MGMT370 Chap. 15

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Management Control
(Part of control in organizations)

-Def: Includes all activities an organization undertakes to ensure that its actions lead to achievement of its objectives.

Management Control System
(Part of control in organizations)

-Def: A planned, ordered scheme of management control that allows managers to readily assess where the firm actually is at a point in time relative to where it wants or expects to be.

Internal Controls
(Part of control in organizations)

-Def: Processes that are developed to provide assurance that an organization reaches its objectives relating to operational efficiency.

The Importance of Control

-All the good planning efforts and brilliant ideas in the world do little good if a firm has no system of management control. -Control, therefore, is an essential part of effective organizational management. -Specifically, control helps an organization adapt to changing conditions, limits the magnification of errors, assists in dealing with increased complexity, and helps minimize costs.

Adapting to Changing Conditions
(Part of the importance of control)

-Change itself is about the only thing that can be predicted with any degree of certainty in turbulent (not controlled or calm) markets. -A properly designed management control system can allow managers to effectively anticipate, monitor, and respond to often constantly changing environmental conditions. -Most firms monitor financial performance as a key quantitative control measure.

Limiting the Magnification of Errors
(Part of the importance of control)

-Generally, a small error or mistake does not adversely (prevent success or harmful) affect organizational operations. However, a small error or mistake left uncorrected is perhaps one undetected as a result of a lack of control and may be magnified with the passage of time which would eventually harm the whole company.

Dealing with Organizational Complexity
(Part of the importance of control)

-Today’s businesses must contend (face the difficulty) not only with an increasingly complex external environment, but with increasing internal complexity as well, particularly in highly diversified or rapidly growing organizations.

Minimizing Costs
(Part of the importance of control)

-A properly designed system of control can often allow a firm to enjoy considerable cost reductions. -Minimizing your costs will help you have more control.

The Link Between Planning and Controlling

-For control to be effective, it must be integrated with planning so that managers can readily compare actual results with planned projections. -The relationship between the two continues as a long-term cycle because managers make plans and then use control to evaluate the effectiveness of organizational activities relative to those plans.

The Control Process

-Consists of 4 basic steps: establishing performance standards, measuring performance, comparing performance against standards, and evaluation and corrective action.

Establishing Performance Standards
(Part of the control process)

-Def: The first step in the control process; targets set by management against which actual performance is compared at a future date.

Measuring Performance
(Part of the control process)

-Second step in the control process is measuring actual performance in the context of the specific activities that management wishes to control.

Comparing Performance Against Standards
(Part of the control process)

-Third step in the control process involves comparing measured actual performance against the standards established in step one. Actual performance may match the performance standard exactly, or it may be higher or lower than the target.

Evaluating Performance and Taking Corrective Action
(Part of the control process)

-The final step of the control process, managers evaluate actual performance relative to standards and then take appropriate action. Performance evaluation calls not only for quantitative and diagnostic skills, but, also for subjective yet crucial decision making.

Correct the Deviation
(Part of evaluating performance and taking corrective action)

-When actual performance deviates significantly from performance standard, managers will ordinarily take steps to correct the discrepancy.

Change Standards
(Part of evaluating performance and taking corrective action)

-The second option available when there is a discrepancy between actual performance and the performance standard is to change the initial performance standards.

Maintain the Status Quo
(Part of evaluating performance and taking corrective action)

-When performance standards are either met or nearly met, maintaining the status quo- the current course of action -may be the best response.

Forms of Management Control

-The 3 levels of control are: Organizational, Operations, and Strategic. -There are many different forms of management control and they are: organizational, bureaucratic, clan, operations, financial, & nonfinancial.

Organizational Control
(Form of management control)

-Def: A broad-based form of control that guides all organizational activities and oversees the overall functioning of the whole firm.

Bureaucratic Control
(Form of management control)

-Def: Attempts to control the firm’s overall functioning through formal, mechanistic structural arrangements; sometimes called hierarchical control.

Clan Control
(Form of management control)

-Def: Seeks to regulate overall organizational functioning through reliance on informal, organic structural arrangements; also referred to as decentralized control. -This form of control tries to foster strong employee commitment by vigorously encouraging employee input and group participation. -Rather than setting strict behavioral standards as in bureaucratic control systems, clan control relies on self-control and informal group norms to effectively create a relaxed yet focused working environment. -Ex: Google has been recognized for its relatively informal, easy-going, clan-controlled atmosphere.

Operations Control
(Form of management control)

-Def: Regulates one or more individual operating systems within an organization.

Preliminary Control
(Form of operations control)

-Def: Monitors deviations in the quality and quantity of the firm’s resources to try to prevent deviations before they to prevent deviations before they enter the system; its focus is on inputs to the product or service production process.

Screening Control
(Form of operations control)

-Def: Regulates operations to ensure that they are consistent with objectives; the focus is on the transformation process that converts inputs into outputs.

Statistical Process Control
(Part of screening control)

-Def: Another form of screening control which employs "control charts" to continuously track performance variation over time.

Feedback Control
(Form of operations control)

-Def: Monitors the firm’s outputs, the results of the transformation process. Also known as Post-Action Control.

Multiple Control Systems
(Part of operations control)

-Def: In practice, most companies do not employ the three forms of operational control in isolation. Instead, most use a multiple control system, often using all three forms simultaneously to effectively achieve control of operating systems.

Financial Control
(Form of management control)

-Pure financial control does not exist in the same sense as do operations, organizational, or strategic control, but control of financial resources is so closely related to the use of other resources that financial control is exercised, in part, through proper control in these other areas. -The most commonly used and basic methods of financial control are: budgetary control, analysis of financial statements, and financial audits.

Budgetary Control
(Common method of financial control)

-The principal means of controlling the availability and cost of financial resources is through budgeting, which is the process of establishing formal, written plan that is called a budget which then is used for future operations in financial terms. -Budgeting allows companies to anticipate and control financial resource needs.

Budgets
(Part of budgetary control)

-Def: Formal, written plans for future operations in financial terms.

Operating Budgets
(Part of budgetary control)

-Def: Deals with relatively short-term financial control concerns, including having sufficient cash on hand to cover daily financial obligations such as routine purchases and payroll.

Capital Budgeting
(Part of budgetary control)

-Def: Concerned with the intermediate and long-term control of capital acquisitions such as plants and equipment.

Top-Down Budgeting
(Part of budgetary control)

-Def: Top managers establish budgets and hand them down to middle and lower level managers for review and implementation.

Bottom-Up Budgeting
(Part of budgetary control)

-Def: Flows up from lower levels of an organization for review by top management and involves those more directly engaged in the actual risks covered by the budget.

Negotiated Budgeting
(Part of budgetary control)

-Def: Involves a degree of give and take between upper and lower levels of management to develop the most appropriate form of budgetary control for a given situation.

Zero-Based Budgeting (ZBB)
(Part of budgetary control)

-Def: A method of budgeting in which managers thoroughly reevaluate organizational activities to determine their true level of importance. -Used to overcome the disadvantages of traditional budgeting. -This thorough reevaluation of activities and alternative uses of financial resources gives ZBB its name: Everything is considered as if it is a completely new, zero-based, matter. -This approach is especially appropriate for today’s increasingly dynamic marketplace.

Financial Statements and Analysis
(Common method of financial control)

-Financial statements allow a firm to classify the effects of the many varied transactions that occur in the course of conducting business. -The two principal financial statements used in management control are balance sheets and income statements.

Balance Sheet
(Part of financial statements and analysis)

-Def: A snapshot of the organization’s financial position at a given moment; indicates what the firm owns and what proportion of its assets are financed with its own or borrowed money.

Income Statement
(Part of financial statements and analysis)

-Def: Shows the profitability of an organization over a period of time- a month, a quarter, or a year -and helps managers focus on the organization’s overall revenues (from sales and investments) and the costs incurred in generating those revenues.

Ratio Analysis
(Part of financial statements and analysis)

-Def: Managers take information from the two financial statements, the balance sheet and income statement, so that they can measure the company’s efficiency, profitability, and sources of finances relative to those of other organizations.

Liquidity Ratio
(Part of ratio analysis)

-Indicate an organization’s ability to meet short-term (less than one year) debt obligations as they come due. Establishing minimum and maximum performance standards will serve to alert the organization that it has either too little or too much invested in liquid assets – those that can be converted into cash quickly. -Type of this ratio is Current Ratio which measures an organization’s ability to pay short-term obligations. -Type of this ratio is Quick Ratio which tells you how well an organization can meet its short-term obligations without selling its inventory.

Solvency Ratio
(Part of ratio analysis)

-Calculating this ratio allows a company to asses its ability to meet long-term obligations. -Type of this ratio is Debt to Equity Ratio which tells you how much the organization is using its equity to finance its assets. -Type of this ratio is Debt to Assets Ratio which tell you how much the firm is financed by debt. -Type of this ratio is Times Interest Earned Ratio which measure the safety margin of an organization with respect to the interest payments it must make to its creditors.

Financial Audits
(Common method of financial control)

-Def: A periodic and comprehensive examination of a firm’s financial records.

Nonfinancial Control
(Form of management control)

-Def: Provide a company with a method to measure nonfinancial performance such as ethics and compliance activities as well as those related to sustainability.

Balanced Scorecard
(Method of nonfinancial control)

-Def: A management control system customized for a company’s industry, technology, mission, and strategy.

Triple Bottom Line
(Method of nonfinancial control)

-Def: Focuses on the social, environmental, and economic impact of a company’s operations equally and simultaneously; also known as people, planet, and profit.

Managing the Control Process

-As with other processes occurring within a company, control must be carefully managed to be successful. To facilitate effective control, managers must understand how to develop the process as well as to overcome resistance to it.

Developing the Control Process
(Part of managing the control process)

-Because of differing circumstances faced by individual organizations, what makes the ideal control system for one is not necessarily appropriate for another. However, effective control systems are typically well-integrated with planning and are flexible, accurate, timely, and objective.

Integration with Planning
(Part of developing the control process)

-Managers must set objectives that may readily be converted into performance standards that will reflect how well plans are being carried out.

Flexibility
(Part of developing the control process)

-Allows the company to respond to changes in the business environment, and important factor in the development of an effective management control system. -With sudden change, control must be flexible enough to readily accommodate modifications while remaining effective.

Accuracy
(Part of developing the control process)

-Control systems are useful only to the extent that the information on which they rely (and therefor produce) is accurate. -System output can only be as good as system input.

Timeliness
(Part of developing the control process)

-An effective management control system provides performance information when it is needed.

Objectivity
(Part of developing the control process)

-To be effective, the control system must provide unbiased information. -The manager cannot play favorites with the subordinates.

Understanding Resistance to Control
(Part of managing the control process)

-Implementation of new control systems often implies modified management philosophies as well as new responsibilities for organizational workers. As with other forms of change, such alterations of control systems are likely to be met with resistance.

Overcontrol
(Part of understanding resistance to control)

-A fine line often exists between the proper level of control and overcontrol, and companies sometimes try to control employees’ activities more than they should.

Inappropriate Focus
(Part of understanding resistance to control)

-An unwanted focus could result from a production control system that places extremely high priority on the number of units produced and doing this it may result in workers who feel they must sacrifice product quality to meet the system’s quantity standards.

Rewards for Inefficiency
(Part of understanding resistance to control)

-A system of budgetary control that rewards inefficiency is likely to be met with resistance because it appears to be unfair and nonsensical.

Accountability
(Part of understanding resistance to control)

-A worker who has been performing inefficiently is likely to resist a control system that shows that he or she is not performing up to standards.

Overcoming Resistance to Control
(Part of managing the control process)

-In general, there are four things managers can do to overcome resistance to control: 1. Create effective control 2. Encourage employee participation 3. Use both management by objectives (MBO) 4. A system of check and balances

Create Effective Control
(Part of overcoming resistance to control)

-Probably the best way to avoid resistance to control is to establish effective control in the first place. -This requires both careful planning before implementation, as well as continual monitoring of the effectiveness of the control system, rather than simply doing what has always been done before or what works best for some other organization.

Encourage Employee Participation
(Part of overcoming resistance to control)

-More and more companies are realizing the benefits of allowing non-managerial employees increased say in the establishment of organizational policies and procedures. -Such empowerment can be applied effectively to planning for implementing a system of control, as employees are less likely to resist a system that they themselves helped to create.

Use MBO
(Part of overcoming resistance to control)

-MBO, management by objectives, is a management philosophy based on converting organizational objectives into individual objectives. -Working closely in concert with management, workers set their own goals, which in turn serve as standards against which to evaluate their actual performance.

Use Checks and Balances
(Part of overcoming resistance to control)

-A system of checks and balances should provide documentation for managerial control decisions.

Signs of Inadequate Control Systems
(Part of managing the control process)

-These are the basic signs to be aware of as a manager of a control system that is not operating effectively: 1. A high incidence of employee resistance to control: A control system that employees continually resist may simply not be right for the specific situation. 2. A unit meets control standards but fails to achieve its overall objectives: It is then likely that the link between planning and control is poor. 3. Increased control does not lead to increased or adequate performance: The extra control may simply not be needed or it may not be appropriate for the situation. 4. The existence of control standards that have been in place for an extended period of time: When an organization becomes motionless in this day and age, it cannot remain competitive. 5. Organizational losses in terms of sales, profits, or market share: Declining performance is a clear indicator of trouble.

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