chapter 16 control -...

Chapter 16

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1Copyright ©2011 by Cengage Learning. All rights reserved

Chapter 16Control

Designed & Prepared byB-books, Ltd.

MGMT3

Chuck Williams


Basics of Control

After reading this section, you should be able to:

1. describe the basic control process.


The Control Process

Begins by establishing clear standards of performanceBegins by establishing clear standards of performance

Involves comparing actual performance to desired performanceInvolves comparing actual performance to desired performance

Takes corrective action to repair performance deficienciesTakes corrective action to repair performance deficiencies

Is a dynamic, cybernetic processIs a dynamic, cybernetic process

Consists of feedback control, concurrent control, feedforward controlConsists of feedback control, concurrent control, feedforward control

But… controlisn’t always

worthwhile or possible

But… controlisn’t always

worthwhile or possible

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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


Corrective Action

• Identify performance deviations

• Analyze those deviations

• Develop and implement programs to correct them

ControlProcessControlControlProcessProcess

CorrectCorrect

IdentifyIdentify

AnalyzeAnalyze1.31.3


Dynamic, Cybernetic Process

Develop & ImplementProgram for

Corrective Action

Develop & ImplementProgram for

Corrective Action

Set StandardsSet Standards

Measure Performance

Measure Performance

Compare withStandards

Compare withStandards

IdentifyDeviationsIdentify

DeviationsAnalyze

DeviationsAnalyze

Deviations1.41.4

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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. Plan and analyze thoroughly.

2. Be discriminating as you select input variables.

3. Keep the feedforward system dynamic. Don’t let it become a matter of habit.

4. Develop a model of the control system.

5. Collect data on input variables regularly.

6. Assess data on input variables regularly.

7. Take action on what you learn.

1. Plan and analyze thoroughly.

2. Be discriminating as you select input variables.

3. Keep the feedforward system dynamic. Don’t let it become a matter of habit.

4. Develop a model of the control system.

5. Collect data on input variables regularly.

6. Assess data on input variables regularly.

7. Take action on what you learn.1.51.5


Control Loss

Is controlworthwhile?Maybe, maybe not.

Managers mustassess the regulation costs and the cybernetic feasibility.

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Control Methods

After reading these sections, you should be able to:

2. discuss the various methods that managerscan use to maintain control.

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


Control Methods

NormativeNormative ConcertiveConcertive Self-ControlSelf-Control

BureaucraticBureaucratic ObjectiveObjective

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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

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Beyond the BookAdding Control from the TopWhen current CEO Paul Hanrahan first joined energy provider AES, an executive told him, “We don’t have procedures…use your common sense.”For years, the decentralized structure and entrepreneurial atmosphere helped drive AES to rapid growth and success. In 2002, however, a liquidity crisis involving short term debt and lax accounting standards almost sunk the company. While much of the freedom and experimentation remains, Hanrahan has added some structure as well. New finance, human resources, and business development divisions were established. And in 2008, AES’s accounting practices were finally brought into compliance with the Sarbanes-Oxley Act.

Source: M. Gunther, “A Powerful Comeback”, Fortune, 26 October 2009. 110-112.


Objective Control

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

OutputControlOutputControl

Regulation of workers’ results oroutputs through rewards andincentives

Regulation of workers’ results oroutputs through rewards andincentives

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

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Normative Control

Created by:– careful selection of employees– observing experienced employees &

listening to stories about the company

NormativeControl

NormativeControl

2.32.3


Concertive Control

Autonomous work groups– operate without managers

– group members control processes, output, and behaviors

ConcertiveControl

ConcertiveControl

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

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

2.42.4


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 needto maximize work effectiveness

• Employees set goals and monitor their own progress

2.52.5

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What to Control?

CustomerDefectionsCustomerDefections QualityQuality Waste and

PollutionWaste andPollution

BalancedScorecardBalancedScorecard

Budgets,Cash Flow,

EVA

Budgets,Cash Flow,

EVA

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The Balanced Scorecard

CustomerPerspectiveCustomer

PerspectiveInternal

PerspectiveInternal

Perspective

Innovation and LearningPerspective

Innovation and LearningPerspective Financial

PerspectiveFinancial

Perspective

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 at the

expense of others

3.13.1

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The Balanced Scorecard:Southwest Airlines

3.13.1

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Sources: G. Anthes, “ROI Guide: Balanced Scorecard,” Computer World, 17 February 2003, available online at http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=78512&intsrc=article_pots_bot [accessed 5 September 2008].


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 statementsIncome

statementsShow 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

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

Beyond the Book

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1. Assets• Current assets• Fixed assets

2. Liabilities• Current liabilities• Long-term liabilities

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

Parts of a Basic Balance SheetParts of a Basic Balance Sheet

Beyond the Book



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

Basic Income StatementBasic Income Statement

Beyond the Book


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

Beyond the Book

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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

ExpenseBudgetsExpenseBudgets

Used to determine spending onsupplies, projects, or activities

Used to determine spending onsupplies, projects, or activities

ProfitBudgetsProfit

BudgetsUsed 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

3.23.2

Beyond the Book


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 toshareholders

� Long-term bank loans

� Interest paid to bondholders

� Dividends and growth in stock value that accrue toshareholders

3.23.2


Economic Value Added (EVA)

1. Calculate net operating profit after tax (NOPAT)

1. Calculate net operating profit after tax (NOPAT)

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

3.23.2

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Beyond the BookBig Results from Little ChangesSmall changes to a process can have significant results, especially in large companies like Home Depot. In trying to find new ways to cut back on expenses, Home Depot decided to change the brand of the coffee they served at their help desk for professional contractors (note: they didn’t eliminate the coffee entirely). They managed to save $500,000. Several $500,000 changes can really add up.

Source: C. Tome, “C-Suite Strategies, The Colvin Interview: Renovating Home Depot”, interview by G. Colvin, Fortune, 31 August 2009. 45-50.


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 performance3.23.2


Beyond the Book

Cost-Cutting GuidelinesHere are some guidelines for cost-cutting:

1. Instead of implementing one-off cost-cuts, examine the entire process involved in a job and ask how it can be made more efficient.

2. Try bartering with other companies. Exchange low margin cost products for things that you would normally pay cash for.

3. Offer to split the savings with employees.4. Reducing expenses at the cost of quality can have adverse

effects. 5. Leasing as opposed to buying equipment can reduce costs

and have tax benefits. 6. Establish contract terms with your distributors that allow you

to renegotiate prices annually.

Source: T. Meyers, “frugal is back”, Entrepreneur, March 2009. 49-51.

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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 ten 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 changes3.33.3


The Internal PerspectiveControlling Quality

ExcellenceExcellence

ValueValue

Conformance to ExpectationsConformance to Expectations

3.43.4


The Internal PerspectiveControlling Quality

3.43.4

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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

Controlling Waste and Pollution

3.53.5

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