The Controlling Function

18–1
What Is Control?
• Controlling
 The process of monitoring activities to ensure that
they are being accomplished as planned and of
correcting any significant deviations.

• The Purpose of Control

 To ensure that activities are completed in ways that
lead to accomplishment of organizational goals.

18–2
Designing Control Systems
• Market Control
 Emphasizes the use of external market mechanisms
to establish the standards used in the control system.
 External measures: price competition and relative
market share
• Bureaucratic Control
 Emphasizes organizational authority and relies on
rules, regulations, procedures, and policies.
• Clan Control
 Regulates behavior by shared values, norms,
traditions, rituals, and beliefs of the firm’s culture.

18–3
Exhibit 18–1 Characteristics of Three Approaches to Control Systems

Type of Control Characteristics

Market Uses external market mechanisms, such as price competition
and relative market share, to establish standards used in
system. Typically used by organizations whose products or
services are clearly specified and distinct and that face
considerable marketplace competition.
Bureaucratic Emphasizes organizational authority. Relies on administrative
and hierarchical mechanisms, such as rules, regulations,
procedures, policies, standardization of activities, well-
defined job descriptions, and budgets to ensure that
employees exhibit appropriate behaviors and meet
performance standards.
Clan Regulates employee behavior by the shared values, norms,
traditions, rituals, beliefs, and other aspects of the
organization’s culture. Often used by organizations in which
teams are common and technology is changing rapidly.

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Why Is Control Important?
• As the final link in management functions:
 Planning
 Controls let managers know whether their goals
and plans are on target and what future actions to
take.
 Empowering employees
 Control systems provide managers with information
and feedback on employee performance.
 Protecting the workplace
 Controls enhance physical security and help
minimize workplace disruptions.

18–5
Exhibit 18–2 The Planning–Controlling Link

18–6
Exhibit 18–3 The Control Process

18–7
Example: HR Controls
• 1. Measuring actual performance.
Measuring actual number of times an employee has
been taking long breaks weekly/monthly.

• 2. Comparing actual performance against a standard

How long have the breaks been?

• 3. Taking action to correct deviations or inadequate

standards
 Discussion/ verbal warning/ repeat warning/
documenting the behavior etc.

18–8
Example: Marketing Controls
• 1. Measuring actual performance.
Measure the previous/ current price.

• 2. Comparing actual performance against a standard

What price are the competitors offering?

• 3. Taking action to correct deviations or inadequate

standards
 Reducing cost to bring down your price.
 Increase efficiency of your production processes

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Financial Controls
• 1. Measuring actual performance.
Profit/ revenue/ earning/ Total asset turnover ratio etc.

• 2. Comparing actual performance against a standard

What profit/ revenue/ earning/ total asset turnover ratio did
you set as a goal/ standard?

• 3. Taking action to correct deviations or inadequate

standards
 Increasing maangerial effectiveness in managing the
assets
 Take steps to increase revenue
 Improve inventory management etc.
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Measuring: How and What We Measure
• Sources of • Control Criteria
Information (How) (What)
 Personal observation  Employees
 Statistical reports  Satisfaction

 Oral reports  Turnover

 Written reports  Absenteeism

 Budgets
 Costs

 Output

 Sales

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Exhibit 18–4 Common Sources of Information
for Measuring Performance

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Comparing
• Determining the degree of variation between
actual performance and the standard.
 Significance of variation is determined by:
 Theacceptable range of variation from the
standard (forecast or budget).
 Thesize (large or small) and direction (over or
under) of the variation from the standard (forecast
or budget).
 Goal: 10 cars per day ( +/-1 acceptable)
 ….. 9 cars… acceptable. 11 acceptable.

18–13
Exhibit 18–5 Defining the Acceptable Range of Variation

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Taking Managerial Action
• Courses of Action
 “Doing nothing”
 Only if deviation is judged to be insignificant/minor.
 Correcting actual (current) performance
 Immediate corrective action to correct the problem
at once.
 Basiccorrective action to locate and to correct the
source of the deviation.
 Corrective Actions
– Change strategy, structure, fix faulty equipment,
compensation scheme, or training programs; redesign
jobs; or fire employees
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Taking Managerial Action (cont’d)
• Courses of Action (cont’d)
 Revising the standard
 Examining the standard to ascertain whether or not
the standard is realistic, fair, and achievable.
– Upholding the validity of the standard.
– Resetting goals that were initially set too low or too high.

18–16
Exhibit 18–7 Managerial Decisions in the Control Process

18–17
Controlling for Organizational
Performance
• What Is Performance?
 The end result of an activity

• What Is Organizational
Performance?
 The accumulated end results of all of the
organization’s work processes and activities
 Designing strategies, work processes, and work
activities.
 Coordinating the work of employees.

18–18
Organizational Performance Measures
• Organizational Productivity
 Productivity: the overall output of goods and/or
services divided by the inputs needed to generate
that output.
 Output: sales revenues
 Inputs:
costs of resources (materials, labor
expense, and facilities)
 Ultimately, productivity is a measure of how efficiently
employees do their work.

18–19
Organizational Performance Measures
• Organizational Effectiveness
 Measuring how appropriate organizational goals are
and how well the organization is achieving its goals.
 What indicates effectiveness?
– The ability of the organization to exploit its environment in
acquiring scarce and valued resources…. Systems
resource model

– The efficiency of an organization’s transformation process

in converting inputs to outputs….. The process model

18–20
Industry and Company Rankings
• Industry rankings on: • Corporate Culture
 Profits Audits
 Return on revenue • Compensation and
 Return on shareholders’ benefits surveys
equity
• Customer satisfaction
 Growth in profits
surveys
 Revenues per employee
 Revenues per dollar of
assets
 Revenues per dollar of
equity

18–21
Exhibit 18–8 Popular Industry and Company Rankings

18–22
Tools for Controlling Organizational
Performance
• Feedforward Control
 A control that prevents anticipated problems before
actual occurrences of the problem.
 Building in quality through design.
 Requiring suppliers conform to ISO 9001. (ISO 9001 is a standard
that sets out the requirements for a quality management system. It helps businesses and organizations to
be more efficient and improvecustomer satisfaction. A new version of the standard, ISO 9001:2015, has
just been launched, replacing the previous version (ISO 9001:2008).)

• Concurrent Control
 A control that takes place while the monitored activity is
in progress.
 Direct supervision: management by walking around.

18–23
Tools for Controlling Organizational
Performance (cont’d)
• Feedback Control
 A control that takes place after an activity is done.
 Corrective
action is after-the-fact, when the
problem has already occurred.
 Advantages of feedback controls:
 Provide managers with information on the
effectiveness of their planning efforts.
 Enhance employee motivation by providing them
with information on how well they are doing.

18–24
Exhibit 18–9 Types of Control

18–25
Tools for Controlling Organizational
Performance: Financial Controls
• Traditional Controls • Other Measures
 Ratio analysis  Economic Value Added
 Liquidity (EVA)
 EVA=Net economic profit after taxes -
 Leverage (Invested Capital * WACC)

 Activity  Market Value Added (MVA)

 The difference between the current
 Profitability market value of a firm and the capital
contributed by investors
 Budget Analysis
 MVA = V (includes value of equity
 Quantitative standards and debt) – K (total capital invested)

 Deviations

18–26
Exhibit 18–10 Popular Financial Ratios

18–27
Exhibit 18–10 Popular Financial Ratios (cont’d)

18–28
Tools for Controlling Organizational
Performance: Financial Controls (cont’d)
• Other Measures
 Economic Value Added (EVA)
 How much value is created by what a company
does with its assets, less any capital investments in
those assets: the rate of return earned over and
above the cost of capital.
– The choice is to use less capital or invest in high-return
projects.

18–29
Tools for Controlling Organizational
Performance: Financial Controls (cont’d)
• Other Measures (cont’d)
 Market Value Added (MVA)
 The value that the stock market places on a firm’s
past and expected capital investment projects
 Ifthe firm’s market value (its stock and debt)
exceeds the value of its invest capital (its equity
and retained earnings), then managers have
created wealth.

• The Practice of Managing Earnings

18–30
Controlling Organizational Performance
• Balanced Scorecard
 Is a measurement tool that uses goals set by
managers in four areas to measure a company’s
performance:
 Financial

 Customer

 Internal processes
 People/innovation/growth assets
 Is intended to emphasize that all of these areas are
important to an organization’s success and that there
should be a balance among them.

18–31
Information Controls
• Purposes of Information Controls
 As a tool to help managers control other
organizational activities.
 Managers need the right information at the right
time and in the right amount.
 As an organizational area that managers need to
control.
 Managers must have comprehensive and secure
controls in place to protect the organization’s
important information.

18–32
Information Controls
• Management Information Systems (MIS)
 A system used to provide management with needed
information on a regular basis.
 Employee record keeping, invoicing, inventory
management, project planning, customer relationship
management etc.
 Data: an unorganized collection of raw, unanalyzed
facts (e.g., unsorted list of customer names).
 Information:data that has been analyzed and
organized such that it has value and relevance to
managers.

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Contemporary Issues in Control
• Cross-Cultural Issues
 The use of technology to increase direct corporate
control of local operations
 Legal constraints on corrective actions in foreign
countries
 Difficulty with the comparability of data collected from
operations in different countries

18–34
Contemporary Issues in Control (cont’d)
• Workplace Concerns
 Workplace privacy versus workplace monitoring:
 E-mail, telephone, computer, and Internet usage
 Productivity, harassment, security, confidentiality,
intellectual property protection
 Employee theft
 Theunauthorized taking of company property by
employees for their personal use.
 Workplace violence
 Anger, rage, and violence in the workplace is
affecting employee productivity.

18–35
Exhibit 18–12
Types of Workplace
Monitoring by
Employers

18–36
Exhibit 18–13 Control Measures for Employee Theft or Fraud

Sources: Based on A.H. Bell and D.M. Smith. “Protecting the

Company Against Theft and Fraud,” Workforce Online
(www.workforce.com) December 3, 2000; J.D. Hansen. “To Catch
a Thief,” Journal of Accountancy, March 2000, pp. 43–46; and J.
Greenberg, “The Cognitive Geometry of Employee Theft,” in
Dysfunctional Behavior in Organizations: Nonviolent and Deviant
Behavior, eds. S.B. Bacharach, A. O’Leary-Kelly, J.M. Collins, and
R.W. Griffin (Stamford, CT: JAI Press, 1998), pp. 147–93.

18–37
 Exhibit 18–14 Workplace Violence

Witnessed yelling or other verbal abuse 42%

Yelled at co-workers themselves 29%
Cried over work-related issues 23%
Seen someone purposely damage
machines or furniture 14%
Seen physical violence in the workplace 10%
Struck a co-worker 2%

Source: Integra Realty Resources, October-November Survey of Adults

18 and Over, in “Desk Rage.” BusinessWeek, November 20, 2000, p. 12.
18–38
Exhibit 18–15 Control Measures for Deterring or Reducing
Workplace Violence

Sources: Based on M. Gorkin, “Five Strategies and Structures for Reducing

Workplace Violence,” Workforce Online (www.workforce.com). December
3, 2000; “Investigating Workplace Violence: Where Do You Start?”
Workforce Online (www.forceforce.com), December 3, 2000; “Ten Tips on
Recognizing and Minimizing Violence,” Workforce Online
(www.workforce.com), December 3, 2000; and “Points to Cover in a
Workplace Violence Policy,” Workforce Online (www.workforce.com),
December 3, 2000.

18–39
Contemporary Issues in Control (cont’d)
• Customer Interactions
 Service profit chain
 Is
the service sequence from employees to
customers to profit.
 Service capability affects service value which impacts
on customer satisfaction that, in turn, leads to
customer loyalty in the form of repeat business
(profit).

18–40
 Exhibit 18–16 The Service Profit Chain

Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from “Putting the Service Profit Chain to Work,” by J. L. Heskett,
T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., and L. A. Schlesinger. March–April 1994: 166. Copyright (c) by the President and Fellows of Harvard
College. All rights reserved. See also J. L. Heskett, W. E. Sasser, and L. A. Schlesinger, The Service Profit Chain (New York: Free Press, 1997).
18–41
 Terms to Know
• controlling • productivity
• market control • organizational
• bureaucratic control effectiveness
• clan control • feedforward control
• control process • concurrent control
• range of variation • management by walking
• around
immediate corrective
action • feedback control
• basic corrective action • economic value added
• performance (EVA)
• market value added
• organizational
(MVA)
performance
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Task
• Discuss “CONTROL” • 3. Occupational health
as a goal-oriented and safety controls
function. • 4. Market Controls

• In doing the above,

describe examples of
the following controls
in management of a
HOSPITAL:
• 1. HR controls
• 2. Financial Controls
18–43