Chapter -6

ControllingConcept:- A management function that monitors the activities to ensure

that they are being accomplished as planned and correcting significant deviations.

- Effectiveness of control system is determined by how well it facilitates goal achievement.

- There are three types of control system;

a. Market control system: Uses external market mechanism, such as price competition and relative market share, to establish standard.

b. Bureaucratic control system: Emphasizes organizational authority, rules, regulations, procedures, policies, well defined job description and budget to ensure that employees exhibit appropriate behavior and meet performance standard.

c. Clan: - Regulates employee behavior by the shared values, norms, traditions, beliefs and other aspects of the

organizational culture.

The control processThe control process consists of three steps;

1. Measuring actual performance: - First of all a manager must get the information about the actual performance of the employee or group of employees.

- They can measure it by;• Personal observation• Statistical reports: Graphs, bar charts and numerical displays• Oral reports: Conference, meetings, one to one conversation

or telephone calls• Written reports:

2. Comparing actual performance against a standard: - It deter mines the degree of discrepancy between actual

performance and the standard.- Finding range of variation and determining whether is it is

acceptable range or not.3.Taking managerial action to correct deviations or inadequate

standard: - Manager can;• Do nothing• Correct the actual performance: - change in strategy, structure,

compensation practices or training programmms, redesign of jobs or replacement of personnel.

- Immediate corrective action: correcting a problem at once to get performance back into track.

- Basic corrective action: Determining how and why performance has deviated and then correcting the source of deviation.

Controlling ProcessManagerial Decisions in the Control Process

Compare actual performance with standard

StandardObjectivesMeasure actual

performance

Revise standard

Correct performance

Identify cause of variation

Do nothing

Do nothing

Is standar

d acceptable?

Is variance acceptable

?

Is standard being attained

No

No

No

Yes

Yes

Yes

• Revise the standard: Goal might be high or low

Types of control

Input Process Output

FeedforwardControl

Anticipatesproblems

Concurrent Control

Correct problemsAs they happens

FeedbackControl

Correct problems after they

occur

1. Feedforward control: - Prevent anticipated problems because it takes place in advance of the actual activities. Like caring for high quality input like KFA imports chicken from Brazil.

- This sort of controls allow mgmt. to prevent problems rather than having to cure them later.

2. Concurrent control:- It takes place while an activity is in progress.

- This sort of control helps to control the current problems before they become costly.

- It is possible through direct supervision.- Many organizational quality programs rely on concurrent

controls to inform workers of whether their work output is of sufficient quality to meet standard.

3. Feedback control: - the control takes place after an action.

- Financial statements are the major sources of information.

Tools for Controlling (Monitoring) Organizational Performance

1. Feedforward/Concurrent/Feedback Controls

2. Financial Controls – Traditional Financial Control – Other Financial Control Measures

• Economic value added (EVA) • Market value added (MVA)

– The Practice of Managing Earnings

3. Balanced Scorecard

4. Information Controls

5. Benchmarking of Best Practices

2. Financial Controls

• One of the primary purposes of every business firm is to earn a profit. To achieve this goal, managers need financial controls.

– Traditional Financial Control – Other Financial Control Measures

• Economic value added (EVA) • Market value added (MVA)

– The Practice of Managing Earnings

a. Traditional Financial Control Measures include ration analysis and budget analysis. Managers use such ratios as internal control devices for monitoring how efficiently and profitably the organization uses its assets, debt, inventories, and the like.

b. Other Financial Control Measures

The fundamental concept behind these financial tools is that companies are supposed to take in capital from investors and make it worth more. When managers do that, they’ve created wealth. When they take in capital and make it worth less, they’ve destroyed wealth.

Economic value added (EVA) is a financial tool for measuring corporate and divisional performance. • It’s calculated by taking after-tax operating profit minus

the total annual cost of capital. • EVA is a measure of how much economic value is being

created by what a company does with its assets, less any capital investments the company has made in its assets.

• As a performance control tool, EVA focuses managers’ attention on earning a rate of return over the cost of capital.

• When EVA is used as a performance measure, employees soon learn that they can improve their organization’s or business unit’s EVA by either using less capital or by investing capital in high-return projects.

• Market value added (MVA) adds a market dimension. – It measures the stock market’s estimate of the value of a

firm’s past and expected capital investment projects. – If the company’s market value (value of all outstanding

stock plus company’s debt) is greater than all the capital invested in it (from shareholders, bondholders, and retained earnings), it has a positive MVA, indicating that managers have created wealth.

– If the company’s market value is less than all the capital invested in it, the MVA will be negative, indicating that managers have destroyed wealth.

Studies have shown that EVA is a predictor of MVA and

that consecutive years of positive EVA generally lead to a

high MVA.

c. The Practice of Managing Earnings – A financial practice that has come under increased scrutiny

recently is the management of earnings. – When organizations “manage” earnings, they “time” income

and expenses to enhance current financial performance, which gives an unrealistic picture of the organization’s financial performance.

– For instance, many organizations have deferred compensation programs for their top executives. They don’t have to account for these expenses now – although there’s usually a short reference to them buried in footnotes in the annual report. As such they make earnings look better in the present. The problem is they can add up to a large future corporate liability.

– Needless to say, these types of financial manipulations raise serious ethical questions.

3. Balanced Scorecard• A performance measurement tool that looks at four

areas – financial, customer, internal processes, and people/innovation/growth assets – that contribute to a company’s performance.

• Managers should develop goals in each of the four areas and measures to determine if these goals are being met.

• The intent of the balanced scorecard is to emphasize that all of these areas are important to an organization’s success and that there should be a balance among them.

4. Information Controls

• Information is critical to monitoring and measuring an organization’s performance.

• Managers need the right information at the right time and in the right amount.

• Inaccurate, incomplete, excessive, or delayed information will seriously impede performance.

• Management Information Systems, manual or computer-based, provide management with needed information on a regular basis.

• An MIS focuses specifically on providing managers with information, not merely data.

– Data are raw, unanalyzed facts, such as numbers, names, or quantities. Raw, unanalyzed facts are relatively useless to managers.

– When data are analyzed and processed, they become information. – An MIS collects data and turns them into relevant information for managers to

use.

5. Benchmarking of Best Practices

• Benchmarking is the search for the best practices among competitors or non-competitors that lead to their superior performance.

• The benchmark is the standard of excellence against which to measure and compare.

• Benchmarking means learning from others.

• As a tool for monitoring and measuring organizational performance, benchmarking can be used to help identify specific performance gaps and potential areas of improvement.

• Managers shouldn’t look at external organizations for best practices. It’s also important for them to look inside their organization for best practices that can be shared.

Steps to Successfully Implement an Internal Benchmarking Best Practices Program

1. Connect best practices to strategies and goals.

2. Identify best practices throughout the organization.

3. Develop best practices reward and recognition systems.

4. Communicate best practices throughout the organization.

5. Create a best practices knowledge-sharing system.

6. Nurture best practices on an ongoing basis. Create an organizational culture that reinforces a “we can learn from everyone” attitude and emphasizes sharing information.

Case on Controlling

Niku Corporation

Without information, managers can’t make good decisions. In order to make good decisions, then, companies need to protect their information. And executives at Niku Corporation, a Silicon Valley software company, thought they had. However, managers were shocked when they discovered that outsiders had penetrated their Web site to steal data. Their experience raises some troubling questions about the security of company information in the Internet age.

Warren Leggett, Niku’s chief information officer, had just returned from a relaxing holiday weekend playing golf with his brother-in-law Jay Berlin, who was a mid-level technical manager at Nike Corporation. Jay had agreed to view a demonstration of Niku’s project management software. On the morning of the meeting, Jay checked his phone messages and had a voice mail from a salesperson at Business Engine Software Corporation, one of Niku’s main competitors. Joy thought that it was quite odd that he’d be getting a message from these people, especially since he didn’t even know the firm and he wouldn’t be his company’s software contact person anyway. So he told Warren about the message.

Warren also thought that Jay’s receipt of such message was rather unusual and decided to go through Niku’s Web access logs. What he discovered shocked him! He found that someone using Internet addresses owned by Business Engine had used Niku passwords to access Niku’s network more than 6,000 times, downloading more than 1,000 documents – including one Warren had written about the planned demonstration for Jay.

On August 12, 2002, Niku founder and former CEO Farzad Dibachi filed a lawsuit against Business Engine alleging corporate espionage. Although the lawsuit was settled in December 2002 with a $ 5 million payment to Niku and additional terms intended to ensure that Business Engine products releases did not incorporate Niku’s trade secrets, the whole incident points out a serious problem in today’s networked corporations – potential holes in corporate security.

Discussion Questions1. Which type of control – feedforward, concurrent, or

feedback – do you think would be most important in preventing corporate data theft? Explain your choice.

2. As chief information officer, what might Warren Leggett do to ensure that this situation doesn’t happen again?

3. Which would be more important in protecting a company’s information or other valuable resources – employees, equipment, or a written procedure? Explain your choice.