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CHAPTER CHAPTER 20 20 Basic Elements of Control Copyright Copyright © by Houghton Mifflin © by Houghton Mifflin Company. Company. All rights reserved. All rights reserved. PowerPoint PowerPoint Presentation Presentation by Charlie Cook by Charlie Cook

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CHAPTERCHAPTER

2020

Basic Elementsof ControlBasic Elementsof Control

Copyright Copyright © by Houghton Mifflin Company.© by Houghton Mifflin Company.All rights reserved.All rights reserved.

PowerPoint PresentationPowerPoint Presentation by Charlie Cook by Charlie Cook

Copyright © by Houghton Mifflin Company. All rights reserved. 20–2

Learning ObjectivesLearning Objectives

After studying this chapter, you should be able to:– Explain the purpose of control, identify different types of

control, and describe the steps in the control process.– Identify and explain the three forms of operations control.– Describe budgets and other tools of financial control.– Identify and distinguish between two opposing forms of

structural control.– Discuss the relationship between strategy and control,

including international control.– Identify characteristics of effective control, why people resist

control, and how managers can overcome this resistance.

After studying this chapter, you should be able to:– Explain the purpose of control, identify different types of

control, and describe the steps in the control process.– Identify and explain the three forms of operations control.– Describe budgets and other tools of financial control.– Identify and distinguish between two opposing forms of

structural control.– Discuss the relationship between strategy and control,

including international control.– Identify characteristics of effective control, why people resist

control, and how managers can overcome this resistance.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–3

Chapter OutlineChapter Outline• The Nature of Control in

Organizations– The Purpose of Control

– Types of Control

– Steps in Control

• Operations Control– Preliminary Control

– Screening Control

– Postaction Control

• Financial Control– Budgetary Control

– Other Tools of Financial Control

• The Nature of Control in Organizations– The Purpose of Control

– Types of Control

– Steps in Control

• Operations Control– Preliminary Control

– Screening Control

– Postaction Control

• Financial Control– Budgetary Control

– Other Tools of Financial Control

• Structural Control– Bureaucratic Control

– Clan Control

• Strategic Control– Integrating Strategy and

Control

– International Strategic Control

• Managing Control in Organizations– Characteristics of Effective

Control

– Resistance to Control

– Overcoming Resistance to Control

• Structural Control– Bureaucratic Control

– Clan Control

• Strategic Control– Integrating Strategy and

Control

– International Strategic Control

• Managing Control in Organizations– Characteristics of Effective

Control

– Resistance to Control

– Overcoming Resistance to Control

Copyright © by Houghton Mifflin Company. All rights reserved. 20–4

The Nature of Control in The Nature of Control in OrganizationsOrganizations

• Control– The regulation of organizational activities so that some

targeted element of performance remains within acceptable limits.

– Provides organizations with indications of how well they are performing in relation to their goals.

– Control provides a mechanism for adjusting performance to keep organizations moving in the right direction.

• Control– The regulation of organizational activities so that some

targeted element of performance remains within acceptable limits.

– Provides organizations with indications of how well they are performing in relation to their goals.

– Control provides a mechanism for adjusting performance to keep organizations moving in the right direction.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–5

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• The Purpose of Control– Control is one of the four basic management functions. The

control function, in turn, has four basic purposes.

• The Purpose of Control– Control is one of the four basic management functions. The

control function, in turn, has four basic purposes.

Adapt to environmental change Limit the accumulation of error

Control helps the organization

Cope with organizational complexity Minimize costs

Figure 20.1

Copyright © by Houghton Mifflin Company. All rights reserved. 20–6

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• Types of Controls– Areas of Control

• Physical resources—inventory management, quality control, and equipment control.

• Human resources—selection and placement, training and development, performance appraisal, and compensation.

• Information resources—sales and marketing forecasts, environmental analysis, public relations, production scheduling, and economic forecasting.

• Financial resources—managing capital funds and cash flow, collection and payment of debts.

• Types of Controls– Areas of Control

• Physical resources—inventory management, quality control, and equipment control.

• Human resources—selection and placement, training and development, performance appraisal, and compensation.

• Information resources—sales and marketing forecasts, environmental analysis, public relations, production scheduling, and economic forecasting.

• Financial resources—managing capital funds and cash flow, collection and payment of debts.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–7

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• Types of Controls (cont’d)– Levels of Control

• Types of Controls (cont’d)– Levels of Control

Strategiccontrol

Structuralcontrol

Operationscontrol

Financialcontrol

Figure 20.2

Copyright © by Houghton Mifflin Company. All rights reserved. 20–8

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• Types of Controls (cont’d)– Responsibilities for Control

• Controller—a position in organizations that helps line managers with their control activities.

• Types of Controls (cont’d)– Responsibilities for Control

• Controller—a position in organizations that helps line managers with their control activities.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–9

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• Steps in the Control Process• Steps in the Control Process

Establishstandards

Measureperformance

Compareperformanceagainst standards

Maintain thestatus quo

Correct thedeviation

Changestandards

Determine needfor correctiveaction

21 43

Figure 20.3

Copyright © by Houghton Mifflin Company. All rights reserved. 20–10

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• Steps in the Control Process (cont’d)– Establish Standards

• Control standard—a target against which subsequent performance will be compared.– Control standards should be expressed in measurable terms.

– Control standards should be consistent with organizational goals.

– Control standards should be identifiable indicators of performance.

– Measure Performance• Performance measurement is a constant, ongoing process.

• Performance measures must be valid indicators (e.g., sales, costs, units produced) of performance.

• Steps in the Control Process (cont’d)– Establish Standards

• Control standard—a target against which subsequent performance will be compared.– Control standards should be expressed in measurable terms.

– Control standards should be consistent with organizational goals.

– Control standards should be identifiable indicators of performance.

– Measure Performance• Performance measurement is a constant, ongoing process.

• Performance measures must be valid indicators (e.g., sales, costs, units produced) of performance.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–11

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• Steps in the Control Process (cont’d)– Compare Performance Against Standards

• Define what is a permissible deviation from the performance standard.

• Utilize the appropriate timetable for measurement.

– Determine the Need for Corrective Action• Maintain the status quo (do nothing).

• Correct the deviation to bring operations into compliance with the standard.

• Change the standard if it was set too high or too low.

• Steps in the Control Process (cont’d)– Compare Performance Against Standards

• Define what is a permissible deviation from the performance standard.

• Utilize the appropriate timetable for measurement.

– Determine the Need for Corrective Action• Maintain the status quo (do nothing).

• Correct the deviation to bring operations into compliance with the standard.

• Change the standard if it was set too high or too low.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–12

The Nature of Control inThe Nature of Control inOrganizations (cont’d)Organizations (cont’d)

• Operations Control• Operations Control

Preliminary control

Focus is on inputs

to the organizational

system

Inputs Transformation Outputs

Screening control

Focus is on how

inputs are being

transformed into

outputs

Postaction control

Focus is on outputs

from the organiza-

tional system

Feedback

Figure 20.4

Copyright © by Houghton Mifflin Company. All rights reserved. 20–13

Financial ControlFinancial Control

• Financial Control– Control of financial resources (i.e., revenues, shareholder

investment) as they flow into the organization, are held by the organization (i.e., working capital, retained earnings), and flow out of the organization (i.e., payment of expenses).

• Financial Control– Control of financial resources (i.e., revenues, shareholder

investment) as they flow into the organization, are held by the organization (i.e., working capital, retained earnings), and flow out of the organization (i.e., payment of expenses).

Copyright © by Houghton Mifflin Company. All rights reserved. 20–14

Financial Control (cont’d)Financial Control (cont’d)

• Financial Control– Budgetary Control

• Budgets may be established at any organizational level.

• Budgets are typically for one year or less.

• Budgets may be expressed in financial terms, units of output, or other quantifiable factors.

• Budgets serve four purposes:– Help managers coordinate resources and projects.

– Help define the established standards for control.

– Provide guidelines about the organization’s resources and expectations.

– Enable the organization to evaluate the performance of managers and organizational units.

• Financial Control– Budgetary Control

• Budgets may be established at any organizational level.

• Budgets are typically for one year or less.

• Budgets may be expressed in financial terms, units of output, or other quantifiable factors.

• Budgets serve four purposes:– Help managers coordinate resources and projects.

– Help define the established standards for control.

– Provide guidelines about the organization’s resources and expectations.

– Enable the organization to evaluate the performance of managers and organizational units.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–15

Financial Control (cont’d)Financial Control (cont’d)

• Types of Budgets• Types of Budgets

Type of Budget What Budget Shows

Financial budget Sources and uses of cash

Cash-flow or cash budget All sources of cash income and cash expenditures in monthly, weekly, or daily periods

Capital-expenditures budget Costs of major assets such as a new plant, machinery, or land

Balance-sheet budget Forecast of the organization’s assets and liabilities in the event that all other budgets are met

Table 20.1a

Copyright © by Houghton Mifflin Company. All rights reserved. 20–16

Financial Control (cont’d)Financial Control (cont’d)

• Types of Budgets (cont’d)• Types of Budgets (cont’d)

Type of Budget What Budget Shows

Operating budget Planned operations in financial terms

Sales or revenue budget Income the organization expects to receive from normal operations

Expense budget Anticipated expenses for the organization during the coming time period

Profit budget Anticipated differences between sales or revenues and expenses

Table 20.1b

Copyright © by Houghton Mifflin Company. All rights reserved. 20–17

Financial Control (cont’d)Financial Control (cont’d)

• Types of Budgets (cont’d)• Types of Budgets (cont’d)

Type of Budget What Budget Shows

Nonmonetary budget Planned operations in nonfinancial terms

Labor budget Hours of direct labor available for use

Space budget Square feet or meters of space available for various functions

Production budget Number of units to be produced during the coming time period

Table 20.1c

Copyright © by Houghton Mifflin Company. All rights reserved. 20–18

FinanciaFinancial Control l Control (cont’d)(cont’d)

• Developing Budgets in Organizations

• Developing Budgets in Organizations

Operating unitbudget requests

Division budgetrequests

Organizational budget• Prepared by budget

committee• Approved by budget

committee, controller,and CEO

Figure 20.5

Copyright © by Houghton Mifflin Company. All rights reserved. 20–19

Financial Control (cont’d)Financial Control (cont’d)

Strengths–Budgets facilitate effective

operational controls.–Budgets facilitate

coordination and communication between departments.

–Budgets establish records of organizational performance, which can enhance planning.

Strengths–Budgets facilitate effective

operational controls.–Budgets facilitate

coordination and communication between departments.

–Budgets establish records of organizational performance, which can enhance planning.

Weaknesses–Budgets can hamper

operations if applied too rigidly.

–Budgets can be time consuming to develop.

–Budgets can limit innovation and change.

Weaknesses–Budgets can hamper

operations if applied too rigidly.

–Budgets can be time consuming to develop.

–Budgets can limit innovation and change.

Strengths and Weaknesses of Budgeting

Copyright © by Houghton Mifflin Company. All rights reserved. 20–20

Other Tools of Financial ControlOther Tools of Financial Control

• Financial Statements – Financial statement is a profile of some aspect of an

organization’s financial circumstances.– Balance sheet

• A listing of assets (current and fixed), liabilities (short- and long-term), and stockholders’ equity at a specific point in time (typically, year-ending) that summarizes the financial condition of the organization.

– Income statement• Summary of financial performance—revenues less expenses as net

income (i.e., profit or loss)—over a period of time, usually one year.

• Financial Statements – Financial statement is a profile of some aspect of an

organization’s financial circumstances.– Balance sheet

• A listing of assets (current and fixed), liabilities (short- and long-term), and stockholders’ equity at a specific point in time (typically, year-ending) that summarizes the financial condition of the organization.

– Income statement• Summary of financial performance—revenues less expenses as net

income (i.e., profit or loss)—over a period of time, usually one year.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–21

Other Tools of Financial Control Other Tools of Financial Control (cont’d)(cont’d)

• Ratio Analysis– The calculation of of one or more financial ratios to assess

some aspect of the organization’s financial health.

• Financial Audits– Audit—an independent appraisal of an organization’s

accounting, financial, and operational systems.• External audits—financial appraisals conducted by experts who are

not employees of the organization to verify to external parties that the organization’s financial and accounting procedures are legal and proper.

• Internal audits—appraisals conducted by employees of the organization to determine the accuracy, efficiency, and appropriateness of financial and accounting procedures.

• Ratio Analysis– The calculation of of one or more financial ratios to assess

some aspect of the organization’s financial health.

• Financial Audits– Audit—an independent appraisal of an organization’s

accounting, financial, and operational systems.• External audits—financial appraisals conducted by experts who are

not employees of the organization to verify to external parties that the organization’s financial and accounting procedures are legal and proper.

• Internal audits—appraisals conducted by employees of the organization to determine the accuracy, efficiency, and appropriateness of financial and accounting procedures.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–22

Structural ControlStructural Control

• Bureaucratic Control– A form of organizational control characterized by formal and

mechanistic structural arrangements.

• Clan Control– An approach to organizational

control characterized by informal and organic structural arrangements.

• Bureaucratic Control– A form of organizational control characterized by formal and

mechanistic structural arrangements.

• Clan Control– An approach to organizational

control characterized by informal and organic structural arrangements.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–23

Structural Control (cont’d)Structural Control (cont’d)

• Organizational Control• Organizational Control

Dimension

Employee complianceGoal of control approach

Strict rules, formal controls,rigid hierarchy

Directed toward minimum levels of acceptable performance

Tall structure, top-down influence

Directed at individualperformance

Limited and formal

Employee commitment

Group norms, culture, self-control

Directed toward enhancedperformance above andbeyond the minimum

Flat structure, shared influence

Directed at group performance

Extended and informal

Performance expectations

Degree of formality

Organization design

Reward system

Participation

Bureaucratic Control Clan Control

Figure 20.6

Copyright © by Houghton Mifflin Company. All rights reserved. 20–24

Strategic ControlStrategic Control

• Integrating Strategy and Control– Strategic control

• Control aimed at ensuring that the organization is maintaining an effective alignment with its environment and moving toward achieving its strategic plan.

• Focuses on structure, leadership, technology, human resources, and informational and operational systems.

• Focuses on the extent to which implemented strategy achieves the organization’s goals.

– International Strategic Control• Focuses on whether to manage the global organization from a

centralized or decentralized perspective.– Centralization creates more control and coordination, whereas

decentralization fosters adaptability and innovation.

• Integrating Strategy and Control– Strategic control

• Control aimed at ensuring that the organization is maintaining an effective alignment with its environment and moving toward achieving its strategic plan.

• Focuses on structure, leadership, technology, human resources, and informational and operational systems.

• Focuses on the extent to which implemented strategy achieves the organization’s goals.

– International Strategic Control• Focuses on whether to manage the global organization from a

centralized or decentralized perspective.– Centralization creates more control and coordination, whereas

decentralization fosters adaptability and innovation.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–25

Managing Control in Managing Control in OrganizationsOrganizations

• Characteristics of Effective Control– Integration with Planning

• The more explicitly and precisely control is linked to planning, the more effective the control system.

– Flexibility• The control system must be flexible enough to accommodate change.

– Accuracy• Inaccurate information results in bad decision making and

inappropriate managerial actions.

– Timeliness• A control system should provide information as often as necessary.

– Objectivity• A control system must be free from bias and distortion.

• Characteristics of Effective Control– Integration with Planning

• The more explicitly and precisely control is linked to planning, the more effective the control system.

– Flexibility• The control system must be flexible enough to accommodate change.

– Accuracy• Inaccurate information results in bad decision making and

inappropriate managerial actions.

– Timeliness• A control system should provide information as often as necessary.

– Objectivity• A control system must be free from bias and distortion.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–26

Managing Control inManaging Control inOrganizations (cont’d)Organizations (cont’d)

• Resistance to Control– Overcontrol

• Trying to control too many details becomes problematic when control affects employee behavior and employees perceive control attempts as unreasonable.

– Inappropriate Focus• The control system may be too narrow or it may focus too much on

quantifiable variables and leave no room for analysis or interpretation.

– Rewards for Inefficiency• Rewarding operational efficiency can lead employees to behave in

ways that are not in the best interests of the organization.

– Too much accountability• Efficient controls are resisted by poorly performing employees.

• Resistance to Control– Overcontrol

• Trying to control too many details becomes problematic when control affects employee behavior and employees perceive control attempts as unreasonable.

– Inappropriate Focus• The control system may be too narrow or it may focus too much on

quantifiable variables and leave no room for analysis or interpretation.

– Rewards for Inefficiency• Rewarding operational efficiency can lead employees to behave in

ways that are not in the best interests of the organization.

– Too much accountability• Efficient controls are resisted by poorly performing employees.

Copyright © by Houghton Mifflin Company. All rights reserved. 20–27

Overcoming Resistance to ControlOvercoming Resistance to Control

• Resistance to control can be overcome by:– Designing effective controls that are properly integrated with

organizational planning and aligned with organizational goals and standards.

– Creating controls that are flexible, accurate, timely, and objective.

– Avoiding overcontrol in the implementation of controls.– Guarding against creating controls that reward inefficiencies.– Encouraging employee participation in the planning and

implementing of control systems.– Developing a system of checks and balances in the control

systems through the use of multiple standards and information systems that allow the organization to verify the accuracy of performance indicators.

• Resistance to control can be overcome by:– Designing effective controls that are properly integrated with

organizational planning and aligned with organizational goals and standards.

– Creating controls that are flexible, accurate, timely, and objective.

– Avoiding overcontrol in the implementation of controls.– Guarding against creating controls that reward inefficiencies.– Encouraging employee participation in the planning and

implementing of control systems.– Developing a system of checks and balances in the control

systems through the use of multiple standards and information systems that allow the organization to verify the accuracy of performance indicators.