OVERVIEW OF THE CHAPTER 16 (CONTROLLING)

16.1 Control: When Managers Monitor Performance

Controlling is monitoring performance, comparing it with goals, and taking
corrective action. This section describes six reasons control is needed and four steps
in the control process.

Section 16.1 Key Concepts:

Controlling

● Control is making something happen the way it was planned to happen.

● Controlling is defined as monitoring performance, comparing it with goals, and
taking corrective action as needed.
● There are four management functions:
o Planning is setting goals and deciding how to achieve them.
o Organizing is arranging tasks, people, and other resources to accomplish the
work.
o Leading is motivating people to work hard to achieve the organization’s goals.
o Controlling is concerned with seeing that the right things happen at the right
time in the right way.
● Lack of control mechanisms can lead to problems for both managers and companies.

Why Is Control Needed?

● To Adapt to Change and Uncertainty

o All organizations must deal with environmental changes and uncertainties.
o Control systems help managers anticipate, monitor, and react to these changes.
● To Discover Irregularities and Errors
o Small problems can mushroom into big ones.
o In the long run, small problems can cripple an organization.
● To Reduce Costs, Increase Productivity, or Add Value
o Control systems can reduce labor costs, eliminate waste, increase output, and
increase product delivery cycles.
o Controls can help add value to a product.
● To Detect Opportunities and Increase Innovation
o Controls can alert managers to opportunities that might go unnoticed.
● To Provide Performance Feedback
 o When a company becomes larger, it may find it has several product lines,
material-purchasing policies, customer bases, and worker needs that conflict
with each other.
o Controls help managers coordinate these various elements.
● To Decentralize Decision Making and Facilitate Teamwork
o Controls allow top managers to decentralize decision making at lower levels.
o It also encourages employees to work together in teams.

Steps in the Control Process

● The four control process steps are: establish standards, measure performance,
compare performance to standards, and take corrective action, if necessary.
● Step 1: Establish Standards
o A control standard, or performance standard or simply standard, is the
desired performance level for a given goal.
o Standards are best measured when they are quantifiable.
o Standards for for-profit organizations include standards of financial
performance, return on investment, and so on.
o Nonprofit institutions and service organizations may use different performance
standards.
o Subjective standards, such as level of employee satisfaction, can also be set.
o One technique for establishing standards is to use the balanced scorecard.
● Step 2: Measure Performance
o The second step is to measure performance, such as by number of products
sold, units produced, or cost per item.
o Performance data are usually obtained from three sources: (1) employee
behavior and deliverables; (2) peer input or observations; and (3) personal
observation.
o Measurement techniques can vary for different industries, such as for
manufacturing industries versus service industries.
● Step 3: Compare Performance to Standards
o The third step in the control process is to compare measured performance
against the standards established.
o Performance above standards may be rewarded.
o Performance that is below standards needs to be investigated to determine if
the deviation from performance is significant.
o The greater the difference between desired and actual performance, the greater
the need for action.
o How much deviation is acceptable depends on the range of variation built into
the standards.
 o Management by exception is a control principle that states that managers
should be informed of a situation only if data shows a significant deviation
from standards.
● Step 4: Take Corrective Action, If Necessary
o This step determines changes that should be made to obtain desirable
outcomes.
o There are three possibilities: (1) make no changes; (2) recognize and reinforce
positive performance; or (3) take action to correct negative performance.
o When performance meets or exceeds the standards set, managers should give
rewards.
o When performance falls significantly short of the standard, managers should
carefully examine the reasons why, and take the appropriate action.
o It may turn out the standards themselves were unrealistic, owing to changing
conditions, in which case the standards need to be altered.

Types of Controls

● There are three types of control: feedforward, concurrent, and feedback.

● They vary based on the timing of when control takes place.
● Feedforward Control
o Feedforward control focuses on preventing future problems.
o This is done by collecting performance information about past performance
and then planning to avoid pitfalls or roadblocks prior to starting a task or
project.
● Concurrent Control
o Concurrent control entails collecting performance information in real time.
o This enables managers to determine if employee behavior and organizational
processes conform to regulations and standards.
o Corrective action can then be taken immediately when performance is not
meeting expectations.
● Feedback Control
o Feedback control amounts to collecting performance information after a task
or project is done.
o This information then is used to correct or improve future performance.
o This form of control is extensively used by supervisors and managers.
16.2 Levels and Areas of Control
This section describes three levels of control—strategic, tactical, and operational—
and six areas of control: physical, human, informational, financial, structural
(bureaucratic and decentralized), and cultural. We also look at the supply chain and
special considerations for control mechanisms in service firms.
Section 16.2 Key Concepts:

Levels of Control

● There are three levels of control that correspond to the three principal managerial
levels: strategic, tactical, and operational.
● The three levels frequently interact.
● Strategic Control
o Strategic control is monitoring performance to ensure that strategic plans are
being implemented, and taking corrective action as needed.
o Strategic control is mainly performed by top managers who have an
organization-wide perspective.
● Tactical Control
o Tactical control is monitoring performance to ensure that tactical plans—
those at the divisional or departmental level—are being implemented, and
taking corrective action as needed.
o Tactical control is done mainly by middle managers.
● Operational Control
o Operational control is monitoring performance to ensure that operational
plans—day-to-day goals—are being implemented, and taking corrective action
as needed.
o Operational control is done mainly by first-level managers.

Areas of Control

● The six areas of organizational control are (1) physical, (2) human, (3) informational,
(4) financial, (5) structural, and (6) cultural.
● Physical Area
o The physical area includes buildings, equipment, and tangible products.
o Equipment controls monitor the use of computers, cars, and other machinery.
o Quality controls ensure that products are being built according to certain
acceptable standards.
o Inventory-management controls keep track of how many products are in stock,
how many will be needed, and what their delivery dates are.
● Human Resources Area
 o The human resources area includes controls used to monitor employees, such
as personality tests, drug testing, performance tests, performance evaluations,
and employee surveys.
o
● Informational Area
o The informational area includes controls of information resources, such as
production schedules, sales forecasts, and environmental impact statements.
● Financial Area
o The financial area would include such considerations as: Are bills being paid
on time? How much money is owed by customers? How much money is owed
to suppliers? Is there enough cash on hand to meet payroll obligations?
o An organization’s financial controls can affect the other three preceding types.
● Structural Area
o The structural area refers to the organization’s arrangement from a hierarchical
or structural standpoint.
o Two examples are bureaucratic control and decentralized control.
▪ Bureaucratic control is an approach to organizational control that is
characterized by the use of rules, regulations, and formal authority to
guide performance.
● This form of control uses strict rules, a rigid hierarchy, and
well-defined job descriptions to elicit employee compliance.
● It also uses administrative mechanisms such as budgets,
performance appraisals, and external rewards to get results.
▪ Decentralized control is an approach to organizational control that is
characterized by informal and organic structural arrangements.
● This form of control uses the corporate culture, group norms,
and workers taking responsibility for their performance to get
increased employee commitment.
● Cultural Area
o The cultural area is an informal method of control that influences the work
process and performance through norms that develop from the values and
beliefs of an organization’s culture.

● The supply chain is the sequence of suppliers that contribute to creating and
delivering a product, from raw materials to production to final buyers.
● Supply chains are a major cost center for most companies, and the way firms structure
the distribution of their products can have enormous financial impact.
● Companies are paying closer attention to the sourcing, shipping, and warehousing of
their products and to the ingredients and component parts they require.
 ● Many organizations are creating specialized supply chain departments that look
specifically at cost and quality control in these areas and the way they contribute to
the cost and quality of finished products.

Control in Service Firms

● Service providers differ from manufacturers in several ways, including the fact that
service companies cannot hold any inventory of their services, which are intangible.
● Service firms also usually develop a personal, if temporary, relationship with their
client or customer.
● Some services, such as flights and hotel accommodations, are highly perishable.
● The U.S. service industry has grown considerably in the last few decades, as a great
deal of manufacturing activity has moved overseas.
● Measuring and controlling employee behavior applies to the role of control in service
organizations.

16.3 The Balanced Scorecard and Strategy Maps

The balanced scorecard helps managers establish goals and measures for four
strategic perspectives. A visual representation of the relationships among balanced
scorecard perspectives is the strategy map.
Section 16.3 Key Concepts:

The Balanced Scorecard

● The balanced scorecard gives top managers a fast but comprehensive view of the
organization via four indicators: (1) customer satisfaction, (2) internal processes,
(3) innovation and improvement activities, and (4) financial measures.
● The balanced scorecard establishes goals and performance measures according to
these four ‘‘perspectives’’ or areas.
● Financial Perspective
o Financial perspective assesses, ‘‘how do we look to shareholders?’’
o Corporate financial strategies and goals generally fall into two buckets:
revenue growth and productivity growth.
o Revenue growth goals might focus on increasing revenue from both new and
existing customers.

● Customer Perspective
o Customer perspective assesses, ‘‘how do customers see us?’’
o Many companies view customers as one of their most important constituents.
o The balanced scorecard uses such measures as market share, customer
acquisition, customer retention, customer satisfaction/loyalty, product/service
quality, response time, and percentage of bids won.
 ● Internal Business Perspective
o The internal business perspective focuses on what the organization must excel
at to effectively meet its financial objectives and customers’ expectations.
o Four critical high-level internal processes that managers are encouraged to
measure and manage are: innovation; customer service and satisfaction;
operational excellence, which includes safety and quality; and good corporate
citizenship.
o Companies tend to adopt continuous improvement programs in pursuit of
upgrades to their internal processes.
● Innovation and Learning Perspective
o The innovation and learning perspective assesses, ‘‘can we continue to
improve and create value?’’
o Learning and growth of employees is the foundation for all other goals in the
balanced scorecard.
o The idea is that capable and motivated employees, who possess the resources
and culture needed to get the job done, will provide higher quality products
and services in a more efficient manner.
o Typical metrics in this perspective are employee satisfaction/engagement,
employee retention, employee productivity, training budget per employee,
technology utilization, and organizational climate and culture.

Strategy Maps

● A strategy map is a visual representation of a company's critical objectives and the

crucial relationships among them that drive organizational performance.
● Maps show relationships among a company's strategic goals.
● This helps employees understand how their work contributes to their employer’s
overall success.
● Figure 16.6 provides an illustrative strategy map for Dr. Pepper Snapple Group.
● The beauty of a strategy map is that it enables leaders to present a strategic road map
to employees on one page, and it provides a clear statement about the criteria used to
assess organizational effectiveness.
16.4 Some Financial Tools for Control
Financial controls are especially important. These include budgets, financial
statements, and audits.

Section 16.4 Key Concepts:

Budgets

● A budget is a formal financial projection.

● A budget states an organization’s planned activities for a given period of time in
quantitative terms.
● Budgets are prepared for the organization as a whole and for the divisions within it.
● The point of a budget is to provide a yardstick against which managers can judge how
well they are controlling monetary expenditures.
● Incremental budgeting allocates increased or decreased funds to a department by
using the last budget period as a reference point; only incremental changes in the
budget request are reviewed.
o One difficulty is that incremental budgets tend to lock departments into stable
spending arrangements.
o Another difficulty is that a department may engage in many activities of
varying importance, so it can be difficult to sort out how well managers
performed at the varying activities.
● A fixed budget or static budget allocates resources on the basis of a single estimate of
costs.
o The budget does not allow for adjustment over time.
● A variable budget or a flexible budget allows the allocation of resources to vary in
proportion with various levels of activity.
o The budget can be adjusted over time as the environment changes.

Financial Statements

● A financial statement is a summary of some aspect of an organization’s financial

status.
● The information contained in such a statement is essential in helping managers
maintain financial control over the organization.
● There are two basic types of financial statements: the balance sheet and the income
statement.
o A balance sheet summarizes an organization’s overall financial worth—assets
and liabilities—at a specific point in time.
▪ Assets are the resources that an organization controls and consist of
current assets and fixed assets.
 ▪ Current assets are cash and other assets that are readily convertible to
cash within one year’s time.
▪ Fixed assets are property, building, equipment, and the like, which
have a useful life that exceeds one year but which are usually harder to
convert to cash.
▪ Liabilities are claims, or debts, by suppliers, lenders, and other
nonowners of the organization against a company’s assets.
o The income statement summarizes an organization’s financial results—
revenues and expenses—over a specified period of time, such as a quarter or a
year.

Audits

● Audits are formal verifications of an organization’s financial and operational systems.

● An external audit is a formal verification of an organization’s financial accounts and
statements by outside experts.
o External auditors are certified public accountants (CPAs) who work for an
accounting firm that is independent of the organization.
o An external auditor’s task is to verify that the organization, in preparing its
financial statements and in determining its assets and liabilities, followed
generally accepted accounting principles.
● An internal audit is a verification of an organization’s financial accounts and
statements by the organization’s own professional staff.
o An internal auditor’s job is to verify the accuracy of the organization’s records
and operating activities.
o Internal audits also help uncover inefficiencies and thus help managers
evaluate the performance of their control systems.
16.5 Total Quality Management
Total quality management (TQM) is dedicated to continuous quality improvement,
training, and customer satisfaction. Two core principles are people orientation and
improvement orientation. Some techniques for improving quality are employee
involvement, benchmarking, outsourcing, reduced cycle time, and statistical process
control.

Section 16.5 Key Concepts:

Deming Management

● Deming management proposed ideas for making organizations more responsive,

more democratic, and less wasteful.
● Deming management includes four principles:
o Quality should be aimed at the needs of the consumer.
o Companies should aim at improving the system, not blaming workers.
o Improved quality leads to increased market share, increased company
prospects, and increased employment.
o Quality can be improved on the basis of hard data, using the PDCA cycle.
▪ The PDCA cycle is a Plan-Do-Check-Act cycle using observed data for
continuous improvement of operations.
▪ The four steps continuously follow each other, resulting in continuous
improvement.

Core TQM Principles

● Total quality management (TQM) is defined as a comprehensive approach—led by

top management and supported throughout the organization—dedicated to continuous
quality improvement, training, and customer satisfaction.
● There are four components to TQM:
o Make continuous improvement a priority.
o Get every employee involved.
o Listen to and learn from customers and employees.
o Use accurate standards to identify and eliminate problems.
● The two core principles of TQM are people orientation and improvement orientation.
● People Orientation
o With people orientation, everyone involved with the organization should focus
on delivering value to customers.
o Organizations adopting TQM value people as their most important resource.
o Assumptions of the people orientation:
▪ Delivering customer value is most important.
 ▪ People will focus on quality if given empowerment.
▪ TQM requires training, teamwork, and cross-functional efforts.
● Improvement Orientation
o With improvement orientation, everyone should work on continuously
improving the work processes.
o Continuous improvement is defined as ongoing small, incremental
improvements in all parts of an organization.
o Assumptions of an improvement orientation:
▪ It’s less expensive to do it right the first time.
▪ It’s better to do small improvements all the time.
▪ Accurate standards must be followed to eliminate small variations.
▪ There must be strong commitment from top management.
Kaizen is a Japanese philosophy of small continuous improvement that seeks to
involve everyone at every level of the organization in the process of identifying
opportunities and implementing and testing solutions
● There are differences between products and services including:
o Manufacturing industries provide tangible products; service industries provide
intangible products.
o Manufacturing products can be stored; services generally need to be consumed
immediately.
o Services tend to require a lot of people effort.
o Customers are much more involved in the delivery of services than they are in
the delivery of manufactured products.
● One clear prerequisite for providing excellent service is effective training.
● Judging the quality of services is different because it comes down to meeting the
customer’s satisfaction, which may be a matter of perception.

TQM Tools, Techniques, and Standards

● Several tools and techniques are available for improving quality.

● Tools described in this section include outsourcing, reduced cycle time, statistical
process control, Six Sigma, and quality standards ISO 9000 and ISO 14000.
● Outsourcing
o Outsourcing is the subcontracting of services and operations to an outside
vendor.
o Outsourcing is usually done to reduce costs or increase productivity.
o Outsourcing short-term and project work to freelance or contract workers in
the so-called gig economy also saves companies many employee-related
expenses.
o Outsourcing is also being done by many state and local governments.
 o Known as privatization, governments subcontract services such as fire
protection, correctional services, and medical services.
● Reduced Cycle Time
o Reduced cycle time is the reduction in steps in a work process.
o The emphasis on increasing the speed with which an organization’s operations
and processes can be performed.
o Eliminating wasteful motions, unnecessary steps, and the like can improve
performance.
● Statistical Process Control
o Statistical process control is a statistical technique that uses periodic random
samples from production runs to see if quality is being maintained within a
standard range of acceptability.
o If quality is not acceptable, production is stopped to make corrections.
● Six Sigma and Lean Six Sigma
o Six Sigma is a rigorous statistical analysis process that reduces defects in
manufacturing and service-related processes.
o A company using Six Sigma attempts to improve quality and reduce waste to
the point where errors nearly vanish.
o Reaching Six Sigma means there are no more than 3.4 defects per million
products or procedures.
o The Six Sigma philosophy is to reduce variation and make customer-focused,
data-driven decisions.
o The key terms are Define, Measure, Analyze, Improve, and Control
(DMAIC.)
o A recent approach is known as lean Six Sigma, which focuses on problem
solving and performance improvement—speed with excellence—of a well-
defined project.
o Even though Six Sigma and lean Six Sigma cannot compensate for human
error or control events outside a company, they give a manager a more
tangible, data-oriented way to approach problem solving.
● ISO 9000 and ISO 14000
o The International Organization for Standardization (ISO) created a set of
quality standards known as the 9000 series.
o The ISO 9000 series consists of quality-control procedures that companies
must install—from purchasing to manufacturing to inventory to shipping—
which can be audited by independent quality-control experts, or “registrars.”
o The goal is to reduce flaws in manufacturing and improve productivity by
adopting eight "big picture" Quality Management Principles:
▪ Customer focus
▪ Leadership
 ▪ Involvement of people
▪ Process approach
▪ System approach to management
▪ Continual improvement
▪ Factual approach to decision making
▪ Mutually beneficial supplier relationships
o Companies must document their ISO 9000 procedures and train their
employees to use them.
o ISO 14000 series identifies standards for environmental performance and
dictates standards for documenting a company’s management of pollution,
efficient use of raw materials, and reduction of the firm’s impact on the
environment.

16.6 Managing Control Effectively

This section describes four keys to successful control and five barriers to successful
control.

Section 16.6 Key Concepts:

Keys to Successful Control Systems

● Strategic and Results-Oriented

o Control systems support strategic plans and are concentrated on significant
activities that will make a real difference to the organization.
o Managers should develop control standards that will measure how well the
firm’s strategic plans are being achieved.
● Timely, Accurate, and Objective
o Control systems should be timely by providing information when needed, and
often enough to allow employees and managers to take corrective action for
any deviations.
o Control systems must be impartial and fair, not biased or prejudiced.
● Realistic, Positive, Understandable, and Encourage Self-Control
o Control systems should incorporate realistic expectations.
o Control systems should emphasize development and improvement.
o Control systems should fit the people involved, be kept as simple as possible,
and present data in understandable terms.
o Control systems should encourage good communication and mutual
participation.
● Flexible
 o Control systems must leave room for individual judgment.
o This allows them to be modified when necessary to meet new requirements.

Barriers to Control Success

● Too Much Control

o Some organizations try to exert too much control.
o Such micromanagement frustrates employees and may lead them to ignore or
try to sabotage the control process.
o Over-control can be counterproductive because employees are more effective
and achieve greater job satisfaction if they feel empowered to use their own
judgment.
● Too Little Employee Participation
o Employee participation can enhance productivity.
o Involving employees in both the planning and execution of control systems
can heighten employee morale.
● Overemphasis on Means Instead of Ends
o Control systems are not ends in themselves but the means to eliminating
problems.
o Employees may manipulate data to fulfill short-run goals instead of the
organization’s strategic plan.
● Overemphasis on Paperwork
o One barrier is management emphasis on getting reports done while neglecting
other performance activity.
o Undue emphasis on reports can lead to too much focus on quantification of
results and even to falsification of data.
● Overemphasis on One Instead of Multiple Approaches.
o One type or method of control may not be enough.
o Multiple control activities and information systems provide multiple
performance indicators, thereby increasing accuracy and objectivity.
16.7 Managing for Productivity

The purpose of a manager is to make decisions about the four management functions
—planning, organizing, leading, and controlling—to get people to achieve
productivity and realize results. Productivity is defined by the formula of outputs
divided by inputs for a specified period of time. Productivity matters because it
determines whether the organization will make a profit or even survive.
Section 16.7 Key Concepts:

Managing for Productivity

● Managers in the 21st century will operate in a complex environment and will need to
deal with seven challenges: managing for competitive advantage, diversity,
globalization, information technology, ethical standards, sustainability, and their own
happiness and life goals.
● Managers should draw on the practical and theoretical knowledge described in this
book to make decisions about the four management functions.
● A manager’s purpose is to get the people reporting to them to achieve productivity
and realize results.

Productivity

● Productivity is defined by the formula of outputs divided by inputs for a specified

period of time.
● Outputs are all the goods and services produced.
● Inputs are labor, capital, materials, and energy.
● Productivity = Outputs OR Goods + Services
Inputs Labor + Capital + Materials + Energy
● A manager can increase overall productivity by making substitutions or increasing the
efficiency of any one element: labor, capital, materials, or energy.

The Importance of Increasing Productivity

● Productivity determines whether the company makes a profit.

● Increased productivity increases our nation’s standard of living.
● Productivity has even been zero or negative in some countries.
● Several explanations for the lack of growth in productivity have been proposed:
o Globalization helps increase the ripple effects of any country’s economic
downturns on its neighbors and trading partners.
o Climate change is affecting productivity as extreme weather, including
droughts and floods, becomes more common.
o Productivity gains from information technology, such as automation and the
Internet, shareware, cloud computing, and other communication technologies,
have slowed.
 o Some believe the lack of productivity growth may be a measurement error
since new technologies are difficult to value.
● Many companies have implemented enterprise resource planning (ERP), software
systems, and information systems for integrating virtually all aspects of a business.
● Benchmarking is a way to measure something against a standard, the benchmark.
● Best practices are a set of guidelines, ethics or ideas that represent the most efficient
or prudent course of action.

Managing Individual Productivity

● Individual employees, managers, and organizations all share responsibility for

increasing individual productivity.
● Individuals contribute by proactively bringing their skills, energy, talents, and
motivation to work on a daily basis, and by engaging in self-development and
organizational citizenship.
● Managers should use the concepts, tools, and techniques discussed throughout this
book to help develop their managerial and leadership skills.
● Organizations need to provide positive work environments and cultures that promote
employee engagement, satisfaction, and flourishing by investing in training and
development and the resources people need to increase their productivity.