CHAPTER 9

Fundamentals
of
Control

Ch.9 1
Ch.9 2
 Learning Outcomes
1. Explain why control is critical for ensuring that performance
aligns with organizational goals and how it supports
continuous improvement and organizational learning.
2. Differentiate between feedforward, concurrent, and
feedback controls, and understand the role of internal and
external controls.
3. Describe the four steps of the control process.
4. Utilize project management tools like Gantt charts and
CPM/PERT, inventory management techniques and JIT,
breakeven analysis for decision-making, and financial tools.
5. Interpret basic financial ratios and use balanced scorecards to
measure and improve organizational effectiveness across
multiple performance areas.

Ch.9 3
 Chapter 9 Outline
1. Managerial Control
▪ Importance of controlling
▪ Types of controls
▪ Internal and external control
2. The Control Process
▪ Establish objectives and standards
▪ Measure actual performance
▪ Compare results with objectives
▪ Take corrective action

Ch.9 4
 Chapter 9 Outline
3. Control Tools and Techniques
▪ Project management and control
▪ Inventory control
▪ Breakeven analysis
▪ Financial controls
▪ Balanced scorecards

Ch.9 5
 Why and How Managers Control?
Controlling:
▪ Is the process of measuring performance and
taking action to ensure desired results
accomplished ➔ improve performance.
▪ Has a positive and necessary role in the mgt
process. Continuous adjustment to get it right.
▪ Ensures that the right things happen, in the right
way, at the right time.
▪ Benefit: Organizational Learning (OL) ~ Example:
After-action review ➔ Learned Lessons.

Ch.9 6
 The Role of Controlling in the Mgt Process

Figure 9.1

Ch.9 7
 Why and How Managers Control?

[Link]
Principles Of Management - Lesson Controlling
Ch.9 8
 Why and How Managers Control?
Types of Controls – Based on time of occurrence.
1. Feedforward controls a.k.a. Preliminary controls.
▪ Employed before a work activity begins.
▪ Ensures that:
✓ Objectives are clear.
✓ Proper directions are established.
✓ Right resources are available.

▪ Goal is to solve problems before they occur →

preventative in nature, e.g., Food ingredients, proper
design.

Ch.9 9
 Why and How Managers Control?

2. Concurrent controls a.k.a. steering controls.

▪ Focus on what happens during work process; in-
process control.
▪ Monitor ongoing operations to make sure they are
being done according to plan, thru direct
supervision.
▪ Goal is to solve problems as they occur.

Ch.9 10
 Why and How Managers Control?
3. Feedback controls a.k.a. post-action control.
▪ Take place after work is completed.
▪ Focus on quality of end results.
▪ Goal is to solve problems after they occur and
prevent future ones.

Ch.9 11
 Feedforward, Concurrent and Feedback Controls

Ch.9 12
 Feedforward, Concurrent and Feedback Controls

Figure 9.2

Ch.9 13
 INTERNAL AND EXTERNAL CONTROL
▪ Internal control. Allows motivated individuals and
groups to exercise self-discipline in fulfilling job
expectations.
• Self-control
➢ Internal control that occurs thru self-discipline
in fulfilling work and personal goals and
responsibilities.
➢ Self management, freedom, emphasizes
participation, empowerment.
➢ Trust.

Ch.9 14
 INTERNAL AND EXTERNAL CONTROL
External control: Occurs through personal supervision and
the use of formal administrative systems.
▪ Types:
1. Bureaucratic control.
• Influences behavior through authority, policies,
procedures, job descriptions, budgets, and day-to-day
supervision.
• Laws & regulations in Organizations' external environment
for compliance.
2. Clan control ~ Normative control.
• Influences behavior through norms and expectations set by
the organizational culture. Shared values!

Ch.9 15
 INTERNAL AND EXTERNAL CONTROL
3. Market Control.
• Influence of market competition on the behavior of
organizations and their members.
• Influence the way adjusting product, pricing
promotion, etc., based on feedback from customers
and the actions of competitors. e.g., green products &
sustainability practices (PR advantage).

Exercise:
Identify and list some examples of controls that are
used in organizations, e.g., @ GJU

Ch.9 16
 Examples - MCQ
MCQ 1: Which of the following best describes
controlling?

A. The process of deciding where an individual should go and how to best go

about it.
B. The process of inspiring people to best utilize the resources.
C. The process of bringing people and material resources together in
working combinations.
D. The process of setting directions and allocating resources.
E. The process of measuring performance and taking action to ensure
desired results.

Ch.14 17
 2. The Control Process

Ch.9 18
 2. The Control Process

Figure 9.3

Four Steps in the Control Process

Ch.9 19
 2. The Control Process

Four Steps in the Control Process

Ch.9 20
 2. The Control Process
Step 1: Establishing Objectives and Standards
▪ Focus on key results (essentials / critical).
▪ Pareto principle (80/20); 80 Consequences /20 Causes.
▪ Standards:
1. Output standards.
Measure performance results in terms of quantity,
quality, cost or time (e.g., EPS, ROI, sales growth,
Market share).
2. Input standards.
Measure effort in terms of amount of work expended
in task performance (e.g., conformance with rules,
efficient use of resource, work attendance).

Ch.9 21
 2. The Control Process
Step 2: Measuring actual performance
▪ Goal: accurate measurement of actual performance
results (output standards) and/or performance
efforts (input standards).
▪ Must identify significant differences between actual
results and original plan.
▪ Effective control requires measurement (why?)
“What gets measured happens”!

Ch.9 22
 2. The Control Process
Step 3: Comparing results with objectives and standards
▪ The control equation:
Need for Action = Desired Performance – Actual Performance
▪ Comparison methods:
1) Historical comparison: past results becomes the base line
for evaluating current performance. (e.g., Y-o-Y).
2) Relative comparison: uses the performance of other
persons, work units, or organizations as the evaluation
standard; benchmarking performance against others.
3) Engineering comparison : uses engineered standards set
scientifically through such methods as time and motion
studies.

Ch.9 23
 2. The Control Process
Step 4:Taking corrective action
▪ Taking action when a discrepancy exists between desired and
actual performance.
▪ Management by Exception:
• Giving attention to situations showing the greatest need for
action.
• Types of exceptions (discrepancy) :
1) Problem situation: Actual performance < desired
2) Opportunity situation: Actual performance > desired

[Link]
Controlling as a Function of Mgt Free Principles of Mgt Video

Ch.9 24
 3. Control Tools and Techniques

✓ Takeaway 3: What are the common control tools

and techniques?
✓ Learning Objective: Explain the use of common
control tools and techniques.

Ch.9 25
 3. Control Tools and Techniques
Project Management
Overall planning, supervision and control of projects:
1) Projects – unique one-time events that occur within a
defined period.
2) Gantt chart – graphic display of scheduled tasks required
to complete a project.
3) CPM/PERT – combination of the Critical Path Method
and Program Evaluation and Review Technique.

Ch.9 26
 Gantt Chart

Ch.9 27
 Gantt Chart

Example: New Building Project schedule

Ch.9 28
 Gantt Chart
▪ Gantt chart is a type of bar chart that illustrates a
project schedule, named after its inventor, Henry Gantt,
who designed such a chart around the years 1910–1915.
Modern Gantt charts also show the dependency
relationships between activities and current schedule
status.
▪ A Gantt chart is simply a timeline view of your
project. It’s a tool that helps you manage all the
different resources, people and tasks along the way
to accomplishing the goal of your project.

Ch.9 29
 Gantt Chart

Ch.9 30
 Gantt Chart

Ch.9 31
 Gantt Chart – Modern Example

Ch.9 32
 CPM / PERT CHART- Example 1

Ch.9 33
 CPM/PERT CHART
▪ CPM is a statistical technique of project management in
which planning, scheduling, organizing, coordination and control
of well-defined activities take place.
▪ PERT deals with unpredictable events, but CPM deals
with predictable activities. PERT is used where the nature
of the job is non-repetitive. In contrast to, CPM involves the
job of repetitive nature.
▪ PERT probabilistic whereas CPM deterministic.
▪ Helps PM to track activities to make sure they happen in
the right sequence and on time.
Critical path: is the longest pathway in a CPM/PERT network.

Ch.9 34
 CPM/PERT CHART – Example 2

1. Identify the Critical path.

2. What is the min. time needed to complete the project?

Ch.9 35
 Examples - MCQ
MCQ 2: A Gantt chart differs from a PERT chart in
that a Gantt chart:

A. Uses charts to break a project into a series of small sub-activities that

each has clear beginning and end points.
B. Represents the quickest time in which the entire project can be
finished.
C. Helps with event or activity sequencing to make sure that things get
accomplished in time for later work to build upon them.
D. Shows all the interrelationships that must be coordinated for the entire
project to be successfully completed.
E. Combines critical path method and the program evaluation and review
technique.

Ch.14 36
 3. Control Tools and Techniques
Inventory control
▪ Aim: to ensures that inventory is only high enough to
meet immediate needs ➔ minimize carrying cost.
▪ Economic Order Quantity (EOQ)
Places new orders when inventory levels fall to
predetermined points. (mathematically calculated).
▪ Just-in-time scheduling (JIT)
Routes materials to workstations just in time for use.
Aim ➔ to reduce material cost.

Ch.9 37
 3. Control Tools and Techniques

Ch.9 38
 3. Control Tools and Techniques

Ch.9 39
 3. Control Tools and Techniques
Inventory Model Example
Time Max level Min Level Inv. Level Reorder Point
Inentory Model Example
0 100 20 100 60
120
1 100 20 80 60
2 100 20 60 60
100
3 100 20 40 60
4 100 20 20 80 60
5 100 20 100 60

INV. LEVEL
6 100 20 80 60 60
7 100 20 60 60
40
8 100 20 40 60
9 100 20 20 20
60
10 100 20 100 60 Lead Time
11 100 20 80 0 60
12 100 20 60 0 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

13 100 20 40 60 TIME (weeks)

14 100 20 20 60
Max level Min Level Inv. Level Reorder Point
15 100 20 100 60

Ch.9 40
 3. Control Tools and Techniques
Breakeven analysis
▪ Breakeven point (BEP):
• Occurs when revenues = costs
• BEP = FC / (SP-VC)
• CM = SP-VC
▪ Breakeven analysis:
Performs what-if calculations under
different revenue & cost conditions:

SP= $8/unit, FC= $10,000,

VC= $4/unit.
BEP= 10,000/(8-4) = 2500 units.
What if SP=$10? Or VC=$5?

Ch.9 41
 Breakeven Analysis
QTY UVC TVC FC TC UP Revenues P/L
0 15,000 - 33,000 33,000 19,000 - (33,000) Breakeven Point Analysis
1 15,000 15,000 33,000 48,000 19,000 19,000 (29,000) 300,000
280,000
2 15,000 30,000 33,000 63,000 19,000 38,000 (25,000) 260,000
3 15,000 45,000 33,000 78,000 19,000 57,000 (21,000) 240,000
220,000
Profit
4 15,000 60,000 33,000 93,000 19,000 76,000 (17,000) 200,000
5 15,000 75,000 33,000 108,000 19,000 95,000 (13,000) 180,000
X

Money
160,000
6 15,000 90,000 33,000 123,000 19,000 114,000 (9,000)
BEP
140,000
7 15,000 105,000 33,000 138,000 19,000 133,000 (5,000) 120,000
100,000
8 15,000 120,000 33,000 153,000 19,000 152,000 (1,000) 80,000
9 15,000 135,000 33,000 168,000 19,000 171,000 3,000 60,000
40,000
Loss
10 15,000 150,000 33,000 183,000 19,000 190,000 7,000 20,000
11 15,000 165,000 33,000 198,000 19,000 209,000 11,000 -
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
12 15,000 180,000 33,000 213,000 19,000 228,000 15,000
13 15,000 195,000 33,000 228,000 19,000 247,000 19,000 QTY
14 15,000 210,000 33,000 243,000 19,000 266,000 23,000 FC TC Revenues
15 15,000 225,000 33,000 258,000 19,000 285,000 27,000

UVC= Unit Variable Cost TVC= Total Variable Cost

FC= Fixed Cost, TC= Total Cost = TVC+FC
UP= Unit Price, QTY= Quantity, P/L= Profit/Loss

Ch.9 42
 Breakeven Analysis Example & Exercise

Bonus Homework (handwritten by email tonight by 11 pm)

Your firm pays $3,000 per year in fixed [Link] also pay
$15 /unit to produce your product. Selling Price $20 /unit
1. What is your total cost if you produce 1,000 units?
Calculate profit / loss?
2. What is the BEP?
Ch.9 43
 Use of Breakeven Analysis to make informed “what-if” decisions

Figure 9.4

Ch.9 44
 Examples - MCQ
MCQ 3:
Managers rely on _____ to perform what-if calculations
under different projected cost and revenue conditions.

A. CPM/PERT.
B. Gantt charts.
C. Critical path method.
D. Breakeven analysis.
E. Just-in-time scheduling.

Ch.14 45
 Financial Controls

Basic foundations of Balance Sheet and Income

Statement:

▪ Balance sheet : shows Assets, Liability and owners’ Equity at

one point in time. (snapshot)

▪ Income statement : shows profit /loss during a period (e.g.,

one month, one quarter, one year).

▪ Both together provide a good picture of the financial health

of an organization.

Ch.9 46
 Financial Controls
Balance Sheet Main Components

+ Equity

Balance sheet : shows Assets,

Liability and Owners’ Equity at
one point in time.
Ch.9 47
 Financial Controls

Income statement : shows profit /loss during a period.

Ch.9 48
 Basic Financial Ratios
Basic Financial Ratios
▪ Liquidity: The ability to generate cash to
pay short term obligations. Higher better.
▪ Leverage: The ability to earn more in
returns than the cost of debt (interest
expenses). Lower is better.
▪ Asset management: The ability to use
resources efficiently and operate at
minimum cost. Higher is better
▪ Profitability: The ability to earn revenues
greater than costs. Higher is better.

Ch.9 49
 Examples - MCQ
MCQ 4:
In the context of financial controls, which of the following
best describes leverage?

A. It is the ability to operate at minimum cost.

B. It is the ability to earn revenues greater than costs.
C. It is the ability to earn more in returns than the cost of debt.
D. It is the ability to meet short-term obligations.
E. It is the ability to generate cash to pay bills.

Ch.14 50
 Control Tools and Techniques- Balanced Scorecard
Balanced Scorecard
Scores (records) organization performance in the below 4
areas.
Factors (perspectives) used to develop scorecard goals
and measures:
1. Financial performance.
2. Customer Satisfaction.
3. Internal process improvement.
4. Learning and Growth.

Ch.9 51
 Control Tools and Techniques- Balanced Scorecard

Ch.9 52
Ch.9 Copyright ©2015 John Wiley & Sons, Inc.
53