CHAPTER 20
Basic Elements of Control
Part VI introduces and discusses the fourth basic managerial function, control.
Part VI consists of three chapters. Chapter 20 describes the basic elements of control. Chapter 21 focuses
on managing for total quality. Finally, Chapter 22 addresses the management of information and
information technology.
CHAPTER SUMMARY
Chapter 20 introduces and covers the basic elements of control in organizations. It first characterizes the
nature of control. Subsequent sections discuss operations, financial, structural, and strategic control.
Finally, the chapter concludes with a description of how the control process can be more effectively
managed.
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Explain the purpose of control, identify different types of control, and describe the steps in the
control process.
2. Identify and explain the three forms of operations control.
Jamie Dimon, the CEO of JP Morgan Chase, the U.S. bank with the largest market capitalization, helped
his firm survive the mortgage crisis by establishing control systems He is using control systems as the
primary vehicle to achieve his strategic plans. The case cites a number of instances where strict controls
generate additional profits.
Management Update: JP Morgan Chase had a market capitalization of $129.90 billion in early
September 2011, revenues of $92.68 billion and net income of $18.63 billion in 2010.
Chapter 20: Basic Elements of Control
LECTURE OUTLINE
I. THE NATURE OF CONTROL
Control is the regulation of organizational activities in such as way as to facilitate goal attainment.
Teaching Tip: A good analogy to use to describe control is that of a space flight to Mars. After a
Teaching Tip: To some people, the very idea of control conjures up images of Big Brother and a loss
of personal freedom. The manager’s job is to maintain adequate control without infringing on
individual rights.
A. The Purpose of Control
Control has a number of functions in organizations.
Extra Example: The common room thermostat is also a control device. When the temperature reaches
a certain level, a climate control system is activated. When the temperature changes to the targeted
level, the system shuts down.
Extra Example: Some time ago, a series of small flaws in Microsoft’s XP operating system allowed
hackers to take control of other people’s PCs and use them for unethical or illegal activities. The firm
had to issue over a dozen small corrections in an attempt to stop the hackers, but the problem was not
Chapter 20: Basic Elements of Control
Global Connection: To carry the preceding idea further, international firms have even more complex
control requirements. This point is covered later in the chapter.
4. Effective control can help to minimize costs and boost output.
B. Types of Control
1. Control is part of many different areas of the firm, as it is concerned with efficiently and
2. Control can also be classified by level, such as operations, financial, structural, or
strategic.
a) Operations control focuses on the processes the organization uses to transform
resources into products or services.
3. Responsibility for control resides with all managers. Responsibility for control also can
reside with one or more specialized management positions called controller, which is a
person in organizations that helps line managers with their control activities. More and
more often, control resides with employees as well.
Cross-Reference: As discussed in Chapter 19 and other spots in this book, many organizations today
C. Steps in the Control Process
1. Establish standards.
A control standard is a target against which subsequent performance is compared.
2. Measure performance.
Performance refers to that which managers are attempting to control. How it is measured
Chapter 20: Basic Elements of Control
3. Compare performance against standards.
Comparing performance against standards will result in one of three outcomes:
cut-and-dried process.
4. Consider corrective action.
Once the comparison between performance and standards has been made, an action must
be taken. Three choices exist: (1) do nothing, (2) take corrective action, or (3) change the
standard.
Teaching Tip: As you look over final grades, you may go with a strict 90-80-70-60 percent cutoff for
II. OPERATIONS CONTROL
Operations control focuses on the processes used by the organization to transform inputs into
finished products or services. Operations control has three forms. Most firms use multiple control
systems.
A. Preliminary Control
Teaching Tip: Preliminary control is also called steering control or feedforward control.
B. Screening Control
Screening control takes place during the transformation process and relies heavily on the
C. Postaction Control
Postaction control focuses on determining if the outputs of the organization after the
transformation process are complete.
Chapter 20: Basic Elements of Control
III. FINANCIAL CONTROL
Financial control is the control of financial resources as they flow into the organization, are held by
the organization, and flow out of the organization.
1. Most organizations use three types of budgets—financial, operating, and nonmonetary
budgets.
2. Budges are traditionally developed through a top-down process. Many organizations
today, however, are beginning to allow more participation by all managers in the budget
3. Strengths of budgeting include: increased ease of monitoring, better ability to pinpoint
problems, facilitating communication and coordination, better records of performance,
and usefulness as an aid in planning.
4. Weaknesses of budgeting include: managers can apply them too rigidly, inflexibility in
making adjustments, time-consuming development, and the chance that they may limit
innovation.
B. Other Tools of Financial Control
1. Financial statements are a profile of some aspect of an organization’s finances. Common
financial statements are the balance sheet—a list of assets and liabilities of an
organization at a specific point in time, and the income statement—a summary of
Chapter 20: Basic Elements of Control
2. Ratio analysis consists of the calculation of one or more financial ratios. Liquidity, debt,
return, coverage, and operating ratios are usually assessed.
Group Exercise: If you obtain financial statements from annual reports, give a copy to small groups of
3. Financial audits are an independent appraisal of the firm’s financial control processes.
Financial audits can be external (performed by independent external auditors) or internal
(performed by the organization itself).
Extra Example: Whether or not they have an internal auditing staff, publicly traded corporations must
IV. STRUCTURAL CONTROL
Structural control deals with the effectiveness of the firm’s organization design.
A. Bureaucratic Control
Bureaucratic control is characterized by formal and mechanistic structural arrangements
Extra Example: Most colleges and universities also rely heavily on bureaucratic control.
B. Decentralized Control
Decentralized control is based on informal and organic structural arrangements such as group
V. STRATEGIC CONTROL
Strategic control is aimed at ensuring that the organization is maintaining an effective alignment
with its environment and moving toward achieving its strategic goals.
A. Integrating Strategy and Control
To ensure strategic control, an organization must focus on how well its structure, leadership,
Chapter 20: Basic Elements of Control
Cross-Reference: The basic elements of strategic control parallel the concepts of strategy
implementation as discussed in Chapter 8.
B. International Strategic Control
Strategic control is especially important for international businesses due to their complexity
and geographic diversity.
Extra Example: Daimler-Benz, the manufacturer of Mercedes automobiles, is a good example of a
VI. MANAGING CONTROL IN ORGANIZATIONS
A. Characteristics of Effective Control
1. The more explicit and precise the linkages between planning and control are, the more
effective the control system will be. To achieve this, one must account for the control
system as the plans are developed.
Teaching Tip: In some ways, planning and control are the two most integrated management functions.
Planning helps determine what the organization wants to do, and control keeps it on track toward doing it.
2. The control system itself must be flexible enough to accommodate changes.
5. The information provided by the control system must be as objective as possible.
Extra Example: Waterford Crystal suffered some performance problems because of flaws in its
Extra Example: Another control problem at Waterford resulted from the fact that inadequately trained
B. Resistance to Control
There are several reasons for resistance to control.
1. Overcontrol occurs when an organization attempts to control too many things.
Employees tend to resist if too many controls are placed on them.
Chapter 20: Basic Elements of Control
3. When departments that end the fiscal year in the red get a budget increase, this is an
Global Connection: Many managers in India are especially prone to resist control. They view the
presence of control measures and systems as indicators that their organization lacks confidence in their
managerial abilities.
C. Overcoming Resistance to Control
Resistance can be partially overcome if the control systems are integrated into the planning
system. Control systems must also be flexible, accurate, timely, and objective. In addition,
people should not be overcontrolled or rewarded for inefficiency.
1. If employees participate in developing the control systems, there is generally less
Teaching Tip: One of the biggest challenges facing managers is finding the appropriate balance of
control. They need to have sufficient control to avoid problems, but they also need to avoid
overcontrol.
END OF CHAPTER QUESTIONS
Questions for Review
1. What is the purpose of organizational control? Why is it important?
The purpose of control is to let the organization know how well it is doing by comparing where
2. What are the different levels of control? What are the relationships between the different levels?
At the lowest level, operational and financial controls address issues about transformation processes
3. Describe how a budget is created in most organizations. How does a budget help a manager with
financial control?
Typically, operating units submit budget requests to divisional managers, who in turn submit
Chapter 20: Basic Elements of Control
4. Describe the differences between bureaucratic and decentralized control. What are the advantages
and disadvantages of each?
Bureaucratic control works to ensure employee compliance with directives through rules and
Questions for Analysis
5. How can a manager determine whether his or her firm needs improvement in control? If
improvement is needed, how can the manager tell what type of control needs improvement
(operations, financial, structural, or strategic)? Describe some steps a manager can take to improve
each of these types of control.
Symptoms of poor control may include excessive costs or waste of other resources, too many errors
or defects, an inability to adapt in response to changes, and lack of managerial capability in the face
6. One company uses strict performance standards. Another has standards that are more flexible. What
are the advantages and disadvantages of each system?
A strict system is simple to develop and implement, gives clear-cut output, and has an appearance of
7. Are the differences in bureaucratic control and decentralized control related to differences in
organization structure? If so, how? If not, why not? (The terms do sound similar to those used to
discuss the organizing process.)
Bureaucratic control suggests strict rules, formal controls, and a rigid hierarchy, which is consistent
Chapter 20: Basic Elements of Control
Questions for Application
8. Many organizations today are involving lower-level employees in control. Give at least two
examples of specific actions that a lower-level worker could do to help his or her organization better
adapt to environmental change. Then do the same for limiting the accumulation of error, coping
with organizational complexity, and minimizing costs.
Clearly, students’ answers will vary, but they may note lower-level workers can monitor
9. Describe ways that the top management team, midlevel managers, and operating employees can
participate in each step of the control process. Do all participate equally in each step, or are some
steps better suited for personnel at one level? Explain your answer.
The top management team will probably be most involved in issues of strategic control because the
firm.
10. Interview a worker to determine which areas and levels of control exist for him or her on the job.
Does the worker resist efforts at control? Why or why not?
Students’ responses will vary, but they should be able to identify the types of control present in a
END OF CHAPTER EXERCISES
Building Effective Time Management Skills
I. Purpose
This exercise provides students practice in using time-management skills to prioritize tasks related
to control.
II. Format
This time-management skills exercise is best performed on an individual basis. It should take 20–30
minutes to complete.
Chapter 20: Basic Elements of Control
III. Follow-Up
A. Prioritize the work that needs to be done by sorting the information into three categories: very
timely, moderately timely, and less timely. Then address the following questions.
Very timely tasks include the disgruntled employee and the big customer with a complaint.
B. Are importance and timeliness the same thing?
No. Some tasks need to be done immediately but are not very critical (important), while
C. What additional information do you need before you can begin to prioritize all these demands
on your time?
It’s not clear how urgent some of the problems are. For example, is the disgruntled employee
boss?
D. How would your approach differ if your assistant were in the office?
The assistant could handle some of the routine tasks such as responding to the chamber of
Building Effective Technical Skills
I. Purpose
This exercise improves students’ technical skills by asking them to prepare a personal budget and
then analyze its effectiveness.
II. Format
This exercise should be done by individual students outside of class and will take at least 30 minutes
to complete, although motivated students may spend more time.
III. Follow-Up
A. Prepare lists of your estimated expenditures and income for one month. Remember: You’re
dealing with budgeted amounts, not the amounts that you actually spend and take in. You’re
also dealing with figures that represent a typical month or a reasonable minimum. If, for
B. Now write down all of your actual expenses and all your actual income over the last month. If
you don’t have exact figures, estimate as closely as you can. Calculate both totals.
C. Compare your estimates to your actual expenses and actual income. Are there any
discrepancies? If so, what caused them?
Chapter 20: Basic Elements of Control
Most students will experience discrepancies and the reasons may include unexpected events or
poor initial estimates.
D. Did you expect to have a surplus or a deficit for the month? Did you actually have a surplus or
a deficit? What can you do to make up any deficit or manage any surplus?
Most often, an unexpected surplus or deficit occurs, although hopefully, the discrepancy is
E. Do you regularly use a personal budget? If yes, how is it helpful? If no, how might it be
helpful?
Most people use a budget of some sort, but they vary considerably in terms of their detail and
MANAGEMENT AT WORK
HOW INDIANA LOST CONTROL OF ITS WELFARE SYSTEM
Governor Mitch Daniels privatized Indiana’s welfare system to save $1 billion in taxpayer money. Rather
than have caseworkers handling Medicaid requests, for example, the new system managed by IBM used
the call center organization Affiliated Computer Services to handle client calls. The system was
ineffective in that many worthy residents were denied medical services because of lax controls at ACS.
1. Case Question 1: For what purposes of control was Indiana’s privatized social-services system
created in the first place?
2. Case Question 2: In what areas of control was the new system supposed to improve the operations
of the Family and Social Services Administration (FSSA)? In what ways did the new system affect
the following levels of control at FSSA – (a) financial, (b) structural, and (c) strategic? Then focus
on operations control: In what ways did IBM and ACS act to exercise preliminary control?
Screening control? Postaction control?
Operations and financial control were the key areas expected to improve after the privatization. In
Chapter 20: Basic Elements of Control
3. Case Question 3: In your opinion, how did the approach of IBM and ACS to bureaucratic control
contribute to the collapse of the privatized system? In what ways might decentralization have
improved the situation?
Bureaucratic control is an approach to organizational design characterized by formal and
mechanistic structural arrangements. IBM reduced the role of caseworkers and instead mandated
4. Case Question 4: Refer to each of the characteristics of effective control in order to explain why the
privatized social-services system proved to be ineffective.
One of the hallmarks of an effective control system is flexibility. The control system must be