Productivity is monitoring performance, comparing it with goals, and taking corrective action.

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16.1

Control: When Managers Monitor Performance

MAJOR QUESTION Why is control such an important managerial function?

THE BIG PICTURE

Controlling is monitoring performance, comparing it with goals, and taking corrective action. This section describes six reasons control is needed and four steps in the control process.

Control is making something happen the way it was planned to happen. Controlling is defined as monitoring performance, comparing it with goals, and taking corrective action as needed. Controlling is the fourth management function, along with planning, organizing, and leading, and its purpose is plain: to make sure that performance meets objectives.

· Planning is setting goals and deciding how to achieve them.

· Organizing is arranging tasks, people, and other resources to accomplish the work.

· Leading is motivating people to work hard to achieve the organization’s goals.

· Controlling is concerned with seeing that the right things happen at the right time in the right way.

All these functions affect one another and in turn affect an organization’s performance and productivity. (See Figure 16.1 .)

FIGURE 16.1 Controlling for effective performance What you as a manager do to get things done, with controlling shown in relation to the three other management functions. (These are not lockstep; all four functions happen concurrently.)Summary graphic of controlling for effective performance

Why Is Control Needed?

Lack of control mechanisms can lead to problems for both managers and companies. For example, in the wake of 11 reported deaths and dozens of injuries, more than 100 million autos have been recalled in the United States and worldwide due to faulty airbags manufactured by Takata, a Japanese auto parts maker.10 As the company’s CEO resigned and the scope of the ongoing recall grew,11 The New York Times reported that faulty airbags continued to be installed in new U.S. cars, including Fiat Chrysler, Toyota, Volkswagen, and Mitsubishi.12 Could greater control have helped avoid or reduce the consequences of these situations? Of course. Control can save lives!

Page 547https://html1-cluster-e.mheducation.com/smartbook2/data/151605/highlighted_epubmhe/OPS/img/chapter16/kin32657_p1601.png Control matters. The National Highway Traffic Safety Administration (NHTSA) concluded that the airbag recall from 14 different automarkers is the largest and most complex in U.S. history. The airbags, which were made by Takata, involved car models from 2002 through 2015. The purpose of management control system is to prevent mistakes, errors, and design flaws from reaching consumers.© Jochen Tack/Alamy

There are six reasons control is needed.

1. To Adapt to Change and Uncertainty

Markets shift. Consumer tastes change. New competitors appear. Technologies are reborn. New materials are invented. Government regulations are altered. All organizations must deal with these kinds of environmental changes and uncertainties. Control systems can help managers anticipate, monitor, and react to these changes.

Example: Self-driving cars are in the testing stage at many companies around the world. Early indications, including the recent death of a driver in a collision on a Florida highway, suggest that autonomous cars are probably years away from becoming a reality.13 But if successful, they are sure to bring changes in traffic patterns, safety regulations, road use and signage, insurance policies, auto design, and even car ownership patterns and customer expectations. As one writer predicts, “Driving is still going to be about the experience, but not the experience of driving.”14

2. To Discover Irregularities and Errors

Small problems can mushroom into big ones. Cost overruns, manufacturing defects, employee turnover, bookkeeping errors, and customer dissatisfaction are all matters that may be tolerable in the short run. But in the long run, they can bring about even the downfall of an organization.

Example: The National Highway Traffic Safety Administration (NHTSA) and Tesla Motors are both investigating the causes of the 2016 crash that killed the driver of a self-driving Tesla car on a Florida highway. Tesla says the car’s camera, part of its beta-phase Autopilot system, failed to spot the white tractor-trailer crossing the driver’s path on a bright day. NHTSA wants to know why. The agency, which is developing standards for self-driving cars, has also asked Tesla to share its reconstruction of the accident and has imposed a deadline to be enforced by the prospect of thousands of dollars in fines. If defects in the Autopilot system are found, a product recall could follow.15

3. To Reduce Costs, Increase Productivity, or Add Value

Control systems can reduce labor costs, eliminate waste, increase output, and increase product delivery cycles. In addition, controls can help add value to a product so that customers will be more inclined to choose them over rival products.

Example: Simple changes to an office environment can change employee attitudes and have a positive impact on productivity.16 The use of color, arrangement of space,Page 548 type of seating and lighting, and presence or absence of music can all affect productivity, perhaps by as much as 20%. Control mechanisms to monitor the results of such changes can be as simple as periodic employee satisfaction surveys.17

4. To Detect Opportunities and Increase Innovation

Hot-selling products. Competitive prices on materials. Changing population trends. New overseas markets. Controls can help alert managers to innovative opportunities that might have otherwise gone unnoticed.18

Example: Uniqlo, the big Asian apparel retailer, is locked in competition for global market share with “fast fashion” clothiers Zara (from Spain), H&M (Sweden), and online stores. Like those at most businesses, Uniqlo managers look at a monthly metric called EBIDTA, earnings before interest, depreciation, taxes, and amortization, to gauge their success in each new market they enter.19

5. To Provide Performance Feedback

Can you improve without feedback? When a company becomes larger or when it merges with another company, it may find it has several product lines, materials-purchasing policies, customer bases, and worker needs that conflict with each other. Controls help managers coordinate these various elements by providing feedback.20

Example: Global companies like Pepsi-Cola must manage broad and diverse arrays of brands and products at locations around the world. To ensure the same high level of quality everywhere despite dealing with a virtual army of suppliers, Pepsi relies on an interlocking set of sustainability and quality control policies covering everything from ingredients to packaging. It must abide by regulations imposed by the U.S. Food and Drug Administration and by agencies around the globe, including the European Food Safety Authority and Health Canada, for instance.21

6. To Decentralize Decision Making and Facilitate Teamwork

Controls allow top management to decentralize decision making at lower levels within the organization and to encourage employees to work together in teams. Facing a possible shortage of doctors in some areas of medicine, for instance, health care professionals are anticipating a rise in teamwork, small group practices, and the delegation of some routine patient services to nurse practitioners.22 Controls, including secure digital patient records, will be important in ensuring high-quality and personalized care.

The six reasons are summarized below. (See Figure 16.2 .)

FIGURE 16.2 Six reasons control is needed Summary graphic of the reasons control helps an organization.Page 549

Steps in the Control Process

Control systems may be altered to fit specific situations, but generally they follow the same steps. The four control process steps are (1) establish standards; (2) measure performance; (3) compare performance to standards; and (4) take corrective action, if necessary. (See Figure 16.3 .)

FIGURE 16.3 Steps in the control process Paying attention to the feedback is particularly important because of its dynamic nature.A graphic of the control process Access the text alternative for Figure 16 3.

Let’s consider these four steps.

1. Establish Standards: “What Is the Outcome We Want?”

A control standard, or performance standard or simply standard, is the desired performance level for a given goal. Standards may be narrow or broad, and they can be set for almost anything, although they are best measured when they can be made quantifiable.

Nonprofit institutions might have standards for level of charitable contributions, number of students or volunteers retained, or degree of legal compliance. For-profit organizations might have standards of financial performance, employee hiring, manufacturing defects, percentage increase in market share, percentage reduction in costs, number of customer complaints, and return on investment. Service organizations may look at number of customers, clients, or patients served; time spent with each; and resulting level of satisfaction. More subjective standards, such as level of employee satisfaction, can also be set, although they may have to be expressed more quantifiably in terms of, say, reduced absenteeism and sick days and increased job applications.

One technique for establishing standards is to use the balanced scorecard, as we explain later in this chapter.

2. Measure Performance: “What Is the Actual Outcome We Got?”

The second step in the control process is to measure performance, such as by number of products sold, units produced, or cost per item sold.23

Example: Some performance goals may seem difficult to quantify and therefore measure, but the key is to make them concrete. For instance, “Be on time for all meetings” and “Update your team members once a week on the status of your project” are more measurable standards than “Be punctual” and “Keep everyone informed.”24

Performance data are usually obtained from three sources: (1) employee behavior and deliverables; (2) peer input or observations; and (3) personal observation, as when a manager takes a stroll on the factory floor to see what employees are doing.

As we’ve hinted, measurement techniques can vary for different industries, such as for manufacturing industries versus service industries. We discuss this further later in the chapter.

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3. Compare Performance to Standards: “How Do the Desired and Actual Outcomes Differ?”

The third step in the control process is to compare measured performance against the standards established. Most managers are delighted with performance that exceeds standards, which becomes an occasion for handing out bonuses, promotions, and perhaps offices with a view. For performance that is below standards, they need to ask: Is the deviation from performance significant? The greater the difference between desired and actual performance, the greater the need for action.

How much deviation is acceptable? That depends on the range of variation built in to the standards in step 1. In voting for political candidates, for instance, there is supposed to be no range of variation; as the expression goes, “every vote counts.” In political polling, however, a range of 3%–4% error is considered an acceptable range of variation. In machining parts for the solar-powered space probe Juno, currently orbiting Jupiter after a five-year journey, NASA engineers could tolerate a range of variation a good deal smaller than someone machining parts for a power lawnmower.

Photo of the Juno space probe Control and space flight. The Juno space probe was built by Lockheed Martin and is operated by NASA. It began an orbit of Jupiter in July 2016 and is expected to conduct a 20 month scientific investigation. It uses very sophisticated equipment to measure the planet’s gravity field, magnetic field, and polar magnestosphere. This type of equipment requires high levels of accuracy.Source: NASA/JPL-Caltech

The range of variation is often incorporated in computer systems into a principle called management by exception. Management by exception is a control principle that states that managers should be informed of a situation only if data show a significant deviation from standards.

4. Take Corrective Action, If Necessary: “What Changes Should We Make to Obtain Desirable Outcomes?”

This step concerns feedback—modifying, if necessary, the control process according to the results or effects. This might be a dynamic process that will produce different effects every time you put the system to use. There are three possibilities here: (1) Make no changes. (2) Recognize and reinforce positive performance. (3) Take action to correct negative performance.

When performance meets or exceeds the standards set, managers should give rewards, ranging from giving a verbal “Job well done” to more substantial payoffs such as raises, bonuses, and promotions to reinforce good behavior.

When performance falls significantly short of the standard, managers should carefully examine the reasons and take the appropriate action. Sometimes the standards themselves were unrealistic, owing to changing conditions, in which case the standardsPage 551 need to be altered. Sometimes employees haven’t been given the resources for achieving the standards. And sometimes the employees may need more attention from management as a way of signaling that their efforts have been insufficient in fulfilling their part of the job bargain.

EXAMPLE

Steps in the Control Process: What’s Expected of UPS Drivers?

To help younger drivers train for successful careers, UPS worked with a U.S. Department of Labor financial grant and research gleaned from studying the way people who grew up with video games and smartphones learn. The result was a high-tech training center called Integrad®, which now operates in locations in seven different states. The program has so far trained more than 7,500 drivers and more than 1,500 managers in “safe work methods, safe driving methods, customer service methods, training in using the handheld computer (DIAD—acronym for Delivery Information Acquisition Device) for recording delivery information, proper package selection, and UPS history.”25

Establishing Standards. UPS establishes standards for its drivers that project the number of miles driven, deliveries, and pickups. A typical day for a driver in Louisville, Kentucky, might include driving 60 miles to make 125 deliveries.26

Measuring Performance. UPS managers get a constant stream of feedback about drivers’ performance from the DIAD device and from two onboard computer systems. ORION optimizes the drivers’ routes, and Telematics relays information about how often drivers back up and whether they are wearing seat belts. “Everything the driver does is being measured,” says the company’s business manager in Louisville.27

Comparing Performance to Standards. UPS managers compare a driver’s performance (miles driven and number of pickups and deliveries) with the standards that were set for his or her particular route. A range of variation may be allowed to take into account such matters as winter or summer driving or traffic conditions that slow productivity.

Taking Corrective Action. When a UPS driver fails to perform according to the standards set for him or her, a supervisor then rides along and gives suggestions for improvement. If drivers are unable to improve, they are warned, then suspended, and then dismissed. Sometimes performance problems can be system-wide, and then solutions must be as well. After unexpected volume left the company with 1 million undelivered packages on Christmas Eve in 2013, the company invested $150 million in better preparing for the holiday rush and hired more than 100,000 temporary employees, which proved to be too many and had a negative impact on fourth-quarter earnings.28

YOUR CALL

The UPS controls were devised by industrial engineers based on experience. Do you think the same kinds of controls could be established for, say, filling out tax forms for H&R Block?

Types of Controls

There are three types of control: feedforward, concurrent, and feedback. They vary based on the timing of when control takes place.

Feedforward Control

Feedforward control focuses on preventing future problems. It does this by collecting performance information about past performance and then planning to avoid pitfalls or roadblocks prior to starting a task or project.29 Nestle is a global food and nutrition company that uses feedforward control.

Nestle’s quality management system “starts on farms.” The company works with local farmers to improve “the quality of their produce and adopt environmentally sustainable farming practices.” Doing this helps provide Nestle with high-quality raw materials, and it “enables farmers to protect or even increase their income,” according to corporate documents.30

Concurrent Control

Concurrent control entails collecting performance information in real time. This enables managers to determine if employee behavior and organizational processes conform to regulations and standards. Corrective action can then be taken immediately when performance is not meeting expectations. For instance,Page 552 trucking companies use GPS tracking to monitor “where company vehicles go, when they get there and how fast they move between destinations. It helps managers plan more efficient routes and alerts drivers to adjust routes in the event of an accident ahead. It also encourages employees to stay on task rather than running personal errands.”31

Technology is typically used for concurrent control. Word-procesing software is a good example. It immediately lets us know when we misspell words or use incorrect grammar. Corporate online monitoring of our e-mail and Internet use is another example of concurrent control.

Feedback Control

This form of control is extensively used by supervisors and managers. Feedback control amounts to collecting performance information after a task or project is done. This information then is used to correct or improve future performance. Classic examples include receiving test scores a week after taking the test, receiving customer feedback after purchasing a product, receiving student ratings of a teaching performance weeks after teaching a class, rating the quality of a movie after watching it, and participating in a performance review at work.

The problem with feedback control is that it occurs too late. For instance, if an instructor is doing a bad job in the classroom, he or she needs to make changes right away. Learning 10 weeks later that his or her performance was ineffective does not help current students. The same is true when it comes to customer satisfaction and quality. On the positive side, many people want feedback, and late is better than never.

IBM recognized the limitations of providing feedback in annual performance reviews. The company scrapped its 10-year-old system, called Personal Business Commitments, and replaced it with one called Checkpoint. The new system requires employees to set short-term goals, and managers provide quarterly feedback on their progress.32

Photo of two garden store employees Small business. What type of control is most important for small businesses? Do you think employees in small companies, such as a garden pots store, need less control than employees in large companies?© Don Mason/Blend Images/Getty Images RF

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16.2

Levels and Areas of Control

MAJOR QUESTION How do successful companies implement controls?

THE BIG PICTURE

This section describes three levels of control—strategic, tactical, and operational—and six areas of control: physical, human, informational, financial, structural (bureaucratic and decentralized), and cultural. We also look at the supply chain and special considerations for control mechanisms in service firms.

How are you going to apply the steps of control to your own management area? Let’s look at this in several ways: First, you need to consider the level of management at which you operate—top, middle, or first level. Second, you need to consider the areas that you draw on for resources—physical, human, information, and/or financial. Finally, we look at the type of firm. If you manage a manufacturing firm, you will have supply chain issues that require controls at many points, while if your firm is a service provider, you still require controls, but of a different type.

Levels of Control: Strategic, Tactical, and Operational

There are three levels of control, which correspond to the three principal managerial levels: strategic planning by top managers, tactical planning by middle managers, and operational planning by first-line (supervisory) managers and team leaders.

1. Strategic Control by Top Managers

Strategic control is monitoring performance to ensure that strategic plans are being implemented and taking corrective action as needed. Strategic control is mainly performed by top managers, those at the CEO and VP levels, who have an organizationwide perspective.33

For example, former Ford Motor Company CEO Alan Mulally (who retired in 2014) brought the company back from the financial brink by instituting a weekly meeting with senior managers. Each manager presented a report on his or her areas, coded in green, yellow, or red to indicate whether business was on target or needed improvement. 34

2. Tactical Control by Middle Managers

Tactical control is monitoring performance to ensure that tactical plans—those at the divisional or departmental level—are being implemented and taking corrective action as needed. Tactical control is done mainly by middle managers, those with such titles as “division head,” “plant manager,” and “branch sales manager.” Reporting is done on a weekly or monthly basis.

3. Operational Control by First-Line Managers

Operational control is monitoring performance to ensure that operational plans—day-to-day goals—are being implemented and taking corrective action as needed. Operational control is done mainly by first-line managers, those with titles such as “department head” or “supervisor.” It also includes team leaders. Reporting is done on a daily basis.

Considerable interaction occurs among the three levels, with lower-level managers providing information upward and upper-level managers checking on some of the more critical aspects of plan implementation below them.

Six Areas of Control

The six areas of organizational control are physical, human, informational, financial, structural, and cultural.

1. Physical Area

The physical area includes buildings, equipment, and tangible products.

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Examples: Equipment controls monitor the use of computers, cars, HVAC equipment, and other machinery. The speedometer in your car is a physical control. Quality controls ensure that products are being built according to certain acceptable standards. Inventory-management controls keep track of how many products are in stock, how many will be needed, and what their delivery dates are. If you have ever searched for a popular item on Amazon.com , for instance, you may have seen a notification like “Only 5 left in stock (more on the way).” The company’s sophisticated inventory controls supply the information that makes these notifications possible. Lowe’s, a home improvement retailer, is experimenting with robot inventory checkers that roam the aisles, deftly avoiding shoppers while scanning product bar codes on the shelves.35

2. Human Resources Area

The controls used to monitor employees include personality tests and drug testing for hiring, performance tests during training, performance evaluations to measure work productivity, and employee surveys to assess job satisfaction and leadership. Airbnb’s human resource function has expanded its role and likely its control functions as well, as the following Example box describes.

EXAMPLE

Airbnb Revolutionizes Human Resources

Mark Levy is the Global Head of Employee Experiences at Airbnb, the online company that brought sharing to the business of finding a place to stay when traveling. Airbnb has more than 1 million listings in 34,000 cities around the world; they range from a fold-out couch in someone’s living room to a 17-bedroom private chateau in France. The company’s innovation was to use the Internet to put hosts and guests in touch.

When Levy was hired, the company had a human resources department split into several functions reporting to one overall leader. Levy did not like this structure. He preferred a structure organized around “employee experiences,” to parallel the company’s existing customer experience group. Among the new function’s responsibilities are traditional HR concerns like recruiting, development, and compensation benefits, but also “facilities, food, global citizenship,” and employee events and recognition. “Every aspect of creating the employee experience is focused on designing an extraordinary physical, emotional, intellectual, virtual, and aspirational experience for Airbnb employees.”

One HR innovation is the company’s use of storyboarding to map the ideal recruiting experience and ways in which recruiters can serve as “the ideal host.” Another is using crowdsourcing to poll employees on what new skills and knowledge they need to develop in their careers, instead of imposing career development from the top down. Airbnb’s goal is to refashion the workplace as “an experience.”36

YOUR CALL

What traditional control functions does Airbnb’s Employee Experience Group fulfill? What new responsibilities has the group taken on? How can it measure its own performance in recreating “the workplace as an experience”?

3. Informational Area

Production schedules, sales forecasts, environmental impact statements, analyses of competition, and public relations briefings all are controls on an organization’s various information resources. Among the factors that will govern a decision about whether a high-speed passenger-rail line is to be built in Oregon, for instance, is an environmental impact statement being prepared by the state’s Department of Transportation.37

4. Financial Area

Are bills being paid on time? How much money is owed by customers? How much money is owed to suppliers? Is there enough cash on hand to meet payroll obligations? What are the debt-repayment schedules? What is the advertising budget? Clearly, the organization’s financial controls are important because they can affect the preceding three areas. If Oregon’s high-speed rail line becomes a reality, one of the major tasks for project managers will be controlling the cost of building it, which estimates say could rise as high as $4.5 billion.38

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5. Structural Area

How is the organization arranged from a hierarchical or structural standpoint? 39 Two examples are bureaucratic control and decentralized control.

· Bureaucratic control. Bureaucratic control is an approach to organizational control that is characterized by use of rules, regulations, and formal authority to guide performance. This form of control attempts to elicit employee compliance, using strict rules, a rigid hierarchy, well-defined job descriptions, and administrative mechanisms such as budgets, performance appraisals, and compensation schemes (external rewards to get results). The foremost example of use of bureaucratic control is the traditional military organization.

Bureaucratic control works well in organizations in which the tasks are explicit and certain. While rigid, it can be an effective means of ensuring that performance standards are being met. However, it may not be effective if people are looking for ways to stay out of trouble by simply following the rules, or if they try to beat the system by manipulating performance reports, or if they try to actively resist bureaucratic constraints.

· Decentralized control. Decentralized control is an approach to organizational control that is characterized by informal and organic structural arrangements, the opposite of bureaucratic control. This form of control aims to get increased employee commitment, using the corporate culture, group norms, and workers taking responsibility for their performance. Decentralized control is found in companies with a relatively flat organization.

6. Cultural Area

The cultural area is an informal method of control. It influences the work process and levels of performance through the set of norms that develop as a result of the values and beliefs that constitute an organization’s culture. If an organization’s culture values innovation and collaboration, as at many tech start-ups, for instance, then employees are likely to be evaluated on the basis of how much they engage in collaborative activities and enhance or create new products.

https://html1-cluster-e.mheducation.com/smartbook2/data/151605/highlighted_epubmhe/OPS/img/chapter16/kin32657_p1604.pngBureaucratic control. In businesses such as construction of large subdivisions, tasks are explicit and certain, and employees are expected to perform them the same way each time. However, a small contractor, such as one building custom houses, need not be bureaucratic.© MyLoupe/Universal Images Group/UIG/Getty Images

Controlling the Supply Chain

The supply chain is the sequence of suppliers that contribute to creating and delivering a product, from raw materials to production to final buyers. Supply chains are a major cost center for most companies, and the way firms structure the distribution of their productsPage 556 can have enormous financial impact. In recognition of this impact, companies are paying closer attention to the sourcing, shipping, and warehousing of their products and of the ingredients and component parts they require. Many organizations are creating specialized supply chain departments that look specifically at cost and quality control in these areas and the way they contribute to the cost and quality of finished products. Managing supply chain functions has become so important that some academic management departments now offer undergraduate and master’s degrees in supply chain management, including at Arizona State University, for example.

At Hostess Brands, a dramatic change in the way products are delivered to stores is credited with helping the snack food company recover from bankruptcy. Hostess used to follow the traditional model for perishable items, sending 8,000 of its own drivers out to deliver Twinkies and other products directly to store shelves. After declaring bankruptcy, however, the firm revamped its process and adopted a much less expensive distribution plan. Now it delivers goods only as far as retailers’ distribution centers, and retailers take on the job of stocking their own individual stores. After also drastically cutting the size of its workforce, the company recently took in revenues of $650 million under new ownership. 40

At Target, with annual sales in the $75 billion range,41 the supply chain has evolved with advances in online shopping. Where the goal was once to deliver goods from suppliers to regional warehouses in a straight line, now, says the company’s CIO, Mike McNamara, “All of our inventory is available to all our guests, all the time. We will ship from a point to a guest that makes the most economic sense, or gives the guest the shortest lead time. That means that the thing that was once linear is now a network.”42

Amazon has been experimenting with using drones as “the delivery truck of the future.” The company hopes drones will someday be able to accurately deliver packages weighing up to five pounds (“the vast majority of the things we sell at Amazon”) within 30 minutes in both cities and rural areas. It warns that drones won’t become a reality anytime soon, however.43

Control in Service Firms

Service providers, such as income-tax preparers, hospitals and dental practices, consultants, accountants, hair and nail salons, stockbrokers, hotels, and airlines, differ from manufacturers in several ways. The most obvious is that service companies cannot hold any inventory of their services, which are intangible; instead they provide these services only on demand. Your new haircut does not exist until you sit down in the stylist’s chair, for example.

Another difference is that service firms usually develop a personal, if temporary, relationship with their client or customer. Your haircut or flu shot is provided only to you, in other words, and the seat you buy on a plane heading to Amsterdam can be filled only by you. Some services are highly perishable. If you don’t show up for your flight to Amsterdam, your ability to occupy that particular seat on that particular plane vanishes forever, along with your chance to sleep in the hotel room you reserved at your destination. The education you acquire in college is another example of the personal nature of service; that education is yours alone.44

The U.S. service industry has grown considerably in the last few decades as a great deal of manufacturing activity has moved overseas. Before World War II, there were about two service-industry jobs for every manufacturing job in the United States. Today the ratio of service to manufacturing employment is almost seven to one.45

Since services are provided by humans (for the most part), everything we have outlined in this chapter that relates to measuring and controlling employee behavior applies to the role of control in service organizations. Clearly, training and education affect the quality of any service. Health care organizations operate under high control standards, for example, as evidenced by the many years of education and training required to obtain a license to practice medicine or dentistry. The same holds for the practice of law. Ongoing training and certification are a form of control for airline pilots, tax accountants (CPAs), teachers, physical therapists, and personal trainers.

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16.3

The Balanced Scorecard and Strategy Maps

MAJOR QUESTION How can the balanced scorecard and strategy maps help me establish standards and measure performance?

THE BIG PICTURE

The balanced scorecard helps managers establish goals and measures for four strategic perspectives. A visual representation of the relationships among balanced scorecard perspectives is the strategy map.

Wouldn’t you, as a top manager, like to have displayed in easy-to-read graphics all the information on sales, orders, and the like assembled from data pulled in real-time from corporate software? The technology exists and it has a name: a dashboard, like the instrument panel in a car.

Bob Parsons, founder of GoDaddy, believed in dashboards. “Measure everything of significance. Anything that is measured and watched improves,” he said.46

Throughout this book we have stressed the importance of evidence-based management—the use of real-world data rather than fads and hunches in making management decisions. When properly done, the dashboard is an example of the important tools that make this kind of management possible. The balanced scorecard is another.

The Balanced Scorecard: A Dashboard-like View of the Organization

Robert Kaplan is a professor of accounting at the Harvard Business School and a leading authority on strategic performance measurement. David Norton is co-founder of Balanced Scorecard Collaborative. Kaplan and Norton developed what they call the balanced scorecard, which gives top managers a fast but comprehensive view of the organization via four indicators: (1) customer satisfaction, (2) internal processes, (3) innovation and improvement activities, and (4) financial measures.

“Think of the balanced scorecard as the dials and indicators in an airplane cockpit,” write Kaplan and Norton. For a pilot, “reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.” 47 It is not enough, say Kaplan and Norton, to simply measure financial performance, such as sales figures and return on investment. Operational matters, such as customer satisfaction, are equally important. 48

The Balanced Scorecard: Four “Perspectives”

The balanced scorecard establishes (a) goals and (b) performance measures according to four “perspectives,” or areas—financial, customer, internal business, and innovation and learning. (See Figure 16.4 )

FIGURE 16.4 The balanced scorecard: Four perspectivesSummary graphic of the four balanced scorecard perspectives Source: Adapted from R. S. Kaplan and D. P. Norton, “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, pp. 71–79.

1. Financial Perspective: “How Do We Look to Shareholders?”

Corporate financial strategies and goals generally fall into two buckets: revenue growth and productivity growth. Revenue growth goals might focus on increasing revenue fromPage 558 both new and existing customers. Equipment manufacturer John Deere, for instance, is pursuing new revenue by developing software services that provide information and guidance to farmers in the field. It is doing this to offset a recent 5% decrease in revenue.49 Productivity metrics like revenue per employee or total output produced divided by number of employees are common organization-level goals. We can also measure productivity in terms of costs. For example, Bob Evans Farms, Inc., is closing 27 underperforming restaurants in an attempt to decrease costs and improve profitability. 50

2. Customer Perspective: “How Do Customers See Us?”

Many companies view customers as one of their most important constituents. The balanced scorecard translates this belief into measures such as market share, customer acquisition, customer retention, customer satisfaction/loyalty, product/service quality, response time (the time between order and delivery), and percentage of bids won.

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Sunnybrook Health Sciences Centre, part of the University of Toronto Faculty of Medicine, has 1.2 million patient visits a year. The four “quality of care” goals in its balanced scorecard all relate to the ways in which its constituents—patients and partners—experience the organization. The goals are:

· Goal 1 Improve the patient experience and outcomes through inter-professional, high quality care.

· Goal 2 Focus on the highest levels of specialized care in support of our Academic Health Sciences Centre definition.

· Goal 3 Work with system partners and government to build an integrated delivery system in support of our communities and our Academic Health Sciences Centre definition.

· Goal 4 Achieving excellence in clinical care associated with our strategic priorities.51

3. Internal Business Perspective: “What Must We Excel At?”

The internal business perspective focuses on “what the organization must excel at” to effectively meet its financial objectives and customers’ expectations. A team of researchers identified four critical high-level internal processes that managers are encouraged to measure and manage:

1. Innovation.

2. Customer service and satisfaction.

3. Operational excellence, which includes safety and quality.

4. Good corporate citizenship.52

These processes influence productivity, efficiency, quality, safety, and a host of other internal metrics. Companies tend to adopt continuous improvement programs in pursuit of upgrades to their internal processes. Consider how Citi modified its workflow processes to reduce costs.

Example: Citi recently worked with commercial vehicle manufacturer Navistar to eliminate the need for thousands of paper checks it was sending its suppliers. The bank used its Citi Payment Exchange system to set up a secure, cloud-based accounts payable function for Navistar. Andrew Bernardi, cash operations director at Navistar, says the effect was to “convert more than 1,100 suppliers to electronic payments and eliminate more than 70,000 check payments handled by our A/P (accounts payable) group.” Since it can cost companies anywhere from $30 to $60 to process a single paper check, taking a large company’s payment process paperless can save millions of dollars a year.53

4. Innovation and Learning Perspective: “Can We Continue to Improve and Create Value?”

Learning and growth of employees are the foundation for all other goals in the balanced scorecard. The idea here is that capable and motivated employees, who possess the resources and culture needed to get the job done, will provide higher-quality products and services in a more efficient manner. Making this happen requires a commitment to invest in progressive human resource practices and technology. Typical metrics in this perspective are employee satisfaction/engagement, employee retention, employee productivity, training budget per employee, technologyPage 560 utilization, and organizational climate and culture. Many are tracked with employee surveys to gauge attitudes and opinions.

To what extent is/was your current or past employer committed to the innovation and learning of its employees? You can find out by completing Self-Assessment 16.1 .

SELF-ASSESSMENT 16.1 https://html1-cluster-e.mheducation.com/smartbook2/data/151605/highlighted_epubmhe/OPS/img/designelements/connect_art_rev.png

Assessing the Innovation and Learning Perspective of the Balanced Scorecard

The following survey was designed to assess the innovation and learning perspective of the balanced scorecard. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 16.1 in Connect.

1. Where does the company stand in terms of commitment to innovation and learning? Are you surprised by the results?

2. Use the three highest and lowest scores to identify the strengths and weaknesses of this company’s commitment to innovation and learning.

3. Based on your answer to question 2, provide three suggestions for what management could do to improve its commitment to innovation and learning.

Strategy Mapping: Visual Representation of the Path to Organizational Effectiveness

Have you ever worked for a company that failed to effectively communicate its vision and strategic plan? If yes, then you know how it feels to be disengaged because you don’t know how your work contributes to organizational effectiveness. Kaplan and Norton recognized this common problem and developed a tool called a strategy map.

A strategy map is a “visual representation of a company’s critical objectives and the crucial relationships among them that drive organizational performance.” Maps show relationships among a company’s strategic goals. This helps employees understand how their work contributes to their employer’s overall success.54 They also provide insight into how an organization creates value to its key constituents. For example, a map informs others about the knowledge, skills, and systems that employees should possess (innovation and learning perspective) to innovate and build internal capabilities (internal business perspective) that deliver value to customers (customer perspective), which eventually creates higher shareholder value (financial perspective).

We created an illustrative strategy map in Figure 16.5 . Starting with learning and growth, the arrows in the diagram show the logic that connects goals to internal processes, to customers, to financial goals, and finally to the long-term goal of providing shareholder value. For example, you can see that organizational culture affects the internal process goals related to innovation, operational improvements, and good corporate citizenship. This causal structure provides a strategic road map of how the company plans to achieve organizational effectiveness.

FIGURE 16.5 Sample strategy map for Dr Pepper Snapple Group Graphic example of a strategy map for the Dr Pepper Snapple group Sources: This map was based on information in “Dr Pepper Snapple Group to Boost Container Recycling, and More … ,” TheShelbyReport.com, February 12, 2016; C. Choi, “Dr Pepper to Test Naturally Sweetened Sodas,” FoodManufacturing.com, February 13, 2014; A. Gasparro and M. Esterl, “Keurig Reels In Dr Pepper for Its Coming Soda Machine,” TheWallStreetJournal.com, January 7, 2015; S. Frizell, “Coke and Pepsi Pledge to Cut Calories,” Time.com, September 23, 2014; M. Esterl, “How Dr Pepper Cuts Costs. And Then Cuts Costs Some More,” The Wall Street Journal, February 16, 2016, p R2; “Vision—Call to Breakthrough ACTION,” DrPepperSnappleGroup.com, accessed May 12, 2016.

You can also detect which of the four perspectives is most important by counting the number of goals in each perspective. For this sample map, there are four, five, eight, and four goals for the financial, customer, internal processes, and learning and growth perspectives, respectively. You can also see that internal process goals affect eight other goals—count the number of arrows coming from internal process goals. All told, the beauty of a strategy map is that it enables leaders to present a strategic road map to employees on one page. It also provides a clear statement about the criteria used to assess organizational effectiveness.

There is one final benefit to strategy maps. They serve as the starting point for any organization that wants to implement goal cascading or management by objectives.

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16.4

Some Financial Tools for Control

MAJOR QUESTION Financial performance is important to most organizations. What are the financial tools I need to know about?

THE BIG PICTURE

Financial controls are especially important. These include budgets, financial statements, and audits.

At some point in your career, you may very well be your own boss. That doesn’t mean you have to become a high-flying entrepreneur or found an amazing start-up. It simply means that in today’s “gig economy,” young workers are much more likely than ever before to join the approximately 53 million U.S. adults who work on-demand as freelancers or independent contractors for at least part of their working life.55 If this happens to be you, knowledge about financial tools will serve you well.

Photo of three women and two men looking at a computerFinancial control and contract employees. Five young coworkers meeting to discuss a project. One or more are likely freelancers given the increasing trend of companies hiring them. Hiring freelancers can save labor costs but it also can leave them feeling outside the normal comings and goings of the work environment.© Ingram Publishing RF

Hiring freelancers can save companies as much as a third of normal payroll costs, because most freelancers aren’t eligible for expensive employee benefits like paid time off, company medical coverage, and pensions.56 Nor do they experience the convenience of having their income taxes automatically withheld from their pay. At the same time, however, freelancers enjoy the freedom to work from home, make their own hours, choose their assignments, work on multiple assignments in different industries, and, yes, be their own boss. That includes being responsible for managing their cash flow and business expenses, as well as for setting money aside to pay their own income taxes, both of which can be a challenge when income is seasonable, variable, or both.

With this in mind, you can probably appreciate how important it is for you to understand the basics of financial controls. Whether as the manager of your own small “gig economy” business or as a manager on staff in an organization, you will need to monitor finances and be sure revenues are covering costs.

There are a great many kinds of financial controls, but here let us look at the following: budgets, financial statements, and audits. (Necessarily, this is merely an overview of this topic. Financial controls are covered in detail in other business courses.)

Budgets: Formal Financial Projections

A budget is a formal financial projection. It states an organization’s planned activities for a given period of time in quantitative terms, such as dollars, hours, or number of products. Budgets are prepared not only for the organization as a whole but alsoPage 563 for the divisions and departments within it. The point of a budget is to provide a yardstick against which managers can judge how well they are controlling monetary expenditures.

Various software tools are also available to help you manage personal or freelance budgeting, such as QuickBooks and apps like Mint and Venmo.57

Historically, managers have used three budget-planning approaches. Two of them—the Planning Programming Budgeting System and Zero Base Budgeting—are no longer favored and are now infrequently used. The dominant approach today is incremental budgeting.58

Incremental Budgeting

Incremental budgeting allocates increased or decreased funds to a department by using the last budget period as a reference point; only incremental changes in the budget request are reviewed. One difficulty is that incremental budgets tend to lock departments into stable spending arrangements; they are not flexible in meeting environmental demands. Another difficulty is that a department may engage in many activities—some more important than others—but it’s not easy to sort out how well managers performed at the various activities. Thus, the department activities and the yearly budget increases take on lives of their own.

Fixed versus Variable Budgets

In general, we can identify two types of incremental budgets: fixed and variable.

· Fixed budgets—where resources are allocated on a single estimate of costs. Also known as a static budget, a fixed budget allocates resources on the basis of a single estimate of costs. That is, there is only one set of expenses; the budget does not allow for adjustment over time. For example, you might have a budget of $50,000 for buying equipment in a given year—no matter how much you may need equipment exceeding that amount.

· Variable budgets—where resources are varied in proportion with various levels of activity. Also known as a flexible budget, a variable budget allows the allocation of resources to vary in proportion with various levels of activity. That is, the budget can be adjusted over time to accommodate pertinent changes in the environment. For example, you might have a budget that allows you to hire temporary workers or lease temporary equipment if production exceeds certain levels. As a freelancer, you might set up your budget to allow for the unexpected, like the purchase of a second monitor for your laptop if you accept an assignment that requires it.

Financial Statements: Summarizing the Organization’s Financial Status

A financial statement is a summary of some aspect of an organization’s financial status. The information contained in such a statement is essential in helping managers maintain financial control over the organization.

There are two basic types of financial statements: the balance sheet and the income statement.

The Balance Sheet: Picture of Organization’s Financial Worth for a Specific Point in Time

A balance sheet summarizes an organization’s overall financial worth—that is, assets and liabilities—at a specific point in time.

Assets are the resources that an organization controls; they consist of current assets and fixed assets. Current assets are cash and other assets that are readily convertible to cash within one year’s time. Examples are inventory, sales for which payment has not been received (accounts receivable), and U.S. Treasury bills or money market mutual funds.Page 564 Fixed assets are property, buildings, equipment, and the like that have a useful life that exceeds one year but that are usually harder to convert to cash. Liabilities are claims, or debts, by suppliers, lenders, and other nonowners of the organization against a company’s assets. If you are a member of the gig economy, the quarterly estimated federal and local taxes you will need to pay on your annual income are a financial liability of your business.

The Income Statement: Picture of Organization’s Financial Results for a Specified Period of Time

The balance sheet depicts the organization’s overall financial worth at a specific point in time. By contrast, the income statement summarizes an organization’s financial results—revenues and expenses—over a specified period of time, such as a quarter or a year.

You will need to understand an income statement if you end up self-employed or start a business. We created a sample profit and loss statement for a two-person operation consisting of an owner and one employee (see Table 16.1 ). The company is doing quite well with $204,357 of net income, computed by subtracting total expenses fromPage 565 gross profit. You can also see the types of expenses that confront any small business. You have expenses for insurance, payroll and payroll taxes, accounting, auto, rent, supplies, and other expenses.

TABLE 16.1 Sample Profit and Loss Statements

LACI, THE COMPUTER DOCTOR PROFIT & LOSS JANUARY 1 THROUGH DECEMBER 31, 2016

Income:

Jan 1–Dec 31, 16

Sales

  481,219.00

Services Income

  23,050.00

Total Income

504,269.00

Parts and Materials

    45,711.60

Gross Profit

 458,557.40

Expenses:

Bank Service Charges

        150.00

Charitable Donations

    2,000.00

Dues and Subscriptions

     1,520.88

Insurance:

General Liability Insurance

    1,925.00

Workman’s Compensation Insurance

     1,016.00

Total Insurance Expense:

     2,941.00

Payroll Taxes:

Payroll 941

   13,992.76

Federal Unemployment Tax

        103.00

State Unemployment Tax

        210.00

Total Payroll Taxes:

    14,305.76

Payroll:

Officer Wages

150,000.00

Salary and Wages

 49,896.50

Total Payroll:

 199,896.50

Accounting and Legal

      1,402.75

Automobile Expenses:

Maintenance

         140.16

Gas

     1,012.92

License

        828.31

Total Automobile Expenses:

      1,981.39

Office Rent

  24,000.00

Office supplies

      1,775.00

Repairs and Maintenance

         285.19

Telephone and Internet

     1,856.25

Utilities

    2,085.09

TOTAL EXPENSE:

  254,199.81

NET INCOME:

 204,357.59

Source: Angelo Kinicki.

Audits: External versus Internal

When you think of auditors, do you think of grim-faced accountants looking through a company’s books to catch embezzlers and other cheats? That’s one function of auditing, but besides verifying the accuracy and fairness of financial statements, the audit also is intended to be a tool for management decision making. Audits are formal verifications of an organization’s financial and operational systems.

You can imagine that audits of medium and large companies entail collecting, analyzing, and interpreting large amounts of information. Because of this, more and more companies are using data analytics to conduct audits; we discussed data analytics in Chapter 7 . Regarding the use of analytics, one expert concluded, “The use of analytics in the audit process results in better audit planning, focus, and recommendations.”59

Audits are of two types—external and internal.

External Audits—Financial Appraisals by Outside Financial Experts

An external audit is a formal verification of an organization’s financial accounts and statements by outside experts. The auditors are certified public accountants (CPAs) who work for an accounting firm (such as PricewaterhouseCoopers) that is independent of the organization being audited. Their task is to verify that the organization, in preparing its financial statements and in determining its assets and liabilities, followed generally accepted accounting principles.60

Photo of Leonardo DiCaprio and Brie Larson holding Academy AwardsAccountants at the Academy Awards? Brie Larson on the left with Leonardo DiCaprio holding their Academy Awards in 2016. Every year since 1929 the secret ballots for Oscar nominees voted on by members of the Academy of Motion Picture Arts and Sciences have been tabulated by accountants from the firm now known as PricewaterhouseCoopers. The accounting firm takes this event very seriously; secrecy is tight, and there is no loose gossip around the office water cooler. Two accountants tally the votes, stuff the winners’ names in the envelopes—the ones that will be handed to award presenters during the Academy Awards—and then memorize the winners’ names, just in case the envelopes don’t make it to the show. Accounting is an important business because investors depend on independent auditors to verify that a company’s finances are what they are purported to be.© Helga Esteb/Shutterstock RF

Internal Audits—Financial Appraisals by Inside Financial Experts

An internal audit is a verification of an organization’s financial accounts and statements by the organization’s own professional staff. Their jobs are the same as those of outside experts—to verify the accuracy of the organization’s records and operating activities. Internal audits also help uncover inefficiencies and thus help managers evaluate the performance of their control systems.

We would like to end this section on financial tools in a more personal manner by assessing your financial literacy. Self-Assessment 16.2 evaluates your knowledge in matters associated with interest-bearing accounts, investments, inflation, pensions, creditworthiness, and insurance. It’s a fun way to find out if your financial literacy is up to speed.

SELF-ASSESSMENT 16.2 https://html1-cluster-e.mheducation.com/smartbook2/data/151605/highlighted_epubmhe/OPS/img/designelements/connect_art_rev.png

Assessing Your Financial Literacy

The following survey was designed to assess your financial literacy. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 16.2 in Connect.

1. Where do you stand in terms of financial literacy?

2. Look at the statements you got incorrect, and identify the specific aspects of financial knowledge that you may be lacking.

3. What can you do to improve your financial literacy? Be specific.

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16.5

Total Quality Management

MAJOR QUESTION How do top companies improve the quality of their products or services?

THE BIG PICTURE

Total quality management (TQM) is dedicated to continuous quality improvement, training, and customer satisfaction. Two core principles are people orientation and improvement orientation. Some techniques for improving quality are employee involvement, benchmarking, outsourcing, reduced cycle time, and statistical process control.

In 2015, Midway USA, a fast-growing online retailer of equipment for hunting, shooting, and outdoor sports, became one of the rare two-time winners of the prestigious Baldrige Award. This award is “given by the President of the United States to businesses and to education, health care, and nonprofit organizations that apply and are judged to be outstanding in seven areas of performance excellence.” The seven areas are leadership; strategy; customers, analysis, and knowledge management; workforce; operations; and results. 61

Customer satisfaction is Midway’s No. 1 goal. Thus, the company, headquartered in Missouri, has incorporated customer data into its performance improvement system, and results are impressive. With more than 1.2 million active customers visiting its site, Midway has succeeded in earning a consistent customer approval rating of over 90%, beating out its top competitors for two years in a row. At the same time, Midway has boosted its employee satisfaction rating from 76% to 83% over the last 11 years, in part by asking employees to identify and prioritize what they need in order to achieve job satisfaction. Company managers are then able to help meet those requirements. Career development at the company is a given; more than 80 management positions are filled from within, because nearly 40% of its 350 employees participate in a formal leadership training program that includes mentoring and attendance at strategy meetings.62