Chapter 16

Control

© 2013 Cengage Learning

 Caterpillar Headquarters,
Peoria, Illinois
• Caterpillar is the market leader in heavy equipment with $50 billion per year in
revenue, but it has not been able to master the cyclical nature of its business.
• The company tries to adjust to downturns by refurbishing equipment and trying
to predict when downturns will occur.
• You can see the downturns coming, but you can’t predict how severe they will
be. So what can the company to do better prepare itself, customers, suppliers,
and dealers for the next downturn?
• What are your goals for company performance for the next downswing?
• What can be done to make sudden increases in production more manageable for
you and your suppliers?
• What can Caterpillar and its dealers to decrease customer losses and
defections?

© 2013 Cengage Learning

 Basics of Control

After reading this section,

you should be able to:

1. describe the basic control process.

© 2013 Cengage Learning

 Definition of Control
Control is a regulatory process of
establishing standards that will achieve
organizational goals, comparing actual
performance to those standards, and then,
if necessary, taking corrective action to
restore performance to those standards.

© 2013 Cengage Learning

 Definition of Control
Control is achieved when behavior and
work procedures conform to
standards, and company goals are
accomplished. Control is not just an
after-the-fact process, and preventive
measures are also a form of control.

© 2013 Cengage Learning

 The Control Process
• Begins with the establishment of clear standards of
performance
• Involves a comparison of actual performance to desired
performance
• Takes corrective action to repair performance deficiencies
• A dynamic, cybernetic process
• Consists of feedback, control, concurrent control, feedforward
control
• …But control isn’t always worthwhile or possible

© 2013 Cengage Learning

 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 © 2013 Cengage Learning

 Comparison to Standards
1. Compare actual performance to
performance standards.

The use of “secret shoppers” helps verify

that performance standards are being met.

1.2 © 2013 Cengage Learning

 Corrective Action
• Identify performance deviations
• Analyze those deviations
• Develop and implement programs to correct
them

1.3 © 2013 Cengage Learning

 Cybernetic Control Process

1.4 © 2013 Cengage Learning

1.5

Feedback, Concurrent, and Feedforward

• Feedback control
– Gather information about performance
deficiencies after they occur
• Concurrent control
– Gather information about performance
deficiencies as they occur
• Feedforward control
– Monitor performance inputs rather than outputs to prevent
or minimize performance deficiencies before they occur

© 2013 Cengage Learning

1.5
Guidelines for Using Feedforward Control

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 Is Control Worthwhile?

Managers must assess the regulation costs

and cybernetic feasability

© 2013 Cengage Learning

 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.
© 2013 Cengage Learning
 Control Methods

Bureaucratic
Bureaucratic Objective
Objective

Normative
Normative Concertive
Concertive Self-Control
Self-Control

2 © 2013 Cengage Learning

 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 © 2013 Cengage Learning

 Objective Control
• Objective Control
– Use of observable measures of worker behavior or outputs to assess
performance and influence behavior

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

• Output Control
– Regulation of workers’ results or outputs through rewards and
incentives

2.2 © 2013 Cengage Learning

 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 © 2013 Cengage Learning

 Normative Control
• Created by:
– careful selection of employees
– observing experienced employees &
listening to stories about the company

2.3 © 2013 Cengage Learning

 Concertive Control

• Regulation of workers’ behavior and decisions through

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

2.4 © 2013 Cengage Learning

 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 © 2013 Cengage Learning

 What to Control?

Budgets,
Budgets,
Balanced
Balanced Cash
CashFlow,
Flow,
Scorecard
Scorecard EVA
EVA

Customer
Customer Waste
Wasteand
and
Quality
Quality
Defections
Defections Pollution
Pollution

© 2013 Cengage Learning 3

 The Balanced Scorecard

• Customer Perspective
• Internal Perspective
• Innovation and Learning Perspective
• Financial Perspective

3.1 © 2013 Cengage Learning

 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, but
at the expense of others

3.1 © 2013 Cengage Learning

 Southwest Airlines’ Balanced Scorecard

3.1 © 2013 Cengage Learning

 The Financial Perspective
• Cash Flow Analysis
– Predicts how changes in a business will affect its ability to take in
more cash than it pays out
• Balance Sheets
– Provide a snapshot of a company’s financial position at a particular
time
• Income Statements
– Show what has happened to an organization’s income, expenses, and
net profit over a period of time
• Financial Ratios
– Used to track liquidity, efficiency, and profitability over time
compared to other businesses in its industry

3.2
© 2013 Cengage Learning
 Steps for a Basic Cash Flow Analysis

3.2 © 2013 Cengage Learning

 Parts of a Basic Balance Sheet

3.2 © 2013 Cengage Learning

 Basic Income Statement

3.2 © 2013 Cengage Learning

 Common Financial Ratios

3.2 © 2013 Cengage Learning

 Common Financial Ratios

3.2 © 2013 Cengage Learning

 Common Financial Ratios

3.2 © 2013 Cengage Learning

 Common Financial Ratios

3.2 © 2013 Cengage Learning

 Common Kinds of Budgets

3.2 © 2013 Cengage Learning

 Economic Value
Added (EVA)
Economic
Economic The
Theamount
amountbybywhich
whichcompany
company
Value
Value profits
profitsexceed
exceedthe
thecost
costof
ofcapital
capital
Added
Added in
inaagiven
givenyear
year

Common
CommonCosts
Costsof
ofCapital
Capital

 Long-term
Long-termbank
bankloans
loans
 Interest
Interestpaid
paidto
tobondholders
bondholders
 Dividends
Dividendsand
andgrowth
growthininstock
stockvalue
valuethat
that
accrue
accrueto
toshareholders
shareholders

3.2 © 2013 Cengage Learning

 Calculating Economic Value Added
(EVA)

3.2 © 2013 Cengage Learning

 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 © 2013 Cengage Learning

 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 five 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 changes

3.3 © 2013 Cengage Learning

 The Internal Perspective:
Controlling Quality

Excellence
Excellence

Value
Value

Conformance
Conformance to
to Expectations
Expectations

3.4 © 2013 Cengage Learning

 Advantages and Disadvantages of Different
Measures of Quality

3.4 © 2013 Cengage Learning

 Controlling Waste and Pollution

 Good housekeeping

 Material product substitution

 Process modification

3.5 © 2013 Cengage Learning

 Controlling
Waste and Pollution–

3.5 © 2013 Cengage Learning

Biz Flix - Friday Night Lights
1. The control process begins when
managers set goals and create
standards. In this scene, what does
Coach Gaines state that he expects
from the members of his team?
2. Based on the topics discussed in
this chapter, what similarities could
you draw between what a coach and
the manager of a company must do
to ensure success for their team?
3. Which method of control do you
think most football coaches exert
over their teams: bureaucratic,
objective, normative, or concertive?
Why?

© 2013 Cengage Learning

 Management Workplace -
Barcelona Restaurant Group
1. How do managers at Barcelona
control the company’s financial
performance?
2. What is the “balanced
scorecard” approach to
measuring corporate
performance, and in what ways
does Barcelona utilize this
approach?
3. Describe the feedback control
model and describe an instance
where Barcelona followed this
process to improve its
performance.

© 2013 Cengage Learning