Chapter 16 – Managerial Control
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Bottom-up Budgeting
➢ Most organizations prefer to use a bottom-up budgeting process in which budgets are usually
prepared by those who must operate within them. Thus, budgets are submitted by operational
personnel to superiors for ultimate approval.
ADVANTAGES OF BUDGETING
The advantages of budgeting are that budgets:
➢ Help translate objectives and tasks required to achieve objectives into dollar terms.
DISADVANTAGES OF BUDGETS
The disadvantages of budgeting include:
➢ It can be a time-consuming, and costly process.
Furthermore, budgets can:
➢ Result in overspending because budgets are usually expressed in inflationary and overstated
terms.
LECTURETTE 16.2: Management by Objectives For Control
1 Adapted from R. Anthony, J. Dearden, and N. Bedford, Management Control Systems, 5th ed. (Homewood, IL: Richard D. Irwin,
Chapter 16 – Managerial Control
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MANAGEMENT BY OBJECTIVES – WHAT IS IT?
1. Management-by-Objectives (MBO) is a process by which organization members can work together to
establish mutual goals.
2. MBO is based on the notion that people are committed to the attainment of goals that they help to
establish.
THE MBO PROCESS
MBO car, be viewed as a process in four major stages:
STAGE 1 Top management sets overall corporate objectives and disseminates them down
through the organization for appropriate action.
SETTING OBJECTIVES
1. In order for MBO objectives to maximize performance factors for both the individual and the organi-
zation, it is important to:
➢ State objectives in clear, concise, objective, realistic, and measurable terms.
2. There are two basic categories of objectives: (1) performance objectives and (2) personal develop-
ment objectives.
Performance Objectives
➢ Routine Objectives – maintain the status quo.
Personal Development Objectives
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➢ Set some goal that will result in some form of personal growth and development.
TARGET AREAS FOR CORPORATE OBJECTIVES
Among the areas that can be selected for corporate objectives are:
➢ Market share
➢ Innovation
ADVANTAGES OF THE MBO PROCESS
Management By Objectives:
➢ Helps to integrate objectives and effort.
DISADVANTAGES OF THE MBO PROCESS
The main disadvantages of MBO are that it:
➢ Is time-consuming and expensive.
2 Adapted from P. Drucker, The Practice of Management (New York: Harper & Brothers, 1954); J. Kondrasuk, ‘Studies in MBO Ef-
fectiveness,’ Academy of Management Review 6,1981, 419-430; J. Muczyk and B. Reisman, “MBO as A Complement to Effective
Leadership, ” Academy of Management Executive 3, 1989, 131-138; M. Tubbs, ‘Goal-Sening: A Meta-Analytic Examination of the
Empirical Evidence,” Journal of Applied Psychology 71, 1986, 474-483
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1. What controls can you identify in the management of your school or at a company where you
now work (or recently worked)? If you can, interview a manager or employee of the organiza-
tion to learn more about the controls in use there. How might the organization’s performance
change if those controls were not in place?
Students will have a wide range of answers to this question, but be sure they consider all three types
of control mechanisms – bureaucratic, market, and clan control. Types of control mechanisms can in-
clude policies and procedures, performance reviews, quality control standards, budgets, balance
falter.
2. How are leadership and control different? How are planning and control different? How are
structure and control different?
Leadership, as defined earlier, is the process of influencing others to behave in a preferred way to
achieve organizational objectives. Control, on the other hand, is the process of measuring the progress
towards these organizational objectives and, where necessary, applying corrective measurement. So,
3. Imagine you are the sales manager of a company that sells medical supplies to hospitals nation-
wide. You have 10 salespeople reporting to you. You are responsible for your department
achieving a certain level of sales each year. In general terms, how might you go about taking
each step in the control cycle?
As indicated in the text, the four steps are:
1. Setting performance standards.
DISCUSSION QUESTIONS
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4. In the situation described in Question 3, what actions would you need to take if sales fell far be-
low the budgeted level? What, if any, actions would you need to take if sales far exceeded the
sales budget? If sales are right on target, does effective controlling require any response from
you? (Would your answer differ if the department were on target overall, but some salespeople
fell short and others exceeded their target?)
Whether sales fall far below the budgeted level, or exceed it, the first question that must be asked is
why? Sales that are below the proper level can be due to any number of things – lack of sales train-
5. Besides sales and expenses, identify five other important control measures for a business. In-
clude at least one nonfinancial measure.
6. What are the pros and cons of bureaucratic controls such as rules, procedures, supervision, and
the like?
The pros of rules, procedures, and supervision cause an organization’s personnel to focus on those be-
haviors that management requires or desires. They provide employees with a set of day–to–day guide-
7. Suppose a company at which executives were rewarded for meeting targets based only on prof-
its and stock price switches to a balanced scorecard that adds measures for customer satisfac-
tion, employee engagement, employee diversity, and ethical conduct. How, if at all, would you
expect executive’s performance to change in response to the new control system? How, if at all,
would you expect the company’s performance to change?
Chapter 16 – Managerial Control
Peter Drucker says that “what gets measured gets done” and you could expect the same to hold true in
8. Google has begun offering Google Apps, such as Gmail, Google Calendar, and Docs & Spread-
sheets, as collaboration tools for employees. Describe how the company could use market con-
trols to determine whether Google employees will use these software programs or competing
software (e.g. Word and Excel).
Google could use the number of documents prepared in each application as a form of market control
9. How effective is clan control as a control mechanism? What are its strengths? Its limitations?
When would a manager rely on clan control the most?
The effect of clan control as a control mechanism depends, to a large degree, on the strengths of the
culture. If it is a very strong culture and a very cohesive organization, the impact will be substantial.
10. Does empowerment imply the loss of control? Why or why not?
Empowerment (or the sharing of power with employees) does not necessarily imply a loss of control
since it involves personnel in the management and processes of their business unit, not the assignment
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11. Some people use the concept of “personal control” to describe the application of business con-
trol principles to individual careers. Thinking about your school performance and career plans,
which steps of the control process (Exhibit 16.3) have you been applying effectively? How do
you keep track of your performance in meeting your career and life goals? How do you meas-
ure your success? Does clan control help you meet your personal objectives?
Answers to these questions will vary widely. But a typical student might use bureaucratic control to
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EXPERIENTIAL EXERCISE 16.1 – SAFETY PROGRAM
Objectives
1. To understand some of the specific activities that fall under the management functions planning or-
ganizing, controlling and staffing, and directing.
Suggested Responses
The steps in instituting a safety program, would be the creation of a safety committee. The charge of this
committee would be to create a corporate safety policy procedures and rules. There must be planning of
Teaching
Tips
1. Have students do this exercise twice – once before coming to class, and once after you have
completed your lecture/discussion on control. Then get students to meet in small groups and
EXERCISE 16.2 – PRELIMINARY, CONCURRENT, AND FEEDBACK CONTROL
Objectives
1. To demonstrate the need for control procedures.
2. To gain experience in determining when to use preliminary, concurrent, and feedback controls.
Suggested Responses
HRM and general administration – to do a better job in the future of recruiting personnel. Concurrent
EXPERIENTIAL EXERCISES
Chapter 16 – Managerial Control
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Engineering – Preliminary controls could be implemented to improve inventory control of obsolete inven-
tory. Concurrent controls would be the result of defective detection when substandard inventory is ob-
served. Engineering changes are made concurrently when obsolete inventory is detected. Feedback con-
trols of engineering are the result of worker unrest and the possible formulation of a union. Feedback
controls are recognized by the discrimination charges and poor worker morale is observed.
Suggested Responses to Discussion Questions
1. For which control(s) was it easier to determine application? For which was it harder?
Feedback controls are easiest to determine after the fact problems in finance, marketing, engineering,
2. Would this exercise be better assigned to groups or to individuals?
Teaching
Tips
1. Some students, especially those with little work experience, may need some coaching with re-
spect to the responsibilities of various functional groups.
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The Grizzly Bear Lodge
Case Summary:
Diane and Rudy Conrad own a small lodge outside Yellowstone National Park. The lodge can accommo-
Now the Conrads are thinking about expanding the business. The property next door is available, and it
would give them space for 20 more rooms. Currently their annual sales total $300,000, with all expenses
(mortgage, payroll, maintenance, etc.) running at $230,000, leaving an annual income of $70,000 per
year. They want to make several other improvements as well, working with local businesses to offer
guided rafting, fishing, hiking, and horseback riding trips, and expanding their restaurant. Eventually,
they would like to be open year round.
Chapter Topics Related to the Case:
• Discuss the concept of control
Case Discussion Questions:
1. Discuss how Rudy and Diane can use feedforward, concurrent, and feedback controls both now
and in the future at the Grizzly Bear Lodge to ensure their guests’ satisfaction.
Suggested Response:
Rudy and Diane will want to use feedforward controls to anticipate problems before they arise. For ex-
ample, they will need to create a budget and stick to it in purchasing the new lodge and staffing it. In ad-
CONCLUDING CASE
Chapter 16 – Managerial Control
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2. What might be some of the fundamental budgetary considerations the Conrads would have as they
plan the expansion of their lodge?
Suggested Response:
Rudy and Diane will want to estimate their sales and expenses in any budget they create. In addition,
3. Describe how the Conrads could use market controls to plan and implement their expansion.
Suggested Response:
Market controls can be used at the level of the organization, the individual business unit or department
Chapter 16 – Managerial Control
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Example 16.1 – Early control systems: Wedgwood Pottery, an English company founded in
1759, was one of the first modern day companies to implement and use formal control systems.
Interestingly enough, one of the first control systems implemented by founder Josiah Wedgwood
Example 16.2 – Performance standards: Call centers provide most of the customer contact
these days for banks, communications services, insurance companies, etc. And many companies
Example 16.3 – Budgeting software: ALG (Armstrong Laing Group) Software provides a num-
ber of budgeting and process improvement software packages to businesses. One of their more
Example 16.4 – Using financial ratios: Liquidity ratios are meant to help us determine how well
Example 16.5 – Designing control systems: The Mailers Council is the largest group of mailers
and mailing associations in the nation. This group maintains the Postal Service can be operated
Example 16.6 – Market controls: The website, www.onetonline.org, lists Bureau of Labor Sta-
tistics salary information for thousands of jobs as well as the potential career outlook for jobs.
EXAMPLES
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Example 16.7 – Clan control: Atlas Copco Tools is a hand tool manufacturer, located in Swe-
den. Atlas Copco uses teams in production and assembly that work on flexible machinery, so any
product can be produced on any machine in the team. These teams have workflow leaders to sup-
8 Nilsson, Göran. “Process orientation, integration of work teams, and management control.” Paper presented at the 4th International
Seminar on Manufacturing Accounting Research in Kolding, Denmark, June 10-12, 1999.
Chapter 16 – Managerial Control
Please see the following additional materials in Connect.
• Goodwill
Goodwill’s mission is to provide job training and employment opportunities to individuals who
How does Goodwill use controls to make informed decisions about its resources?
Goodwill is a not-for-profit organization but they still must make enough revenue to pay bills and
keep track of how it spends its money. This has become more important in recent years, as donors
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