Organizational culture functions as a kind of control system

CHAPTER 8

Control, Change, and Entrepreneurship

Learning Objectives (1 of 2)

8-1. Define organizational control, and explain how it increases organizational effectiveness.

8-2. Describe the four steps in the control process and the way it operates over time.

8-3. Identify the main output controls, and discuss their advantages and disadvantages as means of coordinating and motivating employees.

8-4. Identify the main behavior controls, and discuss their advantages and disadvantages as a means of managing and motivating employees.

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Learning Objectives (2 of 2)

8-4. Explain how organizational culture or clan control creates an effective organizational architecture.

8-5. Discuss the relationship between organizational control and change, and explain why managing change is a vital management task.

8-6. Understand the role of entrepreneurship in the control and change process.

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What Is Organizational Control?

Controlling

Process where managers monitor and regulate how efficiently and effectively an organization and its members are performing the activities necessary to achieve organizational goals

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Controlling:

Keep employees motivate

Identify problems in organization

Provide changes needed

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Control Systems and IT

Control Systems

Formal, target-setting, monitoring, evaluation and feedback systems that provide managers with information about how well the organization’s strategy and structure are working

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Managers need the measures that a control system provides to make assessments about efficiency.

Topics for Discussion (1 of 5)

What is the relationship between organizing and controlling? [LO 8-1]

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The text defines controlling as the process whereby managers monitor and regulate how efficiently and effectively an organization and its members are performing the activities necessary to achieve organizational goals.

In previous chapters, the text defines planning and organizing as the process whereby mangers develop the organizational strategy and structure that they hope will allow the organization to use resources most effectively to create value for customers.

In order to control the organization, managers must monitor and evaluate whether their organization’s strategy and structure (which was developed during the organizing function) are working as they intended, how they could be improved, and how they might be changed if they are not working.

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Control Systems

A good control system should:

Be flexible so managers can respond as needed

Provide accurate information about the organization

Provide information in a timely manner

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In today’s working environments, all employees at all levels have the ability to feed information into the system.

Three Types of Control

Figure 8.1

Jump to Appendix 1 long image description.

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Types of Control (1 of 2)

Feedforward Control

Control that allows managers to anticipate problems before they arise

Concurrent Control

Give managers immediate feedback on how efficiently inputs are being transformed into outputs so that managers can correct problems as they arise

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Feedforward Control: by giving strict product specifications to suppliers in advance (a form of performance target), an organization can control the quality of the inputs it receives from its suppliers and thus avoid potential problems during the conversion process.

Concurrent control a constant monitoring of the quality of the goods or services, at every step of the production process, allowing managers to address quickly.

Types of Control (2 of 2)

Feedback Control

Control that gives managers information about customers’ reactions to goods and services so that corrective action can be taken if necessary

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The text gives the example of a feedback control system that monitors the number of customer returns alerts managers when defective products are being produced, and a management information system (MIS) that measures increases or decreases in relative sales of different products alerts managers to changes in customer tastes so they can increase or reduce the production of specific products.

Four Steps in Organizational Control

Figure 8.2

Jump to Appendix 2 for long image description.

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Establish standards, goals, or targets against which performance is to be evaluated.

Standards must be consistent with the organization’s strategy.

Measure actual performance.

Managers can measure outputs resulting from worker behavior or they can measure the behavior themselves.

Compare actual performance against chosen standards.

Managers must decide if performance actually deviates, often, several problems combine creating low performance.

Evaluate the result and initiate corrective action if the situation is not being achieved.

Standards have been set too high or too low.

Workers may need additional training or equipment.

This step is often hard since the environment is constantly changing.

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Topics for Discussion (2 of 5)

What kind of controls would you expect to find most used in (a) a hospital, (b) the navy, (c) a city police force? Why? [LO 8-1, 8-2, 8-3]

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A hospital would most likely use output and behavior control systems. Ratios such as the number of days outstanding for receivables are used to determine the economic health of the hospital. Operating budgets are used for each department as well as each function (i.e., marketing and advertising) of the hospital. Organizational goals, such as the desire to achieve the best reputation in the treatment of heart disease, are usually established.

Behavior controls, such as direct supervision and bureaucratic control, are also very common. Interns and residents of the hospital are regularly monitored to ensure that they are making the correct diagnosis for patients. Bureaucratic controls are evident in the abundance of rules, policies and procedures that are established and must be obeyed. This is done to ensure safety, health and well-being of the employees and patients of the hospital.

The navy primarily uses behavior and culture control systems. The behavior of enlisted personnel is constantly monitored and they are expected to follow a plethora of rules, including the way that they should walk, talk, and respond to superiors. There is a deep culture entrenched in the military. Because members of the Navy are representing their country and their arm of the military at all times, there is a high level of behavior that is expected of them, especially when they are in uniform.

A city police force uses output, behavior, and clan control systems. Because the city established a budget for the police force, they are under the control of their output. They are expected to keep the crime level below certain levels working within their budget. Behavior controls are used when policemen are expected to follow established procedures in many of their duties. A culture is created within the police force in regards to the way that they fulfill their duties. Because their purpose to protect the people, they should deal with the community in a professional manner and develop a trusting relationship with its members.

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Three Organizational Control Systems

Figure 8.3

Type of control Mechanisms of control
Output control Financial measures of performance Organizational goals Operating budgets
Behavior control Direct supervision Management by objectives Rules and standard operating procedures
Organizational culture/clan control Values Norms Socialization
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Financial Measures of Performance (1 of 2)

Profit Ratios

Measures of how efficiently managers convert resources into profits

Return on investment (ROI)

Liquidity Ratios

Measures of how well managers protect resources to meet short term debt—current and quick ratios

Jump to Appendix 3 for long image description.

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ROI lets managers assess an organization’s competitive advantage.

The current ratio (current assets divided by current liabilities) tells managers whether they have the resources available to meet the claims of short-term creditors.

The quick ratio shows whether they can pay these claims without selling inventory.

Financial Measures of Performance (2 of 2)

Leverage Ratios

Measures of how much debt or equity is used to finance operations—debt-to-asset and times-covered ratios

Activity Ratios

Measures of how efficiently managers are creating value from assets—inventory turnover, days sales outstanding ratios.

Jump to Appendix 4 long image descriptions.

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Highly leveraged = more debt than equity.

Just as with personal credit cards, a company’s debt can be risky when net income or profit fails to cover the debt’s interest.

Organizational Goals

Goals should be specific and difficult but attainable.

Stretch Goals

Goals that challenge and stretch managers’ ability but are not out of reach and do not require an impossibly high expenditure of managerial time and energy

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One of managers’ tasks is to determine if a goal is too difficult or too easy to obtain. And they must determine if their employees, or subordinate managers have the capabilities to meet the goal.

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Organization-Wide Goal Setting

Figure 8.4

Jump to Appendix 5 for long image description.

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Operating Budgets (1 of 2)

Operating Budget

A blueprint that states how managers intend to allocate and use the resources they control to attain organizational goals effectively and efficiently

Lower-level managers are evaluated for their ability to stay within the budget and to make the best use of available resources

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The text uses the example of GE’s lighting division’s budget and how to allocate among their various divisions.

Operating Budgets (2 of 2)

Three components are the essence of effective output control.

Objective financial measures

Challenging goals and performance standards

Appropriate operating budgets

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Problems with Output Control

Managers must create output standards that motivate at all levels.

Standards should not cause managers to behave in inappropriate ways to achieve organizational goals.

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If a goal is unlikely to be obtained and monetary rewards are tied to it, how might an employee act to preserve his or her reward? The text gives the example of sales managers and their goals.

Behavior Control (1 of 3)

Direct Supervision involves managers who:

Actively monitor and observe the behavior of their subordinates

Teach subordinates the behaviors that are appropriate and inappropriate

Intervene to take corrective action as needed

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Direct supervision, such as mentoring, can motivate and promote efficient and effective behavior within the organization.

Behavior Control (2 of 3)

Management by Objectives (MBO)

A goal-setting process in which managers and each of his or her subordinates negotiate specific goals and objectives for the subordinate to achieve and then periodically evaluate the extent to which the subordinate is achieving those goals

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The text uses Cypress Semiconductor as an example of how IT can manager the MBO process quickly and effectively.

Management by Objectives

Specific goals and objectives are established at each level of the organization.

Managers and their subordinates together determine the subordinates’ goals.

Managers and their subordinates periodically review the subordinates’ progress toward meeting goals.

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There can be no perception of personal biases or political objectives in the process; if employees sense that there is, it could be harmful to the control system.

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Topics for Discussion (3 of 5)

How do output control and behavior control differ? [LO 8-1 8-2, 8-3]

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In an output control system managers must first choose the set of goals or output performance standards or targets that they think will best measure efficiency, quality, innovation, and responsiveness to customers for their organization. Then they measure whether or not the performance goals and standards are being achieved at the four main levels in an organization (corporate, divisional, functional, and individual levels).

As its name insinuates, behavior control systems involve providing mechanisms to ensure that workers behave in ways that make the structure work. It concentrates on controlling the behavior of the workers opposed to their output or results. The three kinds of behavior control systems are direct supervision, monitoring progress toward goals, and bureaucratic control.

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Behavior Control (3 of 3)

Bureaucratic Control

Control of behavior by means of a comprehensive system of rules and standard operating procedures

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Managers set rules, and employees follow them, setting a predictable standard. With predictability, a manager needn’t monitor behavior—standardized behavior leads to standardized outputs.

Bureaucratic Control

Problems with Bureaucratic Control

Rules easier to make than to discard, leading to bureaucratic “red tape” and slowing organizational reaction times to problems

Loss of flexibility, new ideas, and creative problem solving

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Bureaucratic control can stifle employees’ creative thinking and new ideas.

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Organizational Culture and Clan Control (1 of 2)

Organizational Culture

The shared set of beliefs, expectations, values, norms, and work routines that influences how members of an organization relate to one another and work together to achieve organizational goals

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Like society, organization’s also have acceptable values and norms that employees follow. We are often unaware that we are following these, as they become part of the fabric that ties society, organizations together.

Topics for Discussion (4 of 5)

What is organizational culture, and how does it affect the way employees behave? [LO 8-4]

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Organizational culture is the shared set of beliefs, expectations, values, norms, and work routines that influences how members of an organization relate to one another and work together to achieve organizational goals. An organizational culture can be adaptive or inert.

An adaptive culture controls employee attitudes and behaviors. They help an organization to grow and change as needed to achieve its goals. In adaptive cultures, employees often receive rewards linked directly to their performance. It develops an emphasis on entrepreneurship and respect for the employee.

By contrast, inert cultures are those that lead to values and norms that fail to motivate or inspire employees. The employment practices are based on short-term employment. Employees are not often rewarded for their performance and have little incentive to improve their skills. Poor working relationships develop between the organization and employees, and values of noncooperation and laziness are common. The employees are content to be told what to do and have little motivation to perform beyond minimum work requirements.

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Organizational Culture and Clan Control (2 of 2)

Clan Control

Control exerted on individuals and groups in an organization by shared values, norms, standards of behavior, and expectations

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Adaptive vs. Inert Culture

Adaptive Culture

Culture whose values and norms help an organization to build momentum and to grow and change as needed to achieve its goals and be effective

Inert Culture

Culture that leads to values and norms that fail to motivate or inspire employees

Leads to stagnation and often failure over time

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Strong adaptive cultures: 3M, UPS, Microsoft, and IBM.

Developing a culture that promotes commitment to employees that is reflected in an employee’s commitment to the organization.

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Organizational Control and Change

Figure 8.5

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Organizational Change (1 of 5)

Organization Change

Movement of an organization away from its present state and toward some desired future state to increase its efficiency and effectiveness

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Something unpredicted can always occur, and managers need to be able to respond to these changes.

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Four Steps in the Organizational Change Process

Figure 8.6

Jump to Appendix 6 for long image description.

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Organizational Change (2 of 5)

Organizational Learning

Process through which managers try to increase organizational members’ abilities to understand and appropriately respond to changing conditions

Impetus for change

Can help members make decisions about changes

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Issues may occur between desired performance and actual performance. Managers can determine whether change is needed by using performance measures.

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Organizational Change (3 of 5)

Top-Down Change

A fast, revolutionary approach to change in which top managers identify what needs to be changed, decide what to do, and then move quickly to implement changes throughout the organization

Copyright Chip Somodevilla/Getty Images

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In a top-down change, top managers, perhaps the CEO, determine that the organization needs to make a change to achieve a specific goals. They then ask lower-level managers to implement the process to achieve the change. A revolutionary approach, it is intended to make quick changes and to address problems as they occur.

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Organizational Change (4 of 5)

Bottom-Up Change

A gradual or evolutionary approach to change in which managers at all levels work together to develop a detailed plan for change

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One of the advantages of this type of change, is that it is likely to address any employee resistance.

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Topics for Discussion (5 of 5)

Why is it important for managers to involve subordinates in the control process? [LO 8-3, 8-4]

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It is very important to involve subordinates in the control process in order to achieve success in any organization. If subordinates are involved in setting the goals and standards, they will feel a sense of ownership toward them, which will motivate them to work to achieve those goals. They will be more committed to goals that they helped to design. It will also help to ensure that unrealistic goals are not created.

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Organizational Change (5 of 5)

Benchmarking

Process of comparing one company’s performance on specific dimensions with the performance of other high performing organizations

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The text uses Xerox’s benchmarking experience from the 1980s as an example.

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Entrepreneurship, Control, and Change (1 of 3)

Entrepreneurs

People who notice opportunities and take responsibility for mobilizing the resources necessary to produce new and improved goods and services

Copyright David Paul Morris/Bloomberg/Getty Images

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Entrepreneurship, Control, and Change (2 of 3)

Intrapreneurs

Employees of existing organizations who notice opportunities for product or service improvements and are responsible for managing the development process

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Intrapreneurs have left companies when their ideas were underappreciated or ignored. The text points out the experiences of Hewlett and Packard, and Rod Canion to illustrate this.

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Entrepreneurship, Control, and Change (3 of 3)

Entrepreneurship

Mobilization of resources to take advantage of an opportunity to provide customers with new or improved goods and services

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An entrepreneur might be successful in coming up with a marketable idea, but if he or she does not have the management skills to create a successful long-term strategy, the idea might fail.

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BE A MANAGER

What kind of output controls will best facilitate positive interactions both within the teams and among the teams?

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Managers and each team should be given organizational goals that are challenging and require them to “stretch.” Each team could be evaluated on the time taken from the start of the project till the website is up and running. Revenues generated by individual websites, or click-through or page-view statistics could also be used to control output. The teams can also be set timelines or budgets within which to complete their projects, and be evaluated on the basis on whether they achieve those goals.

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APPENDICES

Long descriptions of images

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Appendix 1: Three Types of Control

The flow chart shows three types of control in sequential order: input stage to conversion stage to output stage. The input stage has feedforward control (anticipate problems before they occur), the conversion stage has concurrent control (manage problems as they occur), and the output stage has feedback control (manage problems after they have arisen).

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Return to slide.

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Appendix 2: Four Steps in Organizational Control

A chart shows four steps in organizational control: 1. establish the standards of performance, goals, or targets against which performance is to be evaluated, 2. measure actual performance, 3. compare actual performance against chosen standards of performance, and 4. evaluate the result and initiate corrective action if the standard is not being achieved.

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Return to slide.

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Appendix 3: Financial Measures of Performance

Ratios spelled out:

Return on investment equals net profit before taxes over total assets.

Current ratio equals current assets over current liabilities.

Gross profit margin equals sales revenues minus cost of goods sold over sales revenues.

Quick ratio equals current assets minus inventory over current liabilities.

Return to slide.

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Appendix 4: Financial Measures of Performance

Ratios:

Debt to assets ratio equals total debt over total assets.

Inventory turnover equals cost of goods sold over inventory.

Times covered ratio equals profit before interest and taxes over total interest charges.

Days sales outstanding equals current accounts receivable over sales for period divided by days in period.

Return to slide.

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Appendix 5: Organization-Wide Goal Setting

A chart shows three levels of managers, each of which sets different levels of goals. 1. Corporate-level managers set goals for divisions to meet corporate goals, 2. divisional managers set goals for functions needed to meet a division's goals, and 3. functional managers set goals for each worker in order to achieve the goals for a function.

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Appendix 6: Four Steps in the Organizational Change Process

A flow chart graphic shows the four steps in the organizational change process.

Assess the need for change.

Recognize that there is a problem.

Identify the source of the problem.

Decide on the change to make.

Decide on what the organization’s ideal future state would be.

Identify obstacles to change.

Implement the change.

Decide whether change will occur from the top down or from the bottom up.

Introduce and manage change.

Evaluate the change.

Compare pre-change performance with post-change performance.

Use benchmarking.

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