Ratios•Gross Profit Margin

•Return on Equity

Leverage Ratios•Debt to Equity

•Debt Coverage

Efficiency Ratios•Inventory Turnover

•Average Collections Period

Adapted from Exhibit 7.7

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Common Kinds of Budgets

Revenue

Expense

Profit

Cash

Capital Expenditure

Variable

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Been There, Done ThatEVA at Armstrong World Industries It allows them to more closely align them with

shareholders’ interests Augments traditional measures Reinforced with long-term incentives

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Controlling Customer Defections

(Customer Perspective) The rate by which customers are leaving the company

Don’t rely completely on customer satisfaction surveys

Easier to retain a customer, than get new ones

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Controlling Quality(Internal Business Perspective)

Internal perspective Quality is usually measured three ways:

excellence value conformance to expectations

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Controlling Waste and Pollution(Innovation & Learning Perspective) Often an over-looked area Three strategies for waste prevention and

reduction good housekeeping material/product substitution process modification

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Four Levels of Waste Minimization

Waste Disposal

Waste Treatment

Recycle & Reuse

WastePrevention

& Reduction

Adapted from Exhibit 7.14

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What Really Happened? Regal built 111 new theaters Late to the megaplex market, competitors

already had the best locations Regal uses its information system to control

costs, but that may not be enough Losses and debt are mounting