Welcome to AB140 Control

Michael B. McKenna

Managerial ControlLeft to their own, people may act in ways

that they perceive to be beneficial to them individually but that may work to the detriment of the organization as a whole. Even well intentioned people may not know whether they are directing their efforts towards the activities that are most important.

Management – Bateman and Snell, (2009) p284.

Managerial Control

• ControlAny process that directs the activities of individuals toward the achievement of organizational goals

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Why do companies need control systems?

Spinning out of control?

• Lax top management

• Absence of policies

• Lack of agree-upon standards

• “Shoot the messenger” management

• Lack of periodic reviews

• Bad information systems

• Lack of ethics in the culture

Different Types of Control

• Bureaucratic Control

• Market Control

• Clan Control

The Control Process

Management: Bateman/Snell

Strategies for Achieving Control

• Bureaucratic control -The use of rules, regulations, and authority to guide performance

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Market Control• Market controls let supply and demand

determine prices and profits.-Price becomes an indicator of the value of the good or service.

-Price competition has the effect of controlling productivity and performance.

• Market controls can be at the corporate, business unit, and individual level.

• Transfer Price - price charged by one unit for a good or service provided to another unit within the organization

Strategies for Achieving Control

• Clan control-Control based on the norms, values, shared goals, and trust among group members.

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Step 1 of Control Systems

1. SETTING PERFORMANCE STANDARDS• Goals

• Profitability• Customer Satisfaction

• Level of expected performance

Step 2 of Control Systems

2. MEASURING PERFORMANCE

• Collect Data

Measuring Performance

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Comparing Performance with the Standard

• Principle of exception - A managerial principle stating that control is enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard.

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Step 3 of Control Systems

3. COMPARE PERFORMANCE

• Standards

• Determine deviations

Step 4 of Control Systems

4. TAKE ACTION

• Correct problems• Reinforce success

Step 4 - Taking Action to Correct Problemsand Reinforce Successes

• Specialist control -Operators of computer-numerical-control (CNC) machines must notify engineering specialists of malfunctions

• Operator control-Multi-skilled operators can rectify their own problems as they occur

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Bureaucratic Control – 3 Types

• Feedforward control

• Concurrent control

• Feedback control

Approaches to Bureaucratic Control

• Feedforward control-The control process used before operations begin, including policies, procedures, and rules designed to ensure that planned activities are carried out properly.

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Approaches to Bureaucratic Control

• Concurrent control-The control process used while plans are being carried out, including directing, monitoring, and fine-tuning activities as they are performed.

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Approaches to Bureaucratic Control

• Feedback control-Control that focuses on the use of information about previous results to correct deviations from the acceptable standard.

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Six Sigma• Six Sigma - a quality control tool designed to

reduce defects in all organization processes• Sigma is the Greek letter used in statistics to

designate the estimated standard deviation or variance in a process.

• The lower the sigma number, the higher the level of variation or defects.

• The higher the sigma number, the lower the level of variation or defects.

• At six-sigma-level, a process is producing fewer than 3.4 defects per million (approximately 99.99966 accuracy)

Management Audits

• Management audit-An evaluation of the effectiveness and efficiency of various systems within an organization

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Management Audits

• External audit -An evaluation conducted by one organization, such as a CPA firm, on another.

• Internal audit -A periodic assessment of a company’s own planning, organizing, leading, and controlling processes.

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External Audit

1. Investigates other organizations for possible merger or acquisition

2. Determines the soundness of a company that will be used as a major supplier

3. Discovers the strengths and weaknesses of a competitor to maintain or better exploit the competitive advantage of the investigating organization

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Internal Audit

1. Assesses what the company has done for itself

2. What it has done for its customers or other recipients of its goods or services.

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Budgetary Controls

• Budgeting -The process of investigating what is being done and comparing the results with the corresponding budget data to verify accomplishments or remedy differences

-also called budgetary controlling.

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Types of Budgets

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A Sales-Expense Budget

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Types of Budgets

• Accounting audits-Procedures used to verify accounting reports and statements.

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Activity-Based Costing

• Activity-based costing (ABC)-A method of cost accounting designed to identify streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities

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How Dana Discovers WhatIts True Costs Are

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Financial Controls

• Balance sheet A report that shows the financial picture of a company at a given time and itemizes assets, liabilities, and stockholders’ equity.

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How can we develop effective control systems?

• They recognize the relationship between empowerment and control.

• They use multiple approaches.

Effective Control Systems

• Systems based on valid performance standards

-The most effective standards are quantitative. You also want to make sure there are not too many measures in place

• Communicate adequate information to employees

-People must receive feedback about their performance

Effective Control Systems

• Acceptable to employees-Control system must have useful performance standards but are not over controlling. The standards must be possible to achieve. The system should emphasize positive behavior.

•Use both financial and non-financial control systems.

-Use Financial, customer satisfaction, business processes, and learning and growth measures that are acceptable to employees.

Other types of controls used?

Financial Controls

• Total assets = Total liabilities + Stockholders’ Equity

• Profit and Loss Statement - an itemized financial statement of the income and expenses of a company’s operations

• Current Ratio - a liquidity ratio that indicates the extent to which short-term assets can decline and still be adequate to pay short-term liabilities

A Comparative

Balance Sheet

A Comparative Statement of Profit and Loss

Financial Controls

• Debt-Equity Ratio - a leverage ratio that indicates the company’s ability to meet its long-term financial obligations

• Return on Investment (ROI) - A ratio of profit to capital used, or a rate of return from capital

Management Myopia

• Management Myopia - focusing on short-term earnings and profits at the expense of longer-term strategic obligations

Assignments• Discussion Assignment

-“Swap-out” hours

• Dropbox Assignment- How can Lei apply the four-step control process outlined in the text to address

the problem of 'swapping out' hours?

• Unit 6 Exam – 20 questions - POLC• Only 2 hours

• Only enter once