Chapter 16

Chapter 16

Chapter 16 Control Management 4th Edition Chuck Williams Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Prepared by Deborah Baker Texas Christian University 1 What Would You Do? Walgreens Headquarters, Deerfield, Illinois. Walgreens has been an exceptional investment, but past performance is no guarantee of future performance Competition is increasingfrom warehouse discounters, CVS, WalMart, and PBM mail-order pharmacies Non-prescription goods account for 33 percent of Walgreens sales How can Walgreen continue to grow same store sales?

What can it do about its competition? Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 2 Basics of Control After reading this section, you should be able to: 1. describe the basic control process. Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 3 The Control Process Begins Begins with with establishment establishment of of clear clear standards standards of of performance performance Involves Involves aa comparison comparison of of actual actual performance performance to to desired

desired performance performance Takes Takes corrective corrective action action to to repair repair performance performance deficiencies deficiencies Is Is aa dynamic, dynamic, cybernetic cybernetic process process 1 Consists Consists of of feedback feedback control, control, concurrent concurrent control, control, feedforward feedforward control control Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved But But control control isnt isnt always always

worthwhile worthwhile or or possible possible 4 Setting Standards 1. A good standard must enable goal achievement. 2. Listening to customers or observing competitors. 3. Benchmarking other companies. Determine what to benchmark. Identify the companies against which to benchmark. Collect data to determine other companies performance standards. 1.1 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 5 Comparison to Standards 1.

Compare actual performance to performance standards. The use of secret shoppers helps verify that performance standards are being met. 1.2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 6 Corrective Action 1.3 Identify performance deviations Analyze those deviations Develop and implement programs to correct them Identify Identify Control Control Process

Process Correct Correct Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Analyz Analyz ee 7 Dynamic, Cybernetic Process Set Set Standards Standards Develop Develop && Implement Implement Program Program for for Corrective Corrective Action Action Measure Measure Performance Performance Compare Compare with with Standards Standards 1.4

Analyze Analyze Deviations Deviations Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Identify Identify Deviations Deviations Adapted from Exhibit 16.1 8 Feedback, Concurrent, and Feedforward Control 1.5 Feedback Feedback Control Control Gather Gatherinformation informationabout aboutperformance performance deficiencies deficienciesafter afterthey theyoccur occur Concurrent Concurrent

Control Control Gather Gatherinformation informationabout aboutperformance performance deficiencies deficienciesas asthey theyoccur occur Feedforward Feedforward Control Control Monitor Monitorperformance performanceinputs inputsrather rather than thanoutputs outputsto toprevent preventor orminimize minimize performance performancedeficiencies deficienciesbefore beforethey they occur occur

Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 9 Feedforward Control Guidelines for Using Feedforward Control 1. 1. Thorough Thoroughplanning planningand andanalysis analysisare arerequired. required. 2. 2. Careful Carefuldiscrimination discriminationmust mustbe beapplied appliedin inselecting selecting input inputvariables. variables. 3. 3. The Thefeedforward feedforwardsystem systemmust mustbe bekept keptdynamic. dynamic. 4.

4. AAmodel modelof ofthe thecontrol controlsystem systemshould shouldbe bedeveloped. developed. 5. 5. Data Dataon oninput inputvariables variablesmust mustbe beregularly regularlycollected. collected. 6. 6. Data Dataon oninput inputvariables variablesmust mustbe beregularly regularlyassessed. assessed. 7. 7. Feedforward Feedforwardcontrol controlrequires requiresaction. action. 1.5 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved

Adapted from Exhibit 16.2 10 Control Loss Is control worthwhile? Maybe, maybe not. Managers must assess the regulation costs and the cybernetic feasibility. Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 11 Control Methods After reading these sections, you should be able to: 2. discuss the various methods that managers can use to maintain control. 3. describe the behaviors, processes, and outcomes that todays managers are choosing to control their organizations. Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved

12 Control Methods Bureaucratic Bureaucratic Normative Normative Objective Objective Concertive Concertive Self-Control Self-Control 2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 13 Bureaucratic Control Top-down control Use policies and rules to control employees

Often inefficient and highly resistant to change Use rewards and punishment to influence employee behaviors 2.1 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 14 Objective Control Objective Objective Control Control Use Useof ofobservable observablemeasures measuresof ofworker worker behavior behavioror oroutputs outputsto toassess assess performance performanceand andinfluence influencebehavior behavior

Behavior Behavior Control Control Regulation Regulationof ofthe thebehaviors behaviorsand and actions actionsthat thatworkers workersperform perform on onthe thejob job Output Output Control Control Regulation Regulationof ofworkers workersresults resultsor or outputs outputsthrough throughrewards rewardsand and incentives

incentives 2.2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 15 Doing the Right Thing Dont Dont Cheat Cheat on on Travel Travel Expense Expense Reports Reports Workers Workersare areoften oftentempted temptedto topad padtheir theirtravel travel expense expensereports reports Its Itsoften oftenjustified justified by by feeling feeling that that they they are are entitled entitled

IfIfyou youcant canttrust trustan anemployee employeeto tobe betruthful truthful on onan anexpense expensereport, report,how how can canyou you trust trust them themwith with decisions decisionsinvolving involvingmillions millionsof ofdollars? dollars? 2.2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 16 Effective Output Control 1. Output control measures must be reliable, fair, and accurate.

2. Employees and managers must believe that they can produce the desired results. 3. The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance. 2.2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 17 Normative Control Normative Normative Control Control Created by: careful selection of employees observing experienced employees & listening to stories about the comp 2.3 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 18 Concertive Control

Concertive Concertive Control Control Regulation Regulationof ofworkers workersbehavior behaviorand and decisions decisionsthrough throughwork workgroup groupvalues values and andbeliefs beliefs Autonomous work groups operate without managers group members control processes, output, and behaviors 2.4 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 19 Self-Control

Also known as self-management Employees control their own behavior Employees make decisions within well-established boundaries Managers teach others the skills they need to maximize work effectiveness Employees set goals and monitor their own progress 2.5 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 20 What to Control? Balanced Balanced Scorecard Scorecard Customer Customer Defections Defections Budgets, Budgets, Cash CashFlow, Flow, EVA EVA

Quality Quality Waste Wasteand and Pollution Pollution 3 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 21 The Balanced Scorecard Customer Customer Perspective Perspective Innovation Innovation and and Learning Learning Perspective Perspective Internal Internal Perspective Perspective Financial Financial Perspective Perspective

3.1 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 22 Advantages of the Balanced Scorecard 1. Forces managers to set goals and measure performance in each of the four areas 2. Minimizes the chances of suboptimization performance improves in one area, but at the expense of others 3.1 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 23 The Balanced Scorecard: Southwest Airlines 3.1 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 24 The Financial Perspective Cash Cashflow flow analysis

analysis Predicts Predictshow howchanges changesin inaabusiness business will willaffect affectits itsability abilityto totake takein inmore more cash cashthan thanititpays paysout out Provide Provideaasnapshot snapshotof ofaacompanys companys Balance sheets Balance sheets financial position at a particular time financial position at a particular time Income Income statements statements

3.2 Financial Financial ratios ratios Show Showwhat whathas hashappened happenedto toan an organizations organizationsincome, income,expenses, expenses, and andnet netprofit profitover overaaperiod periodof oftime time Used Usedto totrack trackliquidity, liquidity,efficiency, efficiency, and andprofitability profitabilityover overtime timecompared compared

to toother otherbusinesses businessesin inits itsindustry industry Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 25 Basic Accounting Tools Steps Steps for for aa Basic Basic Cash Cash Flow Flow Analysis Analysis 1. Forecast sales 2. Project changes in anticipated cash flows 3. Project anticipated cash outflows 4. Project net cash flows by combining anticipated cash inflows and outflows 3.2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16.5 26 Basic Accounting Tools Parts Parts of

of aa Basic Basic Balance Balance Sheet Sheet 3.2 1. Assets Current assets Fixed assets 2. Liabilities Current liabilities Long-term liabilities 3. Owners equity Stock Additional paid in capital Retained earnings Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16.5 27 Basic Accounting Tools Basic Basic Income Income Statement Statement 3.2 + = = = = =

SALES REVENUE sales returns and allowances other income NET REVENUE cost of goods sold GROSS PROFIT total operating expenses INCOME FROM OPERATIONS interest expense PRETAX INCOME income tax NET INCOME Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16.5 28 Financial Ratios LIQUIDITY LIQUIDITY RATIOS RATIOS LEVERAGE LEVERAGE RATIOS RATIOS Current Current Ratio Ratio Debt Debt to to Equity Equity

Quick Quick (Acid (Acid Test) Test) Ratio Ratio Debt Debt Coverage Coverage EFFICIENCY EFFICIENCY RATIOS RATIOS PROFITABILITY PROFITABILITY RATIOS RATIOS Inventory Inventory Turnover Turnover Gross Gross Profit Profit Margin Margin Average Average Collections Collections Period Period Return Return on on Equity Equity

3.2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16.6 29 Common Kinds of Budgets 3.2 Revenue Revenue Budgets Budgets Used Used to to project project or or forecast forecast future future sales sales Expense Expense Budgets Budgets Used Used to to determine determine spending spending on

on supplies, supplies, projects, projects, or or activities activities Profit Profit Budgets Budgets Used Used by by profit profit centers, centers, which which have have profit profit and and loss loss responsibility responsibility Cash Cash Budgets Budgets Used Used to to forecast forecast the the cash cash aa company company will

will have have for for expenses expenses Capital Capital Expenditure Expenditure Budgets Budgets Used Used to to forecast forecast large, large, long-lasting long-lasting investments investments Variable Variable Budgets Budgets Used Used to to project project costs costs across across varying varying levels levels of of sales/revenues sales/revenues Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved

Adapted from Exhibit 16.7 30 Economic Value Added (EVA) Economic Economic Value Value Added Added The Theamount amountby bywhich whichcompany company profits profitsexceed exceedthe thecost costof ofcapital capital in inaagiven givenyear year Common CommonCosts Costsof ofCapital Capital

Long-term Long-termbank bankloans loans Interest Interestpaid paidto tobondholders bondholders Dividends Dividendsand andgrowth growthin instock stockvalue valuethat thataccrue accrueto to shareholders shareholders 3.2 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 31 Economic Value Added (EVA) 3.2 1. 1. Calculate Calculatenet net operating operating

profit profit after aftertax tax $3,500,000 $3,500,000 2. 2. Identify Identifyhow howmuch muchcapital capital the thecompany companyhas hasinvested invested $16,800,000 $16,800,000 3. 3. Determine Determinethe the cost cost paid paid for forcapital capital 10% 10% 4. 4. Multiply

Multiplycapital capitalused used(step (step2) 2) times timescost costof ofcapital capital(step (step3) 3) (10% (10%xx$16,800,000) $16,800,000) == $1,680,000 $1,680,000 5. 5. Subtract Subtracttotal totaldollar dollarcost costof of capital capitalfrom fromnet net profit profitafter after taxes taxes $3,500,000 $3,500,000net netprofit

profit -$1,680,000 -$1,680,000cost costof ofcapital capital $1,820,000 $1,820,000EVA EVA Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit16.8 32 Why Is EVA Important? Shows whether a business, division, department, profit center, or product is paying for itself Makes managers at all levels pay closer attention to their segment of the business Encourages managers and workers to be creative in looking for ways to improve EVA performance 3.2 Chapter 16

Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 33 The Customer Perspective Controlling Customer Defections Monitoring customer defections: identify which customers are leaving the company measuring the rate at which they are leaving 3.3 Obtaining a new customer costs five times as much as keeping a current one Customers who have left are likely to tell you what you are doing wrong Understanding why a customer leaves can help fix problems and make changes Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 34 The Internal Perspective Controlling Quality Excellence

Excellence Value Value Conformance Conformanceto toExpectations Expectations 3.4 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 35 The Internal Perspective Controlling Quality 3.4 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Exhibit 16.12 36 Controlling Waste and Pollution Good Goodhousekeeping housekeeping Material/product Material/product substitution substitution Process Processmodification modification

3.5 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved 37 Controlling Waste and Pollution Waste Prevention & Reduction Recycle & Reuse Waste Treatment Waste Disposal 3.5 Chapter 16 Copyright 2007 by South-Western, a division of Thomson Learning. All rights reserved Adapted from Exhibit 16.13 38

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