BUSINESS ORGANISATION AND

MANAGEMENT

UNIT-5
 UNIT–V
CONTROLLING
• Control
• The process of monitoring activities to ensure
that they are being accomplished as planned
and of correcting any significant deviations
• An effective control system ensures that
activities are completed in ways that lead to
the attainment of the organization’s goals

2
 The Fundamentals Of An Effective Control
System

• Control
– The task of ensuring that planned activities are
getting the desired results.
– All control systems try to influence behavior.
– Controlling involves setting a target (planning),
measuring performance (evaluation), and
taking corrective action.
– Control also applies to monitoring every task —
large and small — that is delegated.

3
Management and the Control Process

4
 CONTROLLING –
The System and Process of Controlling

Control refers to a systematic process of

regulating organizational activities to make them
consistent with the expectations established in
plans, targets and standards of performance.
Effectively controlling an organization requires an
information about performance standards and
actual performance, as well as actions taken to
correct any deviations from the standards.
 FEATURES or Characteristics OF CONTROL
1. Managerial function: it’s a follow up action to
other functions of management.
2. Forward looking: it’s a corrective function
related to future events only as past can’t be
controlled. It aims at minimizing losses,
wastages and deviations from standards.
3. Review of past events: the deviations in the past
are revealed by the control process. Its called
feedback information. Thus, it facilitates the
reasons for poor performance.
 FEATURES or Characteristics OF CONTROL
4. Action oriented: It is only action which adjusts
performance to predetermined standards whenever
deviations occur.
5. Continuous process: it involves constant analysis of
standards, policies, procedures etc. a manager needs to
perform this function with other functions.
6. Dynamic process: control results in corrective actions
which may lead to a change in the performance of other
functions of management.
7. Purpose of control is positive
8. Control measures & Evaluate performance
9. Control facilities coping with Environment
10. Control closely related with planning
 Relationship between Control and Planning
When a plan becomes operational control is required to
measure performance, finding out the deviations and then
taking corrective actions.

PLANNING PERFORMANCE CONTROL

Planning also depends upon controlling as a manager uses

standards for measuring and appraising performance which
are laid down by the plans. If the standards are not pre set
manager won’t be knowing what is to be controlled.
Steps in the Control Process
The Control Process

10
 SYSTEM & PROCESS OF CONTROLLING
1. Establish or setting performance standards : it is the criteria for
performance. It may include reducing the rejection rate from 15
to 3 percent, increasing the corporation’s return on investment
to 7 percent or reducing the number of accidents to one per
week. Standards should be accurate, precise, acceptable and
workable.
2. Measure actual performance: many organizations prepare
formal reports of quantitative performance measurements that
managers review, daily, weekly or monthly. Regular review of
reports helps managers stay aware of whether the organization
is doing what it should. Not only the quantitative measures are
used, qualitative measures are also used particularly when
customer satisfaction or employee satisfaction is to be
measured.
SYSTEM & PROCESS OF CONTROLLING
3. Comparing actual performance with the standard: The
actual performance is compared with the set standards.
When performance deviates from the standards,
managers dig beneath and try to find out the cause of the
problem. E.g. a salesman was expected to give 10 percent
increased sales but he could give only 6 percent increased
sales. The possible causes could be several business on his
routes were closed owing to a holiday, additional sales
people were applied by the competitors or he needs more
training to make a sales call. Managers must take an
inquiring approach to deviations in order to gain a broad
understanding of factors that influence performance.
 SYSTEM & PROCESS OF CONTROLLING
4. Taking corrective action: in traditional top down
approach to control, managers used to encourage
employees to work harder, redesign the
production process or fire employees. However, in
participative approach manager collaborates with
employees to determine the corrective action
necessary. Sometimes even standards need to be
altered to make them realistic in case none of the
employees could realize them. Managers may wish
to provide positive reinforcement in case all the
targets set are met.
Types of Control

14
 Organizational Control
 Feed forward
 Sometimes calledThree types of control
preliminary or preventive control
 Concurrent
● Assesses current work activities, relies on performance
standards
● Includes rules and regulations for guiding employee tasks and
behaviors
● Intent to ensure that work activities produce the correct
results
 Feedback
 Focuses on the organization’s outputs; also called post-action
or output control
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 Organizational Control Focus

Feedforward Control Concurrent Control Feedback Control

Anticipates Problems Solve Problems as They Solves Problems After
Happen They Occur

Examples • Examples Examples

Pre-employment drug • Adaptive • Analyze sales
testing • culture • per employee
Inspect raw materials Total quality • Final quality
• Hire only management inspection
college graduates • Employee • Survey customers
self-control
Focus is on

Focus is on

Focus is on
Ongoing
Inputs g
Processes
 Feed forward Control

• Focus is on
– Human
– Material
– Financial resources

• Attempts to identify and prevent deviations

• Sometimes called preliminary or preventive
control
17
 Concurrent Control

Includes self-control on behavior – personal values & attitudes

• Monitors ongoing activities to ensure

consistency with performance standards
• Assesses
– Current work activities
– Relies on performance standards
– Includes rules and regulations

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 Feedback Control

• Focuses on organization’s outputs

• Sometimes called postaction or
output control

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 Feedback Control Model

Adjust Standards
Adjust Performance

Establish 1. Establish 2. Measure 3. Compare 4. Take

Strategic Goals standards of actual performance to corrective
performance. performance. standards. If action.
Inadequate
If Adequate

4. Do nothing or
Feedback
provide
reinforcement.

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 Managerial and Quality Control

• Control is a critical issue facing every manager in

every organization today
Quality control
Office productivity
Basic systems
• allocating financial resources,
• developing human resources,
• analyzing financial performance, and
evaluating overall productivity
 Managerial and Quality Control

• Basic mechanisms for controlling organizations

• Basic structure & objectives of control process
• Controlling financial performance
• Changing philosophy of control
• Today’s total quality management
• Recent trends
• Control systems for a turbulent environment
 Organizational Control

• The systematic process through which

managers regulate organizational
activities to make them consistent
with expectations established in
● Plans
● Targets
● Standards of performance
 Organizational Control

• Effective controlling requires information

about
● Performance standards
● Actual performance
● Actions taken to correct any deviations
from the standards
Budgetary Control

• Most commonly used method of

managerial control
• Process of setting targets
• Used to monitor results and
compare to budget
Experiential Exercise: Is Your Budget In Control?

25
 Feed Forward Control
• Feed forward control - focuses on the regulation of inputs
(human, material, and financial resources that flow into
the organization) to ensure that they meet the standards
necessary for the transformation process.
• Feed forward controls are desirable because they allow
management to prevent problems rather than having to
cure them later. Unfortunately, these control require timely
and accurate information that is often difficult to develop.
Feed forward control also is sometimes called preliminary
control, pre control, preventive control, or steering control.
 FEED BACK CONTROL
• This type of control focuses on the outputs of the organization
after transformation is complete. Therefore, also called post
action or output control. For one thing, it often is used when feed
forward and concurrent controls are not feasible or are to costly.
• Moreover, feedback has two advantages over feed forward and
concurrent control. First, feedback provides managers with
meaningful information on how effective its planning effort was.
If feedback indicates little variance between standard and actual
performance, this is evidence that planning was generally on
target.
• If the deviation is great, a manager can use this information
when formulating new plans to make them more effective.
Second, feedback control can enhance employees motivation
 CONCURRENT CONTROL
• Concurrent control takes place while an activity is in progress. It
involves the regulation of ongoing activities that are part of
transformation process to ensure that they conform to
organizational standards. Concurrent control is designed to
ensure that employee work activities produce the correct
results.
• Since concurrent control involves regulating ongoing tasks, it
requires a through understanding of the specific tasks involved
and their relationship to the desired and product.
• Concurrent control sometimes is called screening or yes-no
control, because it often involves checkpoints at which
determinations are made about whether to continue progress,
take corrective action, or stop work altogether on products or
services.
 Qualities of an Effective
Control System
Accuracy Timeliness

Economy Flexibility

Understandability Reasonable criteria

Emphasis on the
Strategic placement
exception

Multiple criteria Corrective action

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 Tools and techniques of controlling
• Budget and budgetary control system: a budget
is a plan or programme of future action which is
prepared on the basis of estimates or forecasts
made for coming operating period. It anticipates
income for a given period and the costs to be
incurred in order to get this income.
• A budget which is prepared for the organization
as a whole is known as master budget.
• A Budget prepared for certain functional areas
such as sales, distribution, production and
finance is known as functional or operating
budget.
 Budgetary control
• It is a system of controlling costs which includes the
preparation of budgets, coordinating the departments
and establishing the responsibilities, comparing actual
performance with the budgeted and acting upon
results to achieve maximum profitability. It is an
intelligent consideration of future events. It clarifies
objectives, helps in the best utilization of resources
and is helpful in the control of performance and costs.
• Zero base budgeting: it was introduced for the first
time in preparing the divisional budgets in 1971 in USA.
Under this each manager has to justify the entire
budget in detail from zero base.
 Zero base budgeting
• In this rapidly changing environment goals
continuously keep on changing. The goals need to be
redefined in a logical manner. The past year financial
allocations may not serve any purpose. It calls for a
new allocation of resources. All the proposals are
drawn from the scratch.
• Basic steps in ZBB:
1. Identification of decision units:
2. Analysis of decision units:
3. Evaluation and ranking of all decision units
4. Allocation of resources to each unit.
 Types of budgets
• Performance budgeting: which indicates whether an
organization is getting adequate results for the money spent.
• Fixed budget: it is a budget that remains unchanged
irrespective of the level of activity actually attained. But if
the level of production does not conform to the standards
established this budget serves no purpose.
• Flexible budget: it gives the budgeted costs for different
levels of activity. It is of great help at times when it is not
possible to exactly forecast the sales.
• Control by exception: the significant deviations if any from
the standards set be only brought to the notice of top
management. Small deviations be tackled by the junior
managers only.
 Marginal costing
Case I Case II
100 units are produced If 101 units are produced
MC of producing one unit is MC will rise to Rs. 5050
Rs. 50. (101 x 50 = Rs. 5050)
(100 x 50 = Rs. 5000) Fixed cost is Rs. 1000
Fixed cost is Rs. 1000 Total Cost is
Total Cost is Marginal cost 5050
Marginal cost 5000 + Fixed cost 1000
+ Fixed cost 1000 = Total Cost 6050
Till the time production does not
= Total Cost 6000
reach full capacity, all the
decisions
are taken by MC.
 Break even analysis
• The point where TR = TC.

TR
TC
Revenue
and cost
FC

sales (in units)

 Management auditing
• It may be defined as a comprehensive and constructive
review of the performance of management team of any
organization. It undertakes a systematic search of the
effectiveness and efficiency of the management.
• It locates the deficiencies in the performance of various
functions and suggest possible improvements.
• It scope is very wide. It identifies if the functions like
planning, organizing, staffing, directing and controlling
are being performed efficiently or not.
 NEW TECHNIQUES OF CONTROL
• Yugo was the lowest priced car in the US market in 1985, but
within 4 years the concern got bankrupt largely because of
the quality problems both in products and service. In
contrast, Toyota steadily gained the market share and is
expected to soon overtake General Motors which is the
world’s top selling auto maker.
• The total quality management became attractive to the US
managers as it had been successfully implemented by the
Japanese companies such as Toyota, Canon and Honda. The
TQM philosophy focuses on teamwork, increasing customer
satisfaction and lowering the costs. Major TQM techniques
involve the use of techniques like quality circles,
benchmarking, six sigma principles, reduced cycle time and
continuous improvement.
 NEW TECHNIQUES OF CONTROL
• Quality circles: it is a group of 6-12 volunteer employees
who meet regularly to discuss and solve the problems
affecting work. Circle members are free to collect data
and take surveys. The reason for promoting quality
circles is that these people know the day to day tasks
and problems and can easily recommendations.
• Benchmarking: it is the continuous process of
measuring products, services and practices against the
toughest competitors or recognizing the industry leaders
to identify the areas of improvement. Of course, only
those companies be selected whose methods are
compatible.
 NEW TECHNIQUES OF CONTROL
• Six sigma: these were first introduced by
Motorola in 1980s. It is based on Greek letter
sigma which means how far something deviates
from perfection. It is a highly ambitious quality
standard that specifies not more than 3.4 defects
per million parts i.e. 99.9997 percent accuracy.
Now it has become a generic term which indicates
higher quality and lower costs. 100s of
99 PERCENT AMOUNTS TO SIX SIGMA AMOUNTS TO
23087 defective computers shipped each 8 defective computers shipped each month
companies like General Electric, Allied Signal, Cox
month
7.2communications and DuPont
hours per month without electricity and
9 seconds per monthCo. have
without used
electricity

six mishandled
800,000 sigma program
personal checks in
eachrecent years.
3 mishandled personal checks each day
day
 NEW TECHNIQUES OF CONTROL
• Reduced cycle time: it refers to the steps taken to
complete a company process. Even if an organization
decides not to use quality circles or other techniques,
substantial improvement is possible by focusing on
improved responsiveness and acceleration of activities
into a shorter time.
• Continuous improvement: Japanese companies have
realized extraordinary success from making a series of
mostly small improvements. This approach is called
continuous improvement or Kaizen. It is the
continuous implementation of a large number of small
incremental improvements in all areas of an
organization on an ongoing basis. The innovations can
start simple and the employees can build on their
success in this unending process.
 Causes of negative deviations
• Uncertainty
• Lack of knowledge, experience, or judgment

41
 Two general approaches to negative
deviations
• Direct control: the procedure that traces
the causes of an unsatisfactory result back
to the persons responsible for it and get
them to correct their practices.
• Preventive control: the procedure that
traces the causes of an unsatisfactory result
back to managers’ management skill and
knowledge.

42
 Direct control

Assumptions underlying direct control

• All performance can be measured

• Personal responsibility exists
• Time expenditure is warranted
• Mistakes can be discovered in time
• Person responsible will take corrective steps

43
 Preventive control

Assumptions of preventive control

• Qualified managers make a minimum of

errors
• The management fundamentals can be
used to measure performance
• Application of management fundamentals
can be evaluated
44
 Advantages of preventive control
• Greater accuracy is achieved in assigning personal
responsibility.
• Preventive control encourages self-control and make
corrective action more effective.
• Preventive control may lighten the managerial
burden caused by direct controls.
• Employees may be motivated to improve
themselves continuously.

45
 How to develop excellent managers

• Instill a willingness to learn

• Accelerate management development
• Planning for innovation
• Measure and reward management

46
Two Basic Categories of Control
Systems

47
Types of Traditional Control Systems
• Diagnostic controls
– A control method, such as a budget, that
ensures that standards are being met and that
variances are diagnosed and explained.
• Boundary Controls
– Policies, such as codes of conduct, that
establish rules and identify the actions and
pitfalls that employees must avoid.
• Personal/Interactive Controls
– Control methods that involve direct, face-to-
face interaction with employees so as to
monitor rapidly changing information and
respond proactively to changing conditions.
48
The Basic Management Control System
• Budget
– Formal financial expression of a manager’s plans.
• Capital Budget
– Shows the expenses for equipment with a life
longer than one year.
• Operating Budget
– Shows the expected sales and/or expenses for
each of the company’s departments for the
planning period in question.

49
 Performance Reporting
• Variances
– Differences between budgeted and actual amounts.
• Audit
– A systematic process of objectively obtaining and
evaluating evidence of the firm’s performance,
judging the accuracy and validity of the data, and
communicating the results to interested users.
• Financial Ratio
– An arithmetic comparison of one financial measure
to another, generally used to monitor and control
financial performance.
50
Ratio Analysis: Factors Affecting Return
on Investment

51
 Other Diagnostic Financial and Managerial
Controls

• Activity-Based Costing (ABC)

– A method for allocating costs to products and
services that takes all the product’s cost drivers
into account when calculating the actual cost of
each product or service.

52
 Other Diagnostic Financial and Managerial
Controls (cont’d)

• Balanced Scorecard
– A management tool, usually a computerized model,
that traces a multitude of performance measures
simultaneously and shows their interactions.
• Enterprise Resource Planning System
– A companywide integrated computer system that
gives managers real-time, instantaneous information
regarding the costs and status of every activity and
project in the business.

53
 Boundary Control Systems
• Boundary Control Systems
– Define the ethical rules for proper conduct in the
organization and specify which actions and pitfalls
that employees must avoid.
– Include ethics standards, codes of conduct, and
strategic policies.
• Steps in establishing boundary controls:
– Emphasize top management’s commitment.
– Publish a code.
– Establish compliance mechanisms.
– Measure results.
54
 Personal/Interactive Control Systems
• Interactive Control
– Maintaining control by personally monitoring how
everyone is doing is interactive control.
• Electronic Performance Monitoring (EPM)
– Monitoring the work activities of employees
through electronic means.

55
Techniques of control

Traditional technique
 INTRODUCTION
1. To enable managers effectively control the
organizational activities, a large number of
controlling techniques are available.
2. A manager should know these techniques and in
which situation it should be applied.
3. There are two types of techniques of controlling.
– Traditional techniques
– Modern technique
 TRADITIONAL TECHNIQUES
These techniques of control are being used by
managers since long time & therefore Known as
traditional techniques.
1. Personal observation
2. Budgeting
3. Break-even analysis
4. Financial statement
5. Statistical data & report
6. Quality control
 1. PERSONAL OBSERVATION
• This is the most traditional method of control.
• It helps managers to collect first hand information.
• It also creates a psychological pressure on the
employees to perform well as they are aware that
they are being observed personally on their job.
• How ever it is very time consuming , & not suitable
for all kinds of jobs.
 2. BUDGETING
• Meaning-
• A budget is a statement which reflects future
incomes ,expenditures & profits of the firm.
• Benefit of budgeting-
1. Standards of performance
2. Planning
3. Predicting the future
4. Financial planning
 3. BREAK EVEN ANALYSIS
• It deals with the study of the relationship
between costs,volume, & profit.
• It determines the probable profit and losses at
different levels of activity.
• The sales volume at which there is no
profit,no loss is known as breakeven point.
• It can be calculated as ,
• Breakeven point=fixed cost/selling price per
unit – variable cost per unit.
 4. FINANCIAL STATEMENT
• Financial statements shows financial position of a
firm over a period of time,generally one year.
• These are prepared along with last year
statements, so that firm can compare its present
performance with last year’s performance &
improve its future performance.
• It offers information on ,
1. Liquidity
2. Financial strength
3. profitability
 5. STATISTICAL DATA & REPORT
• Statistical analysis in the form of
averages,percentages,ratios,..etc.
• Data can be used for diagramatic
representations like histograms, pie chart, bar
graphs..etc.
• A Report is a statement that represents data
in the form of information for carrying out the
controlling function.
 6. QUALITY CONTROL
• Quality control uses operational techniques and
activities to sustain quality of the product or
service to satisfy customer needs
• It is the traditional way to manage quality
• There are three stages during the process when
inspection is performed-
1. When raw material is received.
2. When raw material goes through the production
process
3. When products are finished-testing takes place
before products are dispatched to customers.
 Modern Techniques
• A. Return On Investment (ROI):
• B. Ratio Analysis
– a. Liquidity Ratio
– b. Solvency Ratio:
– c. Profitability Ratio:
– d. Turnover Ratios:
 Modern Techniques
• C. Responsibility Accounting
– a. Cost Centre
– b. Revenue Centre
– c. Profit Centre
– d. Investment Centre
• D. Management Audit:
• E. Network Techniques (PERT & CPM):
• F. Management Information System (MIS):
Techniques of control

Traditional technique
 INTRODUCTION
1. To enable managers effectively control the
organizational activities, a large number of
controlling techniques are available.
2. A manager should know these techniques and in
which situation it should be applied.
3. There are two types of techniques of controlling.
– Traditional techniques
– Modern technique
 TRADITIONAL TECHNIQUES
These techniques of control are being used by
managers since long time & therefore Known as
traditional techniques.
1. Personal observation
2. Budgeting
3. Break-even analysis
4. Financial statement
5. Statistical data & report
6. Quality control
 1. PERSONAL OBSERVATION
• This is the most traditional method of control.
• It helps managers to collect first hand information.
• It also creates a psychological pressure on the
employees to perform well as they are aware that
they are being observed personally on their job.
• How ever it is very time consuming , & not suitable
for all kinds of jobs.
 2. BUDGETING
• Meaning-
• A budget is a statement which reflects future
incomes ,expenditures & profits of the firm.
• Benefit of budgeting-
1. Standards of performance
2. Planning
3. Predicting the future
4. Financial planning
 3. BREAK EVEN ANALYSIS
• It deals with the study of the relationship
between costs,volume, & profit.
• It determines the probable profit and losses at
different levels of activity.
• The sales volume at which there is no
profit,no loss is known as breakeven point.
• It can be calculated as ,
• Breakeven point=fixed cost/selling price per
unit – variable cost per unit.
 4. FINANCIAL STATEMENT
• Financial statements shows financial position of a
firm over a period of time,generally one year.
• These are prepared along with last year
statements, so that firm can compare its present
performance with last year’s performance &
improve its future performance.
• It offers information on ,
1. Liquidity
2. Financial strength
3. profitability
 5. STATISTICAL DATA & REPORT
• Statistical analysis in the form of
averages,percentages,ratios,..etc.
• Data can be used for diagramatic
representations like histograms, pie chart, bar
graphs..etc.
• A Report is a statement that represents data
in the form of information for carrying out the
controlling function.
 6. QUALITY CONTROL
• Quality control uses operational techniques and
activities to sustain quality of the product or
service to satisfy customer needs
• It is the traditional way to manage quality
• There are three stages during the process when
inspection is performed-
1. When raw material is received.
2. When raw material goes through the production
process
3. When products are finished-testing takes place
before products are dispatched to customers.
 Modern Techniques
• A. Return On Investment (ROI):
• B. Ratio Analysis
– a. Liquidity Ratio
– b. Solvency Ratio:
– c. Profitability Ratio:
– d. Turnover Ratios:
 Modern Techniques
• C. Responsibility Accounting
– a. Cost Centre
– b. Revenue Centre
– c. Profit Centre
– d. Investment Centre
• D. Management Audit:
• E. Network Techniques (PERT & CPM):
• F. Management Information System (MIS):
 Organizational Control
• Organizational Control
– Managers monitor and regulate how efficiently
and effectively an organization and its members
are performing the activities necessary to
achieve organizational goals

11-78
 Organizational Control
Managers must monitor and evaluate:
– Is the firm efficiently converting inputs into outputs?
• Are units of inputs and outputs measured
accurately?
– Is product quality improving?
• Is the firm’s quality competitive with other firms?
– Are employees responsive to customers?
• Are customers satisfied with the services offered?
– Are our managers innovative in outlook?
• Does the control system encourage risk-taking?

11-79
 Control Systems
• Control Systems
– Formal, target-setting, monitoring, evaluation
and feedback systems that provide managers
with information about whether the
organization’s strategy and structure are
working efficiently and effectively.

11-80
 Control Systems
• A good control system should:
– be flexible so managers can respond as needed.
– provide accurate information about the
organization.
– provide information in a timely manner.

11-81
 Three Types of Control

Figure 11.1 11-82

 Types of Control
• Feedforward Controls
– Used to anticipate problems before they arise so
that problems do not occur later during the
conversion process
– Giving stringent product specifications to
suppliers in advance
– IT can be used to keep in contact with suppliers
and to monitor their progress

11-83
 Types of Control
• Concurrent Controls
– Give managers immediate feedback on how
efficiently inputs are being transformed into
outputs
• Allows managers to correct problems as they arise

11-84
 Types of Control
• Feedback Controls
– Used to provide information at the output stage
about customers’ reactions to goods and
services so that corrective action can be taken if
necessary

11-85
 Control Process Steps

Figure 11.2 11-86

 The Control Process
1. Establish standards of performance, goals,
or targets against which performance is to
be evaluated.
– Managers at each organizational level need to
set their own standards.

11-87
 The Control Process
2. Measure actual performance
– Managers can measure outputs resulting
from worker behavior or they can measure
the behavior themselves.
• The more non-routine the task, the harder it is to
measure behavior or outputs

11-88
 The Control Process
3. Compare actual performance against chosen
standards of performance
– Managers evaluate whether – and to what
extent – performance deviates from the
standards of
performance
chosen in step 1

11-89
 The Control Process
4. Evaluate result and initiate corrective action
if the standard is not being achieved
– If managers decide that the level of performance
is unacceptable, they must try to change the way
work activities are performed to solve the
problem

11-90
 Three Organizational Control Systems

Figure 11.3 11-91

Financial Measures of Performance
• Profit Ratios –
– measure how efficiently managers are using the
organization’s resources to generate profits
• Return on Investment (ROI) –
– most commonly used financial performance
measure
– organization’s net income before taxes divided by
its total assets

11-92
Financial Measures of Performance
• Operating margin
– calculated by dividing a companies operating
profit by sales revenue
– Provides managers with information about how
efficiently an organization is utilizing its resources

11-93
Financial Measures of Performance
• Liquidity ratios
– measure how well managers have protected
organizational resources to be able to meet short-
term obligations
• Leverage ratios
– measure the degree to which managers use debt
or equity to finance ongoing operations

11-94
Financial Measures of Performance

• Activity ratios
– provide measures of
how well managers
are creating value
from organizational
assets

11-95
 Output Control
• Organizational Goals
– Each division within the firm is given specific
goals that must be met in order to attain overall
organizational goals.
• Goals should be set appropriately so that managers
are motivated to accomplish them

11-96
 Organization-Wide Goal Setting

Figure 11.4 11-97

 Output Control
• Operating Budgets
– Blueprint that states how managers intend to use
organizational resources to achieve organizational
goals efficiently.

11-98
 Effective Output Control
1. Objective financial measures
2. Challenging goals and performance
standards
3. Appropriate operating budgets

11-99
 Problems with Output Control
• Managers must create output standards that
motivate at all levels
• Should not cause managers to behave in
inappropriate ways to achieve organizational
goals

11-100
 Behavior Control
• Direct supervision
– managers who actively monitor and observe the
behavior of their subordinates
– Teach subordinates appropriate behaviors
– Intervene to take corrective action
– Most immediate and potent form of behavioral
control
– Can be an effective way of motivating employees

11-101
 Problems with Direct Supervision
• Very expensive because a manager can
personally manage only a relatively small
number of subordinates effectively
• Can demotivate subordinates if they feel that
they are under such close scrutiny that they
are not free to make their own decisions

11-102