Control Function in Management

n Control n Regulation of activities and behaviors within organizations n Adjustment or conformity to specifications or objectives n Effective control depends heavily on other

functions that precede it and feeds back to them

n Planning n Organizing n Leading

Controls Feedback Loop

Planning Control Organizing
Feedback Changes in

Adapted from Exhibit 16.2: Controls Feedback Loop

Establish standards

Basic Elements in Control Process

Establish standards Specification starts at the top of the organization and involves every level of employee Standards are the targets of performance Involving employees in setting standards Commits the employees to achieving the standards Results in more appropriate standards

Adapted from Exhibit 16.3: The Basic Elements in the Control Process

Specificity of Standards and Performance Measurement

Level of confusion in performance measurement

Hig h

Low

Concret e

Specificity of standards

Abstrac t

Adapted from Exhibit 16.4: The Effect of Specificity of Standards on Performance Measurement

Establishing Standards
e?
ho W

the yb

sh ou

ld

ld

ou

t th se

sh sp ec ific

Standards

? em

Ho w

How difficult should they be to reach?

5
Adapted from Exhibit 16.5: Issues in Establishing Standards

Establish standards

Basic Elements in Control Process

Measure performance Obtain consensus about how to assess performance If performance involves multiple activities, measure must be comprehensive Measurement is costly and hence usefulness of the information must justify the costs

Measure performance

Adapted from Exhibit 16.3: The Basic Elements in the Control Process

al l

Adapted from Exhibit 16.6: Issues in the Measurement of Performance

A r

v e,

n si

Performance Measuremen t
e

b ut

C a

n cr iti

m e

Is th

o nt

c al

Measurement of Performance
a s u r e m e

r ol

nt cr

Establish standards

Basic Elements in Control Process

Compare performance against standards Comparisons are affected by the kinds of measurements available Managers must interpret the patterns of comparisons (some negative/some positive) Comparisons often involve subjective and objective measures

Measure performance Compare performance against standards

Adapted from Exhibit 16.3: The Basic Elements in the Control Process

Establish standards

Basic Elements in Control Process

Evaluate results/take necessary corrective action Not all results require action Evaluate importance and magnitude of the deviation Determine what action to take if necessary Diagnosis skills of managers Level of expertise Evaluate the standards and the measures Employees performing better than standard should be recognized and rewarded

Measure performance Compare performance against standards Evaluate results and take any necessary corrective action
9

Adapted from Exhibit 16.3: The Basic Elements in the Control Process

Outcomes of Performance Measurement

Actual performance better than expected performance +
Actual performance measured against standard for performance Gap Detected Reinforcing Action Taken (e.g., increase rewards and recognition, consider increasing production targets, add new product lines)

Actual performance worse than expected performance

Corrective Action Taken (e.g., increase training, modify supervision, invest in newer equipment)

10

Adapted from Exhibit 16.7: Outcomes of Performance Measurement

Scope of Control
Strategic Control
n Assess and regulate how the

organization fits its external environment and meets its long-range objectives and goals n Control becomes less efficient in uncertain or changing environments

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Types and Scope of Control

Strategic Controls Tactical Controls Operational Controls (Narro w) (Broad )

Scope

12

Adapted from Exhibit 16.8: Types and Scope of Control

Centralization of Control and Environmental Stability

Degree of centralization

Decentralize d

Centralize d Stabl e
13

Environmental stability

Turbule nt

Adapted from Exhibit 16.9: Degree of Centralization of Control in Relation to Environmental Stability

Approaches to Strategic Control

Environmental turbulence

L o w Eas Diffic y Ability to specify and measure ult

precise strategic objectives

14

H i g h

Adapted from Exhibit 16.10: Approaches to Strategic Control

Scope of Control
Tactical Control
n Assess and regulate day-to-day functions of the

organization and its major units in implementing its strategy

n n n n

Financial controls Budgetary controls Supervisory structure controls Human resource controls

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Strategic and Tactical Controls

Limited

Tactical Control s
Time Frame

Strategi c Control Long, unspecific s

Controls relate to organization as a whole Comparisons made to other organization

Controls relate to specific, functional areas Comparisons made within organization

Objective

Types of Comparisons

Implementation of strategy

Focus

Determination of overall organizational strategy

Adapted from Exhibit 16.11: Characteristics of Strategic and Tactical Controls

16

Company Financial Ratios

Ratio Formula Company The GAP, Inc. 2001 in $ millions Profit Return on Investment Liquidity Current Ratio Liabilities Leverage Debt to Assets Net Profit before taxes Total Assets Current Assets Current Liabilities Total Debts Total Assets 241 7,591 3,044 2,056 0.03 The Limited, Inc. 2001 in $ millions 904 4,719 2,682 1,319 0.19

1.4

2.0

2,525 7,591

0.33

1,975 4,719

0.42

17

Adapted from exhibit 16.12: Examples of Company Financial Ratios

Company Financial Ratios

Ratio Formula Company The GAP, Inc. 2001 in $ millions Activity Inventory Turnover Sales Inventory 13,847 1,677 8.3 The Limited, Inc. 2001 in $ millions 9,363 966 9.7

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Adapted from exhibit 16.12: Examples of Company Financial Ratios

Budgetary Control
Issue Rolling budgets and revision Questions Should the budget period be for 12 months followed by another 12-month budget a year later, or should a calendar quarter be added each time a new calendar quarter begins? Should the budget remain fixed for the budget period or should it be revised periodically during the period? Should performance be evaluated against the original budget or against a budget that incorporates the actual activity level of the business? Should incentive compensation, if any, be based on actual versus budgeted performance, or on actual performance against some other standard?

Fixed or flexible budgets Bonuses based on budgets

19

Adapted from exhibit 16.13: Issues in Budgetary Control

Budgetary Control
Issue Evaluation criteria Questions Should the budget used to evaluate performance include only those items over which the evaluated manager has control, or should it include all unit costs and revenues appropriate to the managerial unit? What degree of stretch should there be in the budget?

Tightness of the budget

Source: Adapted from N. C. Churchill, Budget Choices: Planning vs. Control, Harvard Business Review 62, no. 4 (1984), pp. 150164, (p. 151).

20

Adapted from exhibit 16.13: Issues in Budgetary Control

Control in the Human Resource Function

a l a s i a r S p e

21

C o

m p

ti

Human c Resource ti Function o n Controls T r a i n i n Adapted from Exhibit 16.14: Opportunities for Control in the Human Resource Function g

Scope of Control
Operational Control
n Assess and regulate

specific activities and methods used to produce goods and services n Precontrol of operations n Concurrent control of operations n Postcontrol of operations

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Operational Controls
Precontrol Controls the quality, quantity, and other characteristics of the inputs to the process Concurrent Control

Postcontrol Traditionally, quality control Many of these controls are being changed to pre- and concurrent controls

Evaluates the conversion process as it occurs Provides immediate feedback, which impacts worker motivation

23

Adapted from Exhibit 16.16: Operational Controls

Control Effectiveness
n Focus of control n Balanced scorecard
n n n n

Financial perspective Customer perspective Internal business perspective Innovation and learning perspective

n Amount of control

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Control Effectiveness
n Quality of information n Usefulness n Accuracy n Timeliness n Objectivity n Flexibility n Favorable cost-benefit ratio n Source of control

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Effectiveness of Controls
Key Factor Focus of control Concerns What will be controlled? Where should controls be located in the organizational structure? Who is responsible for which controls? Is there a balance between over- and undercontrol?

Amount of control

Quality of information Is the information useful? collected by the Is the information accurate? controls Is the information timely? Is the information objective? Flexibility of controls Favorable costbenefit ratio Source of control Are the controls able to respond to varying conditions? Is the information being gathered worth the cost of gathering it? Is control imposed by others? Is control decided by those who are affected?
Adapted from exhibit 16.17: Key Factors in Determining the Effectiveness of Controls

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Importance of Operations Management

n Complex management activity including

planning production, organising resources, directing operations and personnel and monitoring system performance n Operational planning and control decisions

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Designing operation systems

n What to produce DFM, CAD, BOM n How many to produce capacity

planning n How to produce Technology, component, process flow, facility location, layout planning n Who will do the work Worker skill, safety, workplace collaboration
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Information and control

n Nature of information n Quality n Timeliness n Quantity n Relevance n MIS for operational control

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