Principles of Management

Dr. Karim KobeissiIslamic University of Lebanon - 2013

10Chapter

Foundations of Control

Learning Outcomes

After studying this chapter, you will be able to:

• Explain the nature and importance of control.

• Describe the three steps in the control

process.

• Describe the types of controls organizations

and managers use.

The Nature of Control

Controlling is the process whereby managers monitor and regulate how effectively and efficiently an organization and its members are performing the activities necessary to achieve organizational goals.

In controlling, managers monitor and evaluate whether their organization’s strategy and structure are working as managers intended, how they could be improved, and how they might be changed if they are not working.

The Nature of Control (con)

Control, however, does not just mean reacting to

events after they have occurred. It also means

keeping an organization on track and anticipating

events that might occur.

The Importance of Control

To understand the importance of organizational

control, we simply might consider how it helps

managers obtain superior efficiency, quality,

responsiveness to customers, and innovation – the

four building blocks of competitive advantage.

The Control Process

The control process has three steps:

I. Measuring actual performance

II. Comparing actual performance against a standard

III. Taking managerial action to correct deviations or to address inadequate

standards.

Note that the control process assumes that performance standards already

exist; these standards are the specific goals created during the planning

process.

I - Measuring PerformanceTo determine actual performance a manager must get performance

records, so the first step in control is measuring. Four sources of information that are frequently used to measure actual performance are:

1.Personal observation provides firsthand, intimate knowledge of unfiltered, actual activity. It permits intensive coverage because minor and major performance activities can be observed, and allows the manager to read between the lines. Management by walking around (MBWA) describes when a manager is out in the work area and interacting directly with employees, exchanging information about what’s going on. It’s an opportunity to pick up factual errors and observe body language. Personal observation, however, is subject to the viewer’s perceptual biases, is a time-consuming effort, may be obtrusive, and may trigger concern in some employees.

Measuring Performance (con)

2. Widespread computer use has led managers to rely increasingly on statistical reports for measuring actual performance. Statistical reports are not limited to computer outputs. They can include graphs, bar charts, and numerical displays that managers can use for assessing performance. However, statistical reports often focus on only a few key areas and may often ignore important subjective factors.

3. Information can also be acquired through oral reports, which can be gathered through conferences, meetings, one-to-one conversations, or telephone calls. Although the information is filtered, it is fast, allows for feedback, and permits expression, tone of voice, and words themselves to convey meaning.

4. Actual performance may also be measured by written reports, which require more preparation time and formality than other measurements of performance. This often makes them more comprehensive and concise that oral reports.

Criteria for Measurement

Selecting the right criteria to measure is critical for evaluating performance, but what we measure also influences the areas of work on which people in the organization will focus their efforts.

Some control criteria are applicable to any management situation. Because all managers direct the activities of others, criteria such as employee satisfaction or turnover and absenteeism rates can be measured. Keeping costs within budget is also a fairly common control measure.

Criteria for Measurement (con)

However, any comprehensive control system needs to recognize the diversity of activities among managers. For example, a production manager in a paper tablet manufacturing plant might use measures of (1) the quantity of tablets produced per day, (2) tablets produced per labor hour, (3) scrap tablet rate, or (4) percentage of rejects returned by customers. In contrast, marketing managers use measures such as (5) percent of market held, (6) number of customer visits per salesperson, or (6) number of customer impressions per advertising medium.

While some activities are more difficult than others to measure in quantifiable terms, most activities can be broken down into objective segments that can be measured. Ultimately, the manager determines what value a person, department, or unit contributes to the organization and then converts that contribution into standards.

II - Comparing Performance to Goals

Next comes the step in which we compare the actual performance to the standard. Although some variation in performance can be expected in all activities, it’s critical to determine an acceptable range of variation. Any deviations outside this range require attention.

Comparing Performance to Goals (cont.)

Comparing Performance to Goals (cont.)

Let’s work through an example. Chris Tanner is a sales manager for Green Earth Gardening Supply, a distributor of specialty plants and seeds in the Pacific Northwest. Chris prepares a report during the first week of each month that describes sales for the previous month, classified by product line.

• The previous slide displays both the sales goals (the standard) and actual sales figures for the month of June. After looking at the numbers, should Chris be concerned? Sales were a bit higher than originally targeted, but does that mean there were no significant deviations? That depends on what Chris thinks is significant; that is, what is outside the acceptable range of variation.

• Even though overall performance was quite favorable, some product lines need closer scrutiny. If sales of heirloom seeds, flowering bulbs, and annual flowers continue to be over what was expected, Chris might need to order more product to meet customer demand. Because sales of vegetable plants were 15 percent below goal, Chris may need to run a special on them.

• As this example shows, both over-variance and under-variance may require managerial attention, which is the third step in the control process.

III - Correcting Performance

Depending on the problem, a manager can take different corrective actions.

For instance, if unsatisfactory work is the reason for performance

variations, the manager could take immediate corrective action to correct

it (e. g., training programs, disciplinary action, changes in compensation

practices), which corrects problems right away to get performance back

on track . The manager can also use basic corrective action, which looks

at how and why performance deviated before correcting the source of

deviation. Effective managers analyze deviations and, if the benefits justify

it, take the time to pinpoint and correct the causes of variance.

Revising the Standard If the variance results from an unrealistic standard—

one that is set too low or too high—the standard, not the performance, needs corrective action. For example, if performance consistently exceeds the goal, then a manager should look at whether the goal is too easy and needs to be adjusted.

However, managers must be cautious about revising a standard downward. It’s natural to blame the goal when an employee or a team falls short, rather than accept that one’s performance was inadequate. If you believe the standard is realistic, fair, and achievable, tell employees that you expect future work to improve and then take the necessary corrective action to help make that happen.

Ty p e s o f C o n t r o l

Management can implement controls:

1. Before an activity begins (called feedforward control).

2. While the activity is going on (called concurrent control).

3. After the activity has been completed (called feedback control).

F e e d f o r w a r d C o n t r o l

The most desirable type of control—feedforward control

—prevents problems because it takes place before the

actual activity starts.

For instance, McDonald’s requires that hamburger bread

suppliers produce to exact specifications. Another

example of feedforward control is the scheduled

preventive maintenance programs on aircraft done by

the major airlines.

C o n c u r r e n t C o n t r o l

Concurrent control takes place while a work activity is in progress. • For instance, Google’s director of business product management and his

team keep a watchful eye on one of its most profitable businesses—online ads. They watch the number of searches and clicks, the rate at which users click on ads, and the revenue this generates. Everything is tracked hour by hour, compared with the data from a week earlier, and charted. If something is not working well, they fine-tune it.

• Computers and computerized machine controls can be designed to include concurrent controls, such as organizational quality programs that inform workers whether their work output is of sufficient quality to meet standards. The best-known form of concurrent control, however, is direct supervision, and MBWA is a great way for managers to do this.

F e e d b a c k C o n t r o l

Feedback control takes place after the activity is done. This type of control has two advantages:

1.Feedback gives managers meaningful information on how effective their planning efforts were. Feedback that shows little variance between standard and actual performance indicates that the planning was generally on target. If the deviation is significant, that information can be used to formulate new plans.

2.Feedback enhances motivation because people want to know how well they’re doing.

O u t p u t C o n t r o l S y s t e m s

Top managers usually develop a system of output control for their organization. First, they choose the goals or output performance standards or targets that they think will best measure efficiency, quality, innovation, and responsiveness to customers. Then they see whether the performance goals and standards are being achieved at corporate, divisional or functional, and individual levels of the organization. The main mechanism that managers use to assess output or performance is the Financial Measures of Performance.

Financial Measures of PerformanceFor a company to earn a profit, managers need financial controls. For

example, they might analyze quarterly income statements for excessive expenses or calculate financial ratios to ensure that debt levels haven’t become too high or that assets are being used productively. The most popular financial ratios that managers analyze are:

• Liquidity ratios measure an organization’s ability to meet its current debt obligations.

• Leverage ratios examine the organization’s use of debt to finance its assets and gauge whether it’s able to meet the interest payments on the debt.

• Activity ratios assess how efficiently a company is using its assets. Finally, profitability ratios measure how efficiently and effectively the company is using its assets to generate profits. These ratios are calculated using selected information from the organization’s two primary financial statements—the balance sheet and the income statement—and are sometimes expressed as percentages.