The controlling function helps managers protect an organization's

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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