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					             Chapter 16
              Control


    MGMT
                     Designed & Prepared by
Chuck Williams                 B-books, Ltd.

                                           1
        Basics of Control

After reading this section,
you should be able to:


  1. describe the basic control process.




                                           2
           The Control Process
    Begins by establishing clear
    standards of performance

    Involves comparing actual performance
    to desired performance

    Takes corrective action to repair
    performance deficiencies
                                          But… control
                                           isn’t always
    Is a dynamic, cybernetic process
                                          worthwhile or
                                             possible
    Consists of feedback control,
    concurrent control, feedforward control
1
                                                      3
             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.

1.1
                                                         4
              Corrective Action
      •   Identify performance
          deviations
                                 Identify
      •   Analyze those
          deviations

      •   Develop and
          implement programs     Control
          to correct them        Process

                     Correct                Analyz
1.3                                           e
                                                5
      Dynamic, Cybernetic Process
                              Set Standards


        Develop & Implement
                               Measure
           Program for
                              Performance
         Corrective Action


                              Compare with
                               Standards


             Analyze            Identify
            Deviations         Deviations
1.4
                                              6
          Feedback, Concurrent,
         and Feedforward Control
       Feedback     Gather information about performance
        Control     deficiencies after they occur



      Concurrent    Gather information about performance
       Control      deficiencies as they occur


                    Monitor performance inputs rather
      Feedforward   than outputs to prevent or minimize
        Control     performance deficiencies before they
                    occur
1.5
                                                           7
                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.
1.5
                                                                8
              Control Loss
Is control
worthwhile?
Maybe,
maybe not.


              Managers must
              assess the regulation
              costs and the cybernetic
              feasibility.

                                         9
        Control Methods

After reading these sections,
you should be able to:

 2. discuss the various methods that managers
    can use to maintain control.
 3. describe the behaviors, processes, and
    outcomes that today’s managers are choosing
    to control their organizations.

                                           10
           Control Methods


          Bureaucratic       Objective




    Normative       Concertive       Self-Control




2
                                                    11
            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
2.1
                                       12
           Objective Control
                  Use of observable measures of worker
      Objective
                  behavior or outputs to assess
       Control    performance and influence behavior


                  Regulation of the behaviors and
      Behavior
                  actions that workers perform
      Control     on the job


                  Regulation of workers’ results or
      Output
                  outputs through rewards and
      Control     incentives
2.2
                                                      13
       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.
2.2
                                                     14
           Normative Control
                  Created by:
      Normative     – careful selection of employees
       Control      – observing experienced employees &
                      listening to stories about the company




2.3
                                                     15
            Concertive Control
                        Regulation of workers’ behavior and
       Concertive
                        decisions through work group values
        Control         and beliefs


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



2.4
                                                          16
                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
2.5
                                                     17
           What to Control?

                                   Budgets,
            Balanced
                                  Cash Flow,
            Scorecard
                                     EVA



    Customer                               Waste and
                        Quality
    Defections                             Pollution



3
                                                       18
                                                                                   Beyond the Book
 “What Gets Measured
 Gets Managed”: Greenhouse Gases
• Companies like Wal-Mart and Procter & Gamble are
  partnering with the Carbon Disclosure Project
  (CDP), a $41-trillion organization, to voluntarily
  track and report their carbon emissions.
• Although legal requirements to control carbon
  emissions are in the offing, the CDP is not a
  government agency, but a group of investors
  pressuring companies from within.
• There’s risk in exposing one’s faults, but also
  advantage: companies will have a head start on
  compliance once it becomes law, a good PR angle,
  and knowledge about a major source of inefficiency.
Source: D. Roberts, “Carbon Copy,” Fast Company, December 2007-January 2008, 78.

                                                                                              19
      The Balanced Scorecard

            Customer              Internal
           Perspective          Perspective


      Innovation and Learning
            Perspective          Financial
                                Perspective




3.1
                                              20
            Advantages of the
           Balanced Scorecard
      1. Forces managers to set goals and measure
         performance in each of the four areas

      2. Minimizes the chances of suboptimization
        – performance improves in one area at the
          expense of others



3.1
                                                21
      The Balanced Scorecard:
         Southwest Airlines




3.1
                            22
      The Financial Perspective
                       Predicts how changes in a business
        Cash flow
                       will affect its ability to take in more
         analysis      cash than it pays out

                       Provide a snapshot of a company’s
      Balance sheets
                       financial position at a particular time

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

                       Used to track liquidity, efficiency,
        Financial
                       and profitability over time compared
          ratios       to other businesses in its industry
3.2
                                                                 23
                                       Beyond the Book
 Basic Accounting Tools
     Steps for a Basic Cash Flow Analysis


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



                                                     24
                                    Beyond the Book

 Basic Accounting Tools
         Parts of a Basic Balance Sheet


1. Assets
   •   Current assets
   •   Fixed assets
2. Liabilities
   •   Current liabilities
   •   Long-term liabilities
3. Owner’s equity
   •   Stock
   •   Additional paid in capital
   •   Retained earnings
                                               25
                                   Beyond the Book

Basic Accounting Tools
            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
                                              26
                                     Beyond the Book
Financial Ratios
LIQUIDITY RATIOS          LEVERAGE RATIOS

Current Ratio             Debt to Equity

Quick (Acid Test) Ratio   Debt Coverage



EFFICIENCY RATIOS         PROFITABILITY RATIOS

Inventory Turnover        Gross Profit Margin

Average Collections       Return on Equity
Period


                                                 27
                                              Beyond the Book

        Common Kinds of Budgets
           Revenue             Used to project or forecast
           Budgets                    future sales
           Expense           Used to determine spending on
           Budgets           supplies, projects, or activities
            Profit          Used by profit centers, which have
           Budgets            “profit and loss” responsibility
            Cash               Used to forecast the cash a
           Budgets           company will have for expenses
      Capital Expenditure        Used to forecast large,
           Budgets              long-lasting investments
                               Used to project costs across
       Variable Budgets
                             varying levels of sales/revenues
3.2
                                                                 28
      Economic Value Added (EVA)
         Economic        The amount by which company
           Value         profits exceed the cost of capital
           Added         in a given year


                     Common Costs of Capital

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

3.2
                                                              29
       Economic Value Added (EVA)
      1. Calculate net operating
                                          $3,500,000
         profit after tax

      2. Identify how much capital
                                          $16,800,000
         the company has invested

      3. Determine the cost paid
                                          10%
         for capital

      4. Multiply capital used (step 2)   (10% x $16,800,000) =
         times cost of capital (step 3)   $1,680,000

      5. Subtract total dollar cost of     $3,500,000 net profit
         capital from net profit after    -$1,680,000 cost of capital
         taxes                             $1,820,000 EVA
3.2
                                                                  30
          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
3.2
                                                         31
        The Customer Perspective
      Controlling 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
3.3     fix problems and make changes
                                                     32
      The Internal Perspective
        Controlling Quality

                 Excellence




                    Value




         Conformance to Expectations
3.4
                                       33
      The Internal Perspective
        Controlling Quality




3.4
                                 34
Whirlpool Needs to                                                                           Beyond the Book

Avoid Expensive Damages
• Whirlpool was loosing millions
  of dollars every year to dents
  and scrapes in its machines.
• New loading trucks and better
  packaging helped to reduce
  damage.
• Whirlpool is working to
  prevent damage to its exterior
  packages which discourages
  potential customers.
 Source: I. Brat, “As Costs Rise, Whirlpool Makes a Dent in Dings.” The Wall Street Journal, 30 July 2007.

                                                                                                             35
      Controlling Waste and Pollution

            Good housekeeping



        Material/product substitution



           Process modification



3.5
                                        36
      Controlling Waste and
            Pollution

                 Waste
               Prevention
              & Reduction


             Recycle & Reuse


             Waste Treatment

             Waste Disposal

3.5
                               37

				
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