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© 2007 Thomson/South-Western. All rights reserved.© 2007 Thomson/South-Western. All rights reserved.

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Organizational Organizational Control in a Control in a Complex Business Complex Business EnvironmentEnvironment

ChapterChapter

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Part 5 Control Challenges in the 21st CenturyPart 5 Control Challenges in the 21st Century

© 2007 Thomson/South-Western. All rights reserved. 15–2

1.1. Define and discuss the importance of organizational Define and discuss the importance of organizational control.control.

2.2. Identify the sequence of steps to be undertaken in a Identify the sequence of steps to be undertaken in a thorough control system.thorough control system.

3.3. Identify the factors that are important considerations Identify the factors that are important considerations in the design of a control system.in the design of a control system.

4.4. Describe the various criteria of effective control.Describe the various criteria of effective control.

5.5. Identify the factors that help determine the proper Identify the factors that help determine the proper amount of control.amount of control.

6.6. Define feedforward control, concurrent control, and Define feedforward control, concurrent control, and feedback control.feedback control.

LEARNING OBJECTIVESLEARNING OBJECTIVESWhen you have finished studying this chapter, When you have finished studying this chapter, you should be able to:you should be able to:


LEARNING OBJECTIVES LEARNING OBJECTIVES (cont’d)(cont’d)

7.7. Describe the difference between the philosophies Describe the difference between the philosophies of bureaucratic control and organic control.of bureaucratic control and organic control.

8.8. Describe some of the more important techniques Describe some of the more important techniques and methods for establishing financial control.and methods for establishing financial control.

9.9. Discuss some of the ethical issues related to the Discuss some of the ethical issues related to the control of employee behavior.control of employee behavior.

When you have finished studying this chapter, When you have finished studying this chapter, you should be able to:you should be able to:


Organizational Control DefinedOrganizational Control Defined

• Organizational ControlOrganizational Control The systematic process through which managers The systematic process through which managers

regulate organizational activities to make them regulate organizational activities to make them consistent with the expectations established in plans, consistent with the expectations established in plans, and to help them achieve all predetermined standards and to help them achieve all predetermined standards of performance.of performance.

• This definition implies that leaders must:This definition implies that leaders must: Establish performance standards.Establish performance standards. Develop mechanisms for gathering performance Develop mechanisms for gathering performance

information in order to assess the degree to which information in order to assess the degree to which standards are being met.standards are being met.


Control Process for Diverse and Control Process for Diverse and Multinational OrganizationsMultinational Organizations

• Setting Standards for PerformanceSetting Standards for Performance Whenever possible, the standards should be set in a Whenever possible, the standards should be set in a

manner that allows them to be compared with actual manner that allows them to be compared with actual performance.performance.

• Measuring Actual PerformanceMeasuring Actual Performance An organization must decide:An organization must decide:

What to measure.What to measure.When to measure.When to measure.How frequently to measure.How frequently to measure.


Control Process for Diverse and Control Process for Diverse and Multinational Organizations (cont’d)Multinational Organizations (cont’d)

• Comparing Actual Performance With StandardsComparing Actual Performance With Standards This step involves determining if actual performance This step involves determining if actual performance

compared to standards falls within acceptable limits.compared to standards falls within acceptable limits.

• Responding to DeviationsResponding to Deviations If the deviation from performance is unacceptable, If the deviation from performance is unacceptable,

then corrective action is warranted. then corrective action is warranted. If the deviation is acceptable, no correction action is If the deviation is acceptable, no correction action is

necessary.necessary.


Figure 15.1Figure 15.1 Steps in the Control ProcessSteps in the Control Process


Designing Quality and Effectiveness Designing Quality and Effectiveness into the Control Systeminto the Control System

• Factors affecting control system quality to Factors affecting control system quality to consider when designing a control system:consider when designing a control system:

Identifying design factors.Identifying design factors.

Establishing effectiveness criteria.Establishing effectiveness criteria.

Selecting the proper amount of control.Selecting the proper amount of control.

Identifying the focal point for control.Identifying the focal point for control.


Figure 15.Figure 15.2 2 Control System–Design IssuesControl System–Design Issues


Design Factors Affecting Control Design Factors Affecting Control System QualitySystem Quality

• The Amount of Variety in the Control SystemThe Amount of Variety in the Control System Variety: the number of activities, processes, or items Variety: the number of activities, processes, or items

that are measured and controlled.that are measured and controlled. More variety leads to less predictability.More variety leads to less predictability.

• Law of Requisite Variety in Control SystemsLaw of Requisite Variety in Control Systems Variety in control systems to match the variety in the Variety in control systems to match the variety in the

systems to be controlled can be achieved by:systems to be controlled can be achieved by: Increasing variety in the control system.Increasing variety in the control system.Reducing variety in the system being controlled.Reducing variety in the system being controlled.


Design Factors Affecting Control Design Factors Affecting Control System Quality (cont’d)System Quality (cont’d)

• Ability to Anticipate ProblemsAbility to Anticipate Problems If a deviation can be anticipated before it occurs:If a deviation can be anticipated before it occurs:

Corrective action can be instituted more quickly. Corrective action can be instituted more quickly. Negative consequences of the deviation (e.g., Negative consequences of the deviation (e.g.,

unacceptable performance time lags) are reduced.unacceptable performance time lags) are reduced.

• Sensitivity of the Measuring DeviceSensitivity of the Measuring Device Sensitivity:Sensitivity: the precision with which the measurement the precision with which the measurement

can be made.can be made. Use a device sensitive enough to adequately Use a device sensitive enough to adequately

measure the system being controlled is required.measure the system being controlled is required.


Figure 15.Figure 15.3 3 Time Lags in ControlTime Lags in Control


Design Factors Affecting Control Design Factors Affecting Control System Quality (cont’d)System Quality (cont’d)

• Composition of Feedback Composition of Feedback Reports Reports Variance ReportingVariance Reporting

Highlights only those things Highlights only those things that fail to meet the that fail to meet the established standards.established standards.

Management by ExceptionManagement by ExceptionFocuses on the elements Focuses on the elements

that are not meeting the that are not meeting the standards.standards.


Criteria for Effective ControlCriteria for Effective Control

• Related to Organizational StrategyRelated to Organizational Strategy A control system should measure what is important A control system should measure what is important

now and what will be important in the future… not now and what will be important in the future… not what was important in the past.what was important in the past.

• Uses All Steps in the Control ProcessUses All Steps in the Control Process To be effective, a control system must employ all of To be effective, a control system must employ all of

the steps in the control process.the steps in the control process.

• Composed of Objective and Subjective Composed of Objective and Subjective MeasuresMeasures Effective control systems typically require managers Effective control systems typically require managers

to blend quantitative (objective) and qualitative to blend quantitative (objective) and qualitative (subjective) performance measures.(subjective) performance measures.


Criteria for Effective Control (cont’d)Criteria for Effective Control (cont’d)

• Incorporates Timeliness in Feedback ReportingIncorporates Timeliness in Feedback Reporting Timeliness is the degree to which the control system Timeliness is the degree to which the control system

provides information when it is needed.provides information when it is needed.

• Acceptable to a Diverse Work ForceAcceptable to a Diverse Work Force To be effective, organizational controls must be To be effective, organizational controls must be

accepted by employees.accepted by employees. The control system should motivate workers to The control system should motivate workers to

recognize standards and act to achieve them.recognize standards and act to achieve them.


Selecting the Proper Amount of Selecting the Proper Amount of ControlControl• Costs in Control SystemsCosts in Control Systems

Two basic categories of costs need to be considered Two basic categories of costs need to be considered relative to control systems:relative to control systems:The costs associated with the information needed The costs associated with the information needed

to perform the control process.to perform the control process.The costs associated with undesirable deviations The costs associated with undesirable deviations

from standards.from standards.


Figure 15.Figure 15.4 4 Cost Trade-Offs in a Control SystemCost Trade-Offs in a Control System


Selecting the Proper Amount of Selecting the Proper Amount of Control (cont’d)Control (cont’d)

• Reliability of the SystemReliability of the System Reliability refers to the probability that the object or Reliability refers to the probability that the object or

process being controlled will consistently behave in process being controlled will consistently behave in an acceptable manner.an acceptable manner.

The basic premise is that the more reliable the The basic premise is that the more reliable the process, the less control that is needed.process, the less control that is needed.

• Importance of the Process Being ControlledImportance of the Process Being Controlled The more important the object or process being The more important the object or process being

controlled, the greater the amount of control that controlled, the greater the amount of control that should be exercised.should be exercised.


Selecting the Focal Point for ControlSelecting the Focal Point for Control

• Feedforward (Preventive) ControlFeedforward (Preventive) Control Focuses on detecting undesirable material, financial, or human Focuses on detecting undesirable material, financial, or human

resources that serve as inputs to the transformation process.resources that serve as inputs to the transformation process.

• Concurrent ControlConcurrent Control Focuses on the transformation process to ensure that it is Focuses on the transformation process to ensure that it is

functioning properly.functioning properly.

• Feedback ControlFeedback Control Focuses on discovering undesirable output and implementing Focuses on discovering undesirable output and implementing

corrective action.corrective action.

• Multiple Focal PointsMultiple Focal Points Most organizations use several control systems focused on Most organizations use several control systems focused on

various phases of the transformation process.various phases of the transformation process.


Figure 15.Figure 15.5 5 Control Focal PointsControl Focal Points

Pre-process In-process Post-process


Table 15.Table 15.1 1 Descriptions and Examples of Operations Transformation ProcessesDescriptions and Examples of Operations Transformation Processes

Transformation Description Examples

Physical or chemical Cutting, bending, joining, or chemically Manufacturing company, altering raw materials to make a product chemical processor, oil refinery

Locational Provide transportation function Airlines, trucking companies, package delivery service, U.S. Postal Service

Storage Hold and then release a commodity or item Warehouses and banks

Exchange Transfer possession and ownership of a Wholesale and retail organizationscommodity or item

Physiological Improve the physical or mental well-being Hospitals, healthcare clinicsof sick and injured people

Informational Transmit information to customers Radio and television news departments,computer information services

Entertainment Impart an attitudinal change Motion picture industry, programming departments of television networksto their customers

Educational Impart knowledge to customers Schools, universities


Control Philosophies for LeadersControl Philosophies for Leaders

• Bureaucratic ControlBureaucratic Control Use of formal mechanisms to influence behavior, Use of formal mechanisms to influence behavior,

assess performance, and correct unacceptable assess performance, and correct unacceptable deviations from standards. deviations from standards.

• Organic Control (“Clan Control”)Organic Control (“Clan Control”) Reliance upon social values, traditions, shared Reliance upon social values, traditions, shared

beliefs, flexible authority, and trust to assess beliefs, flexible authority, and trust to assess performance and correct unacceptable deviations.performance and correct unacceptable deviations.


Bureaucratic ControlBureaucratic Control Organic ControlOrganic Control

Task-oriented Task-oriented management stylemanagement style

Relationship-oriented Relationship-oriented management stylemanagement style

Culture favors decision Culture favors decision making at the topmaking at the top

Culture encourages Culture encourages employee participationemployee participation

Employees that lack Employees that lack education and experienceeducation and experience

Highly educated, highly Highly educated, highly trained employeestrained employees

Performance that can be Performance that can be quantified and measuredquantified and measured

Performance that is Performance that is difficult to measuredifficult to measure

Bureaucratic versus Organic ControlsBureaucratic versus Organic Controls


Table 15.Table 15.2 2 Bureaucratic and Organic Methods of ControlBureaucratic and Organic Methods of Control

Bureaucratic Organic Purpose Employee compliance Employee commitment Technique Rigid rules and policies, Corporate culture, individual self-

strict hierarchy, formalized discipline, cohesive peer groups, selection and training selection and socialization

Performance Clearly defined standards Emphasizes group or system expectation of individual performance performance Organizational Tall structure, top-down controls Flat structure, mutual influence structure Rules and procedures for Shared values, goals, and traditions

coordination and control for coordination and control Authority resides in position Authority resides with knowledge

and expertise Rewards Based upon individual employee Based upon group achievements

achievements and equity across employees

Participation Formalized and narrow Informal and broad

Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from “From Control to Commitment in the Workplace” by R. E. Walton, March/April 1985, 76–85. Copyright © by the President and Fellows of Harvard College. All rights reserved.


Selecting A Control Style In Today’s Selecting A Control Style In Today’s Diverse And Multinational Diverse And Multinational OrganizationsOrganizations• Top-level leaders are faced with a dilemma in Top-level leaders are faced with a dilemma in

choosing a control style for their organization.choosing a control style for their organization.• Managers should evaluate:Managers should evaluate:

Individual management styleIndividual management style Organizational cultureOrganizational culture Employee professionalismEmployee professionalism Performance measures.Performance measures.

• The choice of a control style is contingent on all The choice of a control style is contingent on all of these situational factors.of these situational factors.


Impact of Information Technology on Impact of Information Technology on Organizational ControlOrganizational Control

• Technological advances and improvements Technological advances and improvements serve to:serve to: Get critical control information to managers in a more Get critical control information to managers in a more

timely fashion.timely fashion. Allow managers to make the proper control Allow managers to make the proper control

responses more quickly.responses more quickly. Disseminate the information on those decisions more Disseminate the information on those decisions more

quickly so that the negative consequences associated quickly so that the negative consequences associated with out-of-control situations can be minimized.with out-of-control situations can be minimized.


Mechanisms for Financial ControlMechanisms for Financial Control

• Financial StatementsFinancial Statements Balance sheetBalance sheet

Summary of an organization’s financial position at Summary of an organization’s financial position at a given point in time, showing assets, liabilities, a given point in time, showing assets, liabilities, and owner’s equity.and owner’s equity.

Income statementIncome statementSummary of an organization’s financial Summary of an organization’s financial

performance over a given time interval, showing performance over a given time interval, showing revenues, expenses, and bottom-line profit or loss.revenues, expenses, and bottom-line profit or loss.


Key Financial TermsKey Financial Terms

• AssetAsset A thing of value that an A thing of value that an

individual or organization individual or organization owns.owns.

• Current AssetCurrent Asset An item that can be An item that can be

converted into cash in a converted into cash in a short time period.short time period.

• Fixed AssetFixed Asset An asset that is long term in An asset that is long term in

nature and cannot be nature and cannot be converted quickly into cash.converted quickly into cash.

• LiabilityLiability A debt or obligation of the A debt or obligation of the

firm.firm.

• Current LiabilityCurrent Liability A debt that must be paid in A debt that must be paid in

the near future.the near future.

• Long-term LiabilityLong-term Liability A debt that is payable over A debt that is payable over

a long time span.a long time span.


Table 15.Table 15.33 Balance SheetBalance Sheet


Table 15.Table 15.4 4 Income StatementIncome Statement


Financial RatiosFinancial Ratios

• Liquidity ratiosLiquidity ratios Indicators of the firm’s Indicators of the firm’s

ability to meet its short-ability to meet its short-term debt obligations.term debt obligations.

• Profitability ratiosProfitability ratios Indicators of the Indicators of the

relative effectiveness, relative effectiveness, or profitability, of the or profitability, of the organization.organization.

• Debt ratiosDebt ratios Indicators of the firm’s Indicators of the firm’s

ability to handle long-ability to handle long-term debt.term debt.

• Activity ratiosActivity ratios Indicators of Indicators of

performance with performance with respect to key activities respect to key activities defined by defined by management.management.


Ethical Issues in the Control of a Ethical Issues in the Control of a Diverse Work ForceDiverse Work Force

• Drug TestingDrug Testing Pre-employment testingPre-employment testing Testing current employeesTesting current employees

RandomRandom Probable causeProbable cause AccidentAccident

• Undercover SurveillanceUndercover Surveillance Internal securityInternal security External securityExternal security Electronic devicesElectronic devices

• Computer MonitoringComputer Monitoring Privacy in communicationsPrivacy in communications Measuring performanceMeasuring performance Liability for harassmentLiability for harassment


Implications for LeadersImplications for Leaders

• Develop a control system for each important Develop a control system for each important product, service, process, or activity within the product, service, process, or activity within the organization.organization.

• Incorporate sufficient variety, sensitivity, Incorporate sufficient variety, sensitivity, anticipation capability, and feedback into the anticipation capability, and feedback into the control system.control system.

• Determine the appropriate points within the Determine the appropriate points within the organization where control systems should be organization where control systems should be focused.focused.


Implications for Leaders (cont’d)Implications for Leaders (cont’d)

• Gauge the control system’s effectiveness by:Gauge the control system’s effectiveness by: Considering its relationship to corporate strategy.Considering its relationship to corporate strategy. Its completeness.Its completeness. The degree to which it incorporates objective and The degree to which it incorporates objective and

subjective performance measures.subjective performance measures. Its timeliness.Its timeliness. Its acceptability to individuals within the organization.Its acceptability to individuals within the organization.


Implications for Leaders (cont’d)Implications for Leaders (cont’d)

• Understand the intricacies of the financial data Understand the intricacies of the financial data contained in the organization’s financial contained in the organization’s financial statements, and use various financial control statements, and use various financial control techniques to assess the firm’s financial health.techniques to assess the firm’s financial health.

• Adopt a philosophy of control that is consistent Adopt a philosophy of control that is consistent with the management style, corporate culture, with the management style, corporate culture, employee professionalism, and performance employee professionalism, and performance measures present within the organization.measures present within the organization.

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