Chapter 16 – Managerial Control
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16
chapter
Managerial Control
Learning Objectives 2
Key Student Questions 3
Class Roadmap 5
Bottom Line 12
Social Enterprise 13
Lecturettes 14
CHAPTER CONTENTS
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1 Explain why companies develop control systems for employees.
2 Summarize how to design a basic bureaucratic control system.
3 Describe the purposes for using budgets as a control device.
LEARNING OBJECTIVES
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Student questions about control come from one of two perspectives. If you have older students with work
experience, you will see questions from a manager’s point of view, primarily along the lines of “How do I
control my employees?” Students with less experience ask questions from the employee point of view,
often something related to “How do I get my manager to loosen his/her control over me?” Whichever
question is asked, you have the opportunity to present both sides of the picture in your answer.
1. “How can a manager correct an employee’s behavior without making the
employee angry or defensive?”
2. “Why is it difficult to control some employees, while others are easy to
direct?”
3. “How can excessive control be regulated so the employees are not too in-
timidated to work?”
Control is one of the most difficult problems a new manager faces. In answering your students’ questions
about managerial control emphasize the importance of shared goals, respect for individual preferences,
and good feedback technique. Explain that before making any corrections, it is important to be sure that
both you and the employee have the same ideas about the ultimate goal/purpose of the work, and that the
o as soon as possible after the behavior,
o in private,
o with a focus on what needs to be done (the correct actions and/or outcomes),
o with questions about, and extensive listening to, the employee’s view of the sit-
One of the things many managers don’t understand is that they will be much more effective at controlling
their employees’ behavior if they concentrate on moving forward, not on beating the person up for some-
thing that they’ve done wrong. If necessary, after the initial conversation, there can be a second conversa-
tion about the consequences of not changing, but that will change the tone, atmosphere and trust levels of
the discussion.
KEY STUDENT QUESTIONS
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they should update their managers weekly in whatever format their manager prefers, and show them a
typical updating chart (project, status, notes.) We also discuss the importance of open communication,
Teaching Tip
Ferdinand F. Fournies is the author of “Why Employees Don’t Do What You Want Them To Do,
And What To Do About It.” One good exercise for a large class is to ask students to get together
in small groups and remember a time when they didn’t do something that their manager requested
they do. Compare the class results to the following list. Employees don’t do what they are sup-
posed to do because they…
▪ Don’t know why they do things
▪ Don’t know how or what to do
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Management in Action
Can Better Controls Help Best Buy Survive in the Internet Age?
Best Buy once lured shoppers away from department and discount stores to shop for its wide
range of consumer electronics at low prices. Today, online retailing is creating a similar chal-
Introduction
LO 1: Explain why companies develop control systems for organizations
A. Control is any process that directs the activities of individuals toward the achievement of organi-
zational goals.
E.G.
Use Example 16.1 – Early control systems here
B. Symptoms of an out-of-control company include: (Exhibit 16.1)
1. Lax top management
2. Absence of policies
C. Three broad strategies for achieving organizational control are: (Exhibit 16.2)
1. Bureaucratic control is the use of rules, regulations, and formal authority to guide perfor-
mance.
CLASS ROADMAP
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LO 2: Summarize how to design a basic bureaucratic control system.
A. The control cycle has four major steps (Exhibit 16.3):
1. Setting performance standards
a. A performance standard is the level of expected performance for a given goal.
b. Standard is expected performance for a given goal: a target that establishes a desired per-
formance level, motivates performance, and serves as a benchmark against which actual
E.G.
Use Example 16.2 – Performance standards here
2. Measuring performance
a. Performance data commonly are obtained from three sources:
3. Comparing performance with the standard – the manager evaluates the performance.
4. Taking corrective action – this step ensures that operations are adjusted where necessary to
achieve the initially planned results.
a. An after-action review is an open-minded discussion of (Exhibit 16.4):
i. What were our intended results?
B. Approaches to bureaucratic control
1. Feed-forward control is the control process used before operations begin, including policies,
2. Concurrent control is the control process used while plans are being carried out, including
directing, monitoring, and fine-tuning activities as they are performed.
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3. Feedback control is control that focuses on the use of information about previous results to
ization (Exhibit 16.5)
Multiple Generations at Work
Is Annual Performance Feedback a Thing of the Past?
Some companies are doing away with annual performance evaluations in favor of continuous coaching
C. Management audits developed as a means for evaluating the effectiveness and efficiency of vari-
ous systems within an organization, from social responsibility to accounting control.
1. External audits occur when one organization evaluates another organization to
2. Internal audits assess:
a. What the company has done for itself.
LO 3: Describe the purposes for using budgets as a control device.
D. Budgetary Controls
1. Budgeting is the process of investigating what is being done and comparing the results with
the corresponding budget data to verify accomplishments or remedy differences. It is also
called budgetary controlling.
E.G.
Use Example 16.3 – Budgeting software here
2. Types of budgets:
a. Sales budget usually prepared by month, sales area, and product. (Table 16.4)
b. Production budget is expressed in physical units.
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3. Activity-based costing(ABC) is a method of cost accounting designed to identify streams of
activity, and then to allocate costs across particular business processes according to the
LO 4: Define basic types of financial ratios used as control systems.
E. Financial controls – two financial statements that help control overall organizational perfor-
mance are:
1. Balance sheet –a report that shows the financial picture of a company at a given time (Exhib-
it 16.8) This statement itemizes three elements:
2. Profit and Loss statement – an itemized financial statement of the income and expenses of a
company’s operations. (Exhibit 16.9)
3. Financial ratio categories:
a. Liquidity ratios indicate the company’s ability to pay short-term debts.
i. The most common liquidity ratio is current assets to current liabilities, called current
4. Using financial ratios causes management myopia – managers focus on short-term earnings
and profits at the expense of longer-term strategic obligations.
E.G.
Use Example 16.4 – Using financial ratios here
Management in Action –
Progress Report
The challenges facing Best Buy are evident from its financial data, including recent quarterly losses, flat
sales, falling same-store sales, and falling market share, even after the loss of key competitors, Circuit
City and RadioShack. CEO Hubert Joly has responded with spending cuts and a policy of matching the
lowest prices offered by competitors.
• How well do you think Best Buy’s management has analyzed and corrected its performance? Why?
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Opinions will vary, but the key points to consider are the accuracy of diagnosing the problems and the
• Besides the measures described here, what other financial measures could help with controlling perfor-
mance at Best Buy?
Other measures mentioned in the text include balance sheets (assets, liabilities, and stockholders’ equity)
F. The Downside of Bureaucratic Control
1. Rigid bureaucratic behavior occurs when control systems prompt employees to stay out of
trouble by following the rules.
2. Resistance occurs for several reasons:
a. Comprehensive control systems increase the accuracy of performance data and make em-
LO 5: List procedures for implementing effective control systems.
G. Designing Effective Control Systems
1. Establish valid performance standards – tend to be expressed in quantitative terms; they are
objective rather than subjective.
2. Provide adequate information to employees.
E.G.
Use Example 16.5 – Designing control systems here
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LO 6: Identify ways in which organizations use market control mechanisms
A. Market control involves the use of economic forces and the pricing mechanisms that accompany
them to regulate performance. (Exhibit 16.11)
1. Market controls at the corporate level are used to regulate independent business units.
LO 7: Discuss the use of clan control in an empowered organization.
B. Clan Control: The Role of Empowerment and Culture
1. Bureaucratic controls don’t work well today because:
2. Managers must empower employees by:
a. putting control where the operation is
16.12)
3. Clan control – creating relationships built on mutual respect and encouraging the employee to
take responsibility for his or her actions
E.G.
Use Example 16.7 – Clan control here
Management in Action –
Onward
Best Buy CEO Hubert Joly is focused on the basic idea that a company called “Best Buy” should offer
great deals, and this requires operating efficiently and selling effectively. In that spirit, Joly called for “all
hands on deck,” bringing office employees into the stores to help out during the first holiday rush after
Joly took the helm. Joly also saw Best Buy’s Results Oriented Work Environment (ROWE) policy as in-
consistent with his vision. He wanted to see people in the workplace, showing their dedication, so he end-
ed ROWE, sparking an outcry by the policy’s creators and supporters.
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• How well did ROWE meet the criteria of an effective performance system?
• Will eliminating it be more or less effective? Why?
An effective performance system establishes valid performance standards, gives employees adequate in-
formation, ensures acceptability to employees, maintains open communication, and uses multiple ap-
• How can clan control help Best Buy improve its performance?
With clan control, employees take responsibility for exercising effective control on their own. Strong clan
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p. 528: What happens in the absence of control?
Without control, managers don’t know if employees understand what they are supposed to do and wheth-
p. 530: Give an example of a standard for sustainability.
p. 536: What impact would achieving Six Sigma quality have on a company’s costs?
High quality often involves higher costs, but creating processes to get it right the first time should lead to
p. 540: If one activity costs the most, how would you decide if this is a case of overspending?
As the text indicates, costs should be measured against the benefits provided. For example, is the costly
p. 551: You manage the tech support department for your company. How might market controls affect
your costs?
Tech support is something that organizations can purchase from outside vendors. If the internal tech sup-
p. 554: Would you expect more clan control with standardized jobs or creative positions?
There would be more clan control with creative positions. Given that clan control takes a long time to de-
BOTTOM LINE
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Beyond Counting: Alternative Ways to Measure Social Impact
1. Assume the role of Devil’s advocate: Why is counting outcomes, like in the case of
TOMS, an adequate way of assessing a social enterprise’s social impact?
Student responses will vary, but many will bring up the fact that the number of loans and
2. If you ran a social enterprise to reduce poverty in India, which of the three
measures (IVC, PPI, or BIA) would you likely use to measure your enterprise’s so-
cial impact?
SOCIAL ENTERPRISE
Chapter 16 – Managerial Control
LECTURETTE 16.1: Another Look at Budgets
BUDGETS DEFINED
A budget may be defined as a plan reduced to quantitative terms, usually translatable into dollars. Budg-
ets usually represent operational plans over periods up to 18 months, but are sometimes used in long-
range projects. Budgets help the manager understand the limits of resource allocations and use.
THE NATURE OF BUDGETS
Budgets traditionally have the following characteristics:
➢ Budgets are normally stated in monetary terms or other quantitative terms (man-hours, machine-time)
that can be translated into monetary terms.
TYPES OF BUDGETS
➢ Master Budget – a numeric summation of all the budgets of a given organization. A master budget
reflects expenses, sales, revenues, profits, uses of capital, and the resultant return on investment.
➢ Revenue Budget – itemizes all items of organizational revenues. Revenue budgets are often used to
control revenue centers or profit centers within an organization.
THE BUDGETING PROCESS
There are two basic types of budgeting processes:
➢ Top-down budgeting
Top-Down Budgeting
LECTURETTES