Feedforward concurrent and feedback controls

The Controlling Function

Learning Objectives

After completing this chapter, you should be able to:

• Complete the steps involved in the organization’s constant and periodic control systems. • Prescribe specific corrections for problems identified at the functional/departmental level. • Use accounting and financial controls to improve company-wide performance. • Finalize all other aspects of the control process.

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Introduction Chapter 7

7.1 Introduction The modern organization operates in a complex, ever-changing environment. In fact, the exter- nal environment continues to be highly competitive thanks to the ever-increasing expectancies of customers, clients, and key stakeholders. Competitors also constantly vie for market share. Control systems and methods assist managers by providing information about the state of the organization’s production expectancies, financial condition, employee demands, operating sys- tems, marketing activities, governmental influences, and other factors as they arise. Such infor- mation is essential to drive manager course correction decisions (Etzioni, 1964; Merchant, 1982).

Successful organizations use effective and appropriate control systems to obtain organizational goals and objectives. In this chapter, we explore control systems and their importance to overall organizational success. The first section describes the natures of constant and periodic controls. Next, we consider specific departmental and functional area control systems. In the following section, we examine the role played by financial and accounting standards in an organization’s control process. Finally, we look at other forms of control .

M A N A G E M E N T I N P R A C T I C E

At McDonald’s, Organizational Controls Move Fast Food into the New Millennium

McDonald’s has long been known as the industry leader in fast food, specifically in the area of hamburgers, fries, and a soft drink. Numerous business textbooks describe how the company’s stra- tegic model has led to growth domestically and internationally. Everything from the company’s take on where to place stores (location, location, location) to its mantra of quality, service, cleanliness, and value (McDonalds.com, 2013) to the company’s famous Hamburger University management training program suggests that numerous organizational activities and practices have set the stan- dards for success in a crowded marketplace.

The McDonald’s organization has shown the ability to adapt to international circumstances. In India, for example, where consuming beef would violate religious norms, the company created a beefless menu complete with veg- etarian burgers and even vegetarian “cheese.” While critics point out that the children’s menu burger is not exactly a healthy choice (Petrun, 2007), it does appeal to a wide audience within that country.

About a decade ago, however, the tide of public opinion began to turn against the company in some ways. Movies such as Supersize Me began a period in which McDonald’s and many other food companies experienced criticism regarding the health properties present in their menus. McDonald’s first corpo- rate reaction was to change from using

(continued)

Larry French/AP Images for McDonald’s

▲▲ McDonald’s has shown the capacity to adapt to changing circumstances, especially in the area of health-conscious menus.

http://www.mcdonalds.com/us/en/home.html
Introduction Chapter 7

Controlling is the process of evaluating performance against established goals and creating methods appropriate to take corrective action to maintain or improve performance in any area of the organization. Control systems allow managers to analyze the state of the organization and its various constituent parts to determine if the plan and structural system are achieving expected results.

The first distinction to be made involves the differences between what may be described as con- stant controls and periodic controls. Constant controls regulate organizational activities on a continual basis. Any time a standard is not met, the management team should immediately react with corrective action. Periodic controls assess organizational activities on a regularly scheduled basis. Then managers are able to undertake corrective action as needed. This section examines these two control processes.

Constant Controls

A great deal of organizational activity is guided by ongoing, continual standards. Such standards regulate the behaviors of individual employees, groups and departments, and the overall organi- zation. Without this form of guidance, companies can quickly drift away from the actions, activi- ties, and behaviors that allow them to succeed.

Individual Constant Controls Each employee in any type of organization will be expected to follow certain standards and behavioral guidelines. The principles constitute the basic necessity of maintaining membership in the company. Two primary forms of individual constant controls include work procedures and the organization’s rule/discipline system.

cooking oil based on beef tallow to a vegetable version. Over time it became clear that, if the com- pany were to succeed in a new era and environment, things would need to change.

The corporate control system led the way. The company’s evolving sense of mission and vision cre- ated new standards for members of the entire organization to follow, from the CEO to individual employees (Git, 2013). Many stores now post the caloric content of each food offering. In 2013 McDonald’s announced plans to sell a greater variety of healthy foods in addition to its traditional menu. In response to concerns about increasing obesity rates among U.S. children, many of these foods were directed at younger consumers.

In this instance, a corporation’s control system began to address two major goals. The first was to continue the organization’s success by maintaining customer patronage. The second, and perhaps loftier outcome, would be to sell more products that enable individuals to enjoy a quick meal out that may help them live longer with fewer health issues. In the future, you can expect McDonald’s and other corporations to continue using control systems as a tool for adapting to a changing world.

Discussion Questions

1. Do you expect fast food to be healthy food? 2. Should McDonald’s continue to alter its mission to address public health concerns, or should it

just give people what they want? 3. How would the most recent changes at McDonald’s affect the marketing department activities,

food production, and individual employees waiting on customers in various stores?

Introduction Chapter 7

Work procedures, or specific task instructions, guide the day-to-day operations of the firm. Often, such procedures are carefully spelled out in an organizational manual or handbook. At other times, they are part of the employee training process. Work procedures include directions regarding methods of operation for various tasks. Table 7.1 indicates work procedures for various vocations within an organization.

Table 7.1 Examples of work procedures

Food preparation Methods of cooking

Methods of cleaning cooking equipment

Methods for disposing of food waste

Methods for maintaining a sanitary work area

Accounting procedures Daily entries into accounting documents

Methods for paying accounts due

Methods for invoicing accounts receivable payments

Manufacturing Methods of operating equipment

Methods for maintaining/repairing equipment

Sales Type of sales pitch to be used

Methods for making suggestive sales

Office management Methods for maintaining employee privacy

Methods for filing information

Store management Methods for handling payments, such as checks

Methods for closing the store properly

Environmental services Methods for disposing of waste

Cleaning methods

A second set of work procedures covers employee safety. Employees are taught how to complete tasks in the safest manner possible. Examples include wearing protective clothing and eyewear, wearing a hard hat, lifting heavy objects properly, using warning signals when appropriate, han- dling dangerous materials properly, and so forth.

The company’s discipline system ties work procedures, safety procedures, and other elements of employee behavior together. As noted in Chapter 4, the human resources department is largely responsible for creating the system and then assessing penalties when employees violate various rules. All of these ingredients serve to ensure that employees take appropriate actions. Whenever a procedure or rule has been violated, the employee’s immediate supervisor is expected to take immediate corrective action. Infractions are normally reported to the human resources office, so that the incident can be recorded and corrective steps taken to make sure the employee does not break the rule or ignore the procedure in the future.

In many organizations, human resources departments prepare policy manuals that spell out com- pany rules, work procedures, and protocols for handling violations of these directives. In addi- tion, various employee manuals spell out procedures across a variety of tasks. These documents,

Introduction Chapter 7

when combined with direct supervision, provide the basis for constant control over the activities of employees across the organization.

Departmental Constant Controls Individual departments have two forms of control that guide the entire unit. Group norms and functional area policies both help ensure the department stays aligned with the overall organiza- tion’s purposes and directives.

Group norms form in both formal and informal settings. Norms, or rules of behavior, dictate how departmental members interact with one another and with managers at higher ranks. Norms tend to operate in the areas of productivity, work behaviors, and social behaviors.

Norms often quickly evolve in the area of productivity. Management’s responsibility will be to ensure that such norms empha- size giving full effort to the greatest extent possible. Those who fail to meet the group standards may be “sanctioned” by cowork- ers to try harder or keep up with the pace set by the group. Sanctions take the forms of praise for positive actions and criticism for negative results.

Work behaviors include the manner of dress the organization and department deem to be acceptable. In some companies, only a suit and tie are appropriate attire for men, and only conservative outfits are acceptable for women. In others, varying degrees of cloth- ing options may be considered admissible, from work casual to blue jeans and T-shirts. Work behav- iors also cover the use of language in daily operations. For some, use of profanity is the norm and takes place constantly. In other departments, such language would quickly meet with disapproval by coworkers and managers. The same holds true for the manner of addressing supervisors and others. In the legal system, a judge is referred to as “Your Honor” in any formal setting, for example.

Social behaviors include views of office romances and relationships between employees and supervisors. Many organizations strongly discourage dating within a specific office, unit, or department. Relationships between employees and their supervisors are also often affected by norms. In some companies, it would be considered very bad form to socialize with someone of a higher rank. In others, such activities would be commonplace.

As is the case with individual constant controls, violations of group norms often meet with quick and consistent corrections. Someone who acts inappropriately will encounter criticism and worse from peers and supervisors.

Functional area policies are the dictates that guide activities of an organizational department or unit. Each department creates specific directives that should be aligned with overall company policies. When a policy is violated, management will step in and make certain the situation is corrected. Examples of functional area policies are provided in Table 7.2.

Brian McEntire/iStock/Thinkstock

▲▲ Wearing the type of dress that an organization considers acceptable is an example of a work behavior.

Introduction Chapter 7

Table 7.2 Examples of functional area policies

Accounting Methods of depreciation of assets

Methods of inventory valuation

Marketing Pricing systems

Preferred promotional activities

Protocols for hiring advertising agencies and public relations agencies

Human resources Methods for recruiting and hiring employees that best match the company

Pay systems

Benefit programs

Production Methods used for quality control

Once again, departmental managers are expected to abide by functional area policies. Any that are not followed should meet with quick and consistent correction protocols.

Company-Wide Constant Controls As noted in Chapter 2, mission statements define the organization’s overall purpose and reason for being. A corporation’s board of directors oversees the application of the company’s mission statement and is largely responsible for any alterations or revisions to that statement. Then, the CEO and other top managers will be expected to carry out the mission and prevent the organiza- tion from drifting off course. Vision statements then outline the direction for the organization as it moves into the future.

At the most basic level, mission and vision statements serve as the ultimate constant controls because they regulate and guide the entire organization. Top-level managers, even in companies without boards of directors, should constantly examine the path the organization takes, making sure the actions remain consist with these statements. Thus any activity that pulls the organi- zation away from its mission should be corrected as quickly as possible. A few years ago, when Toyota experienced problems in the area of product quality, the CEO quickly apologized and promised to get the organization back on course. Over the years, many similar statements have been made by company executives when they recognized the need to remain true to the organi- zation’s mission. In 2013, Chris Franz, CEO of Peak Venture Group, stated the company needed to return to its core mission of reaching out to the community and providing resources to local entrepreneurs (Gillentine, 2013).

In summary, a series of individual, departmental, and company-wide standards and practices create one level of organizational control. Any time one of these guidelines is violated, manag- ers are advised to step in and make immediate corrections. Organizations with high-quality, constant control systems are much more likely to survive and succeed over time. When constant controls are complemented by periodic controls, the company’s odds of success rise to an even higher level.

Periodic Controls

Planning and controlling are inseparable parts of the management system. Standards are set in planning, and the controlling system uses those standards to identify and correct problems. The

Introduction Chapter 7

standard control process consists of four steps (Anthony & Govindarajan, 2007; Steers, Ungston, & Mowday, 1985):

1. Review the standards set in the planning process. 2. Measure performance at the strategic, tactical, and operational levels. 3. Compare performance outcomes with the standards that were set. 4. Make a decision:

• Successful performance should be rewarded. • Unsuccessful performance should be corrected.

Reviewing Performance Standards Control processes are carried out on three levels: company-wide, departmental or functional area, and individual. These are the same three levels at which plans were written. At the company-wide level, the executive team is responsible for evaluation of activities. Departmental managers assess success in their functional areas. Supervisors working in concert with the human resources department conduct individual performance appraisals.

Planning forms the basis for an effective control system. Managers who fail to prepare quality standards have no basis for evaluating performance. The goal-setting literature (Locke, Shaw, Saari, & Latham, 1981) has taught us that quality goals reflect the following characteristics:

• difficult but attainable • measurable • clearly stated • flexible

At all three levels, members of the organization should be challenged to achieve at the highest levels. Difficult but attainable goals establish an environment in which employees are not tempted to slack off when goals are too easy and are readily met, or to give up when goals are too hard. Measurable goals are a necessity. Without tangible performance targets, control systems cannot work. Clearly stated goals eliminate hedging and fudging. Managers and workers at all levels are accountable for results. Accomplishing the objectives that have been set forms the basis for promotion deci- sions and other rewards. Goal setting should remain flexible. When organizational circumstances change, the planning and goal-setting systems should be adjusted to the new circumstances.

Measuring Actual Performance Many individuals and departments gather data to conduct performance analysis. This data can be quantitative, qualitative, or both. Staff members in various positions make reports that mea- sure actual performance across the company.

Top management examines the documents in reports that contain information regarding stra- tegic goals, such as market share, profitability, and well-being of various strategic business units. Judgments are made about the numbers as well as more subjective concepts, such as the strength of the company’s brand name and image.

Departmental leaders report on statistics from each area. Examples include the items shown in Table 7.3. In the performance analysis process, individual measures are developed for the perfor- mance appraisal process: Production workers are assessed with measures of individual output. Salespeople face sales quotas. Each area has goals that have been set for individual employees.

Introduction Chapter 7

Table 7.3 Tactical/functional analyses

Function Examples of factors to analyze

Production Costs, on-time delivery rates, consumer views of quality

Quality control Rates of defects/returns

Marketing Market share, brand loyalty or power

Sales By total volume, product lines, individual products

Accounting Errors noted by auditors

Finance Cost of capital, liquidity, leverage (debt ratio)

Information technology Quality of website, online ordering systems, support of internal operations

Research and development Number of innovations adopted

Human resources Rates of absenteeism, tardiness, turnover

Comparing Performance to Standards Performance data that has been gathered can be compared with the established standards. For example, the budget is compared to the actual department income statement. The variance between the actual performance and the budget allows the manager to assess how he or she per- formed during the period in question. When making comparisons, five outcomes are possible:

1. The person or unit greatly exceeded the standard. 2. The standard was met. 3. The standard was missed slightly. 4. The standard was missed. 5. The standard was badly missed.

As an example, suppose a product has been on the market for six months. A sales goal was established for 100,000 units to be produced and sold in the coming year. If the total sales turn out to be 150,000 units, the standard was greatly exceeded and management must establish a more realistic standard for the following year. If the standard is met—for example, sales total 103,450 units—then those responsible receive awards. If the standard is slightly missed—sales total 99,100 units—managers may consider other factors, such as unreported units in December or other variables that contributed to a variance of less than 1%. When the standard has been missed (91,000 units sold), corrections will be made. When the standard is badly missed (63,000 units sold), then management may consider whether the new product is viable in the marketplace.

Making Decisions Based on the information provided by comparing performance to standards, managers are ready to make decisions. Of the five possible outcomes of this analysis, some lead to relatively straight- forward responses or decisions. A standard that is too low will be raised. A standard that is met should lead to rewards for those involved. A standard that has been slightly missed invites some scrutiny.

Standards that have been missed—or grossly missed—require the greatest amount of investiga- tion and concern. When the standard has been missed, more substantial corrections need to be made. When the standard has been grossly missed, managers will meet to consider whether to stop the activity or create some kind of major overhaul (Maciariello & Kirby, 1994; Weiner, 1948).

Functional Area Controls Chapter 7

The controlling process may be considered as a feedback device for company leaders. Decisions reached in the controlling process lead to new plans for the future. Standards allow for effective management of the organizational system at each level: company-wide, departmental/functional area, and individual. We consider functional area controls next.

7.2 Functional Area Controls Each department sets goals for its own operations. At times these goals apply not only to the department but also to the overall company. For example, if a manufacturing company has only one production department, then the departmental goal becomes the company’s goal. Using the process noted in Figure 7.1, control systems help managers in each functional area (production, marketing, finance, etc.) collect information about operations in their departments. This enables them to make better decisions about how to fix or improve activities in each part of the company. In each department, the fundamentals of the systems approach can be used to make corrections to any problems that have been identified. Figure 7.1 portrays the flow of items in a general con- trol system.

In a departmental system, inputs include whatever items come into the area. For production, this means raw materials; for human resources, it is people. The transformation process is the department’s key function, including the assembly of physical products and the development of intangible services. Outputs are the finished items sent on to the next department or to the out- side environment. An output for the accounting department would be the annual income sum- mary. The feedback mechanism provides correction and adjustment, keeping the department in tune with other departments and the larger environment. Systems concepts help departmental managers identify problems and find solutions.

Production and Quality Control

Production and quality control are closely linked. Production represents a line function, and quality control is more of a staff function. In the area of production, four standard types of goals are set:

1. Quantity 2. Quality

f07.01_MGT330.ai

Inputs Transformation Process

Outputs

Feedback Mechanism

Figure 7.1 A control system

Functional Area Controls Chapter 7

3. Cost 4. Time

Performance figures in these areas are then met with various responses and corrections.

Quantity Goals Quantity goals may be established by unit or by volume. DVD players are counted in units. Beer breweries count liters or gallons. At times, quantity goals are more complex. For instance, man- agers in a construction company that is building a major structure that will take more than one year to complete will still want to know if output levels are sufficient. To access this information, they use benchmarks to note the completion of various tasks. A standard is set for completion of the framing. A second standard applies to finishing the wiring system. In this way, the manager knows more about the level of productivity.

Quality Goals Quality goals are applied in various ways. For some operations, quality will be represented by exceeding a threshold. For example, a building must pass all inspections to be considered of high enough quality to be sold and inhabited. A customized insurance plan sold to a company must be complete before being put into place.

Other standards are set and examined by variation and defect levels. An example of this would be an automated injection molding machine tool that produces golf balls. This particular golf ball specification requires a dimpled cover of thermoplastic with a thickness of 0.30 in. and an overall ball diameter of not less than 1.680 in., as defined by the U.S. Golf Association, but less than 1.685 in., as defined by the manufacturer. Each ball is carefully and automatically measured as it moves through the produc- tion line just before the finishing process to make sure it meets design specifications. Balls outside of the speci- fications are rejected and recycled. If more than 0.5% of the balls are rejected, management intercedes, stops production, and requires process recalibrations. In this way, scrap is limited, costs are managed appropriately, and a high-quality golf ball is produced for the golfer. Quality control tests like these are found in many forms of manufacturing.

A third set of quality goals examines intangible, qualitative issues. Examples include customer satisfaction and loyalty. Consider a restaurant setting, where production of food is only part of the story. For the production system to work, people must enjoy the food they eat. No hard standard can be set, yet managers still want to know whether customers are pleased with their purchasing experiences. Surveys and questionnaires can make available numbers that provide helpful information, such as where the company ranks in the industry in terms of customer satisfaction.

© Ernest Primi/iStock/Thinkstock

▲▲ A building must pass all inspections to be considered of high enough quality to be sold and inhabited; in this case, quality is repre- sented by exceeding a threshold.

Functional Area Controls Chapter 7

Cost Goals The production manager needs information about the efficiencies, or lack thereof, of the depart- ment’s operations. For instance, what costs are incurred by using raw materials, paying labor, storing merchandise, and shipping products to buyers? Quality control adds information by mea- suring the number of defective units that were discarded or required additional funds to repair.

Time Goals Time goals reflect whether items have been produced on schedule. These goals are set in various ways, such as the number of units per day, week, and month, or other means. A large project will have a goal established as a deadline. For example, the publication of a book has a defined produc- tion date and release date. Time goals measure the efficiency of the department.