Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 1 The Control Process Begins with establishment of clear

Chapter 16Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 1

The Control Process

Begins with establishment of clear standards of performance

Begins with establishment of clear standards of performance

Involves a comparison of actual performance to desired performance

Involves a comparison of actual performance to desired performance

Takes corrective action to repair performance deficiencies

Takes corrective action to repair performance deficiencies

Is a dynamic, cybernetic processIs a dynamic, cybernetic process

Consists of feedback control, concurrent control, feedforward control

Consists of feedback control, concurrent control, feedforward control11

But… controlisn’t always

worthwhile or possible

But… controlisn’t always

worthwhile or possible


Setting Standards

1. A good standard must enable goal achievement.

2. Listening to customers or observing competitors.

3. Benchmarking other companies. Determine what to benchmark. Identify the companies against which to benchmark. Collect data to determine other companies’

performance standards.

1.11.1


Comparison to Standards

1. Compare actual performance to performance standards.

The use of “secret shoppers” helps verify that performance standards are being met.

1.21.2


Corrective Action

Identify performance deviations

Analyze those deviations

Develop and implement programs to correct them

1.31.3

ControlProcess

ControlProcess

CorrectCorrect

IdentifyIdentify

Analyze

Analyze


Dynamic, Cybernetic Process

Adapted from Exhibit 16.1

1.41.4

Develop & ImplementProgram for

Corrective Action

Develop & ImplementProgram for

Corrective Action

Set StandardsSet Standards

Measure Performance

Measure Performance

Compare withStandards

Compare withStandards

IdentifyDeviations

IdentifyDeviations

AnalyzeDeviations

AnalyzeDeviations


Feedback, Concurrent, and Feedforward Control

FeedbackControl

FeedbackControl

Gather information about performancedeficiencies after they occur

Gather information about performancedeficiencies after they occur

ConcurrentControl

ConcurrentControl

Gather information about performancedeficiencies as they occur

Gather information about performancedeficiencies as they occur

FeedforwardControl

FeedforwardControl

Monitor performance inputs ratherthan outputs to prevent or minimizeperformance deficiencies before they occur

Monitor performance inputs ratherthan outputs to prevent or minimizeperformance deficiencies before they occur

1.51.5


Feedforward Control

Guidelines for Using Feedforward Control

1. Thorough planning and analysis are required.

2. Careful discrimination must be applied in selecting input variables.

3. The feedforward system must be kept dynamic.

4. A model of the control system should be developed.

5. Data on input variables must be regularly collected.

6. Data on input variables must be regularly assessed.

7. Feedforward control requires action.

1. Thorough planning and analysis are required.

2. Careful discrimination must be applied in selecting input variables.

3. The feedforward system must be kept dynamic.

4. A model of the control system should be developed.

5. Data on input variables must be regularly collected.

6. Data on input variables must be regularly assessed.

7. Feedforward control requires action.


1.51.5


Control Loss

Is control

worthwhile?

Maybe, maybe

not.

Managers mustassess the regulation costs and the cybernetic feasibility.


Bureaucratic Control

Top-down control

Use rewards and punishment to influence employee behaviors

Use policies and rules to control employees

Often inefficient and highly resistant to change

2.12.1


Objective Control

2.22.2

ObjectiveControl

ObjectiveControl

Use of observable measures of workerbehavior or outputs to assessperformance and influence behavior

Use of observable measures of workerbehavior or outputs to assessperformance and influence behavior

BehaviorControl

BehaviorControl

Regulation of the behaviors andactions that workers perform on the job

Regulation of the behaviors andactions that workers perform on the job

OutputControl

OutputControl

Regulation of workers’ results oroutputs through rewards andincentives

Regulation of workers’ results oroutputs through rewards andincentives


Doing the Right Thing

Don’t Cheat on Travel Expense Reports

Workers are often tempted to pad their travelexpense reports

It’s often justified by feeling that they are entitled

If you can’t trust an employee to be truthfulon an expense report, how can you trust them with decisions involving millions of dollars?

Don’t Cheat on Travel Expense Reports

Workers are often tempted to pad their travelexpense reports

It’s often justified by feeling that they are entitled

If you can’t trust an employee to be truthfulon an expense report, how can you trust them with decisions involving millions of dollars?

2.22.2


Effective Output Control

1. Output control measures must be reliable, fair, and accurate.

2. Employees and managers must believe that they can produce the desired results.

3. The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance.

2.22.2


Normative Control

Created by: careful selection of employees observing experienced employees &

listening to stories about the company

2.32.3

NormativeControl

NormativeControl


Concertive Control

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

and behaviors

2.42.4

ConcertiveControl

ConcertiveControl

Regulation of workers’ behavior anddecisions through work group values and beliefs

Regulation of workers’ behavior anddecisions through work group values and beliefs


Self-Control

Also known as self-management Employees control their own behavior Employees make decisions within

well-established boundaries Managers teach others the skills they need

to maximize work effectiveness Employees set goals and monitor their own

progress

2.52.5


What to Control?

CustomerDefections

CustomerDefections QualityQuality Waste and

Pollution

Waste andPollution

BalancedScorecard

BalancedScorecard

Budgets,Cash Flow,

EVA

Budgets,Cash Flow,

EVA

33


The Balanced Scorecard

CustomerPerspective

CustomerPerspective

InternalPerspective

InternalPerspective

Innovation and LearningPerspective

Innovation and LearningPerspective

FinancialPerspective

FinancialPerspective

3.13.1


Advantages of the Balanced Scorecard

1. Forces managers to set goals and measureperformance in each of the four areas

2. Minimizes the chances of suboptimization performance improves in one area, but at

the expense of others

3.13.1


The Balanced Scorecard:Southwest Airlines

3.13.1


The Financial Perspective

Cash flow analysis

Cash flow analysis

Predicts how changes in a business will affect its ability to take in more cash than it pays out

Predicts how changes in a business will affect its ability to take in more cash than it pays out

Balance sheetsBalance sheets Provide a snapshot of a company’sfinancial position at a particular time

Provide a snapshot of a company’sfinancial position at a particular time

Income statements

Income statements

Show what has happened to an organization’s income, expenses, and net profit over a period of time

Show what has happened to an organization’s income, expenses, and net profit over a period of time

Financialratios

Financialratios

Used to track liquidity, efficiency, and profitability over time comparedto other businesses in its industry

Used to track liquidity, efficiency, and profitability over time comparedto other businesses in its industry

3.23.2


Basic Accounting Tools

1. Forecast sales

2. Project changes in anticipated cash flows

3. Project anticipated cash outflows

4. Project net cash flows by combining anticipated cash inflows and outflows


3.23.2

Steps for a Basic Cash Flow AnalysisSteps for a Basic Cash Flow Analysis



1. Assets• Current assets• Fixed assets

2. Liabilities• Current liabilities• Long-term liabilities

3. Owner’s equity• Stock• Additional paid in capital• Retained earnings

3.23.2

Parts of a Basic Balance SheetParts of a Basic Balance Sheet




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 INCOME3.23.2

Basic Income StatementBasic Income Statement



Financial Ratios

LIQUIDITY RATIOS

Current Ratio

Quick (Acid Test) Ratio

LIQUIDITY RATIOS

Current Ratio

Quick (Acid Test) Ratio

LEVERAGE RATIOS

Debt to Equity

Debt Coverage

LEVERAGE RATIOS

Debt to Equity

Debt Coverage

EFFICIENCY RATIOS

Inventory Turnover

Average CollectionsPeriod

EFFICIENCY RATIOS

Inventory Turnover

Average CollectionsPeriod

PROFITABILITY RATIOS

Gross Profit Margin

Return on Equity

PROFITABILITY RATIOS

Gross Profit Margin

Return on Equity


3.23.2


Common Kinds of Budgets

CashBudgets

CashBudgets

Used to forecast the cash a company will have for expenses

Used to forecast the cash a company will have for expenses

ExpenseBudgets

ExpenseBudgets

Used to determine spending onsupplies, projects, or activities

Used to determine spending onsupplies, projects, or activities

ProfitBudgets

ProfitBudgets

Used by profit centers, which have“profit and loss” responsibility

Used by profit centers, which have“profit and loss” responsibility

RevenueBudgets

RevenueBudgets

Used to project or forecastfuture sales

Used to project or forecastfuture sales

Variable BudgetsVariable Budgets Used to project costs acrossvarying levels of sales/revenues

Used to project costs acrossvarying levels of sales/revenues

Capital ExpenditureBudgets

Capital ExpenditureBudgets

Used to forecast large, long-lasting investments

Used to forecast large, long-lasting investments

3.23.2Adapted from Exhibit 16.7


Economic Value Added (EVA)

Economic ValueAdded

Economic ValueAdded

The amount by which company profits exceed the cost of capital in a given year

The amount by which company profits exceed the cost of capital in a given year

Common Costs of CapitalCommon Costs of Capital

Long-term bank loans Interest paid to bondholders Dividends and growth in stock value that accrue to

shareholders

Long-term bank loans Interest paid to bondholders Dividends and growth in stock value that accrue to

shareholders

3.23.2


Economic Value Added (EVA)

1. Calculate net operating profit after tax

1. Calculate net operating profit after tax

2. Identify how much capitalthe company has invested

2. Identify how much capitalthe company has invested

3. Determine the cost paidfor capital

3. Determine the cost paidfor capital

4. Multiply capital used (step 2)times cost of capital (step 3)

4. Multiply capital used (step 2)times cost of capital (step 3)

5. Subtract total dollar cost of capital from net profit after taxes

5. Subtract total dollar cost of capital from net profit after taxes

$3,500,000$3,500,000

$16,800,000$16,800,000

10%10%

(10% x $16,800,000) = $1,680,000

(10% x $16,800,000) = $1,680,000

$3,500,000 net profit-$1,680,000 cost of capital$1,820,000 EVA

$3,500,000 net profit-$1,680,000 cost of capital$1,820,000 EVA

Adapted from Exhibit16.8

3.23.2


Why Is EVA Important?

Shows whether a business, division, department, profit center, or product is paying for itself

Makes managers at all levels pay closer attention to their segment of the business

Encourages managers

and workers to be

creative in looking for

ways to improve

EVA performance

3.23.2


The Customer PerspectiveControlling Customer Defections

Monitoring customer defections:

identify which customers are leaving the company

measuring the rate at which they are leaving

Obtaining a new customer costs five times as much as keeping a current one

Customers who have left are likely to tell you what you are doing wrong

Understanding why a customer leaves can help fix problems and make changes

3.33.3


The Internal PerspectiveControlling Quality

ExcellenceExcellence

ValueValue

Conformance to ExpectationsConformance to Expectations

3.43.4


The Internal PerspectiveControlling Quality

3.43.4

Exhibit 16.12


Controlling Waste and Pollution

Good housekeepingGood housekeeping

Material/product substitutionMaterial/product substitution

Process modificationProcess modification

3.53.5



Waste Disposal

Waste Treatment

Recycle & Reuse

Waste Prevention & Reduction

3.53.5

Controlling Waste and Pollution

Documents

Chapter 16 Copyright ©2007 by South-Western, a division of Thomson Learning. All rights reserved 1 The Control Process Begins with establishment of clear