The Rational Decision Making Model

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Learning Outcomes After studying this chapter you should be able to:

Explain the purpose of control, identify different types of control, and describe the steps in the control process.

Identify and explain the three forms of operations control.

Describe budgets and other tools for financial control.

Identify and distinguish between two opposing forms of structural control.

Discuss the relationship between strategy and control.

Identify characteristics of effective control, why people resist control, and how managers can overcome this resistance.

The Nature of Control

Control

The regulation of organizational activities in such a way as to facilitate goal attainment

The regulation of organizational activities so that some targeted element of performance remains within acceptable limits.

Purposes of Control

Provides organizations with indications of how well they are performing in relation to their goals.

Provides a mechanism for adjusting performance to keep organizations moving in the right direction.

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The Planning–Controlling Link

Planning

Controlling

Organizing/ Leading

Planning

Controlling

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FIGURE 14.1

The Purpose of Control

Controls

Physical Resources

Human Resources

Information Resources

Financial Resources

Areas of Control

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Types of Controls

Areas of Control
Physical resources	Inventory management, quality control, and equipment control.
Human resources	Selection and placement, training and development, performance appraisal, and compensation.
Information resources	Sales and marketing forecasts, environmental analysis, public relations, production scheduling, and economic forecasting.
Financial resources	Managing capital funds and cash flow, collection and payment of debts.

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FIGURE 14.2

Levels of Control

Responsibilities for Control

Managers are accountable for and involved in activities for which control is their responsibility.

Controller

A position in organizations that helps line managers with their control activities.

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Responsibility for Control

CEO

Division Controller

Corporate Controller

Division Controller

Division Head

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FIGURE 14.3

Steps in the Control Process

Establishing Standards

Control standard is a target against which subsequent performance will be compared.

Should be expressed in measurable terms.

Should be consistent with organizational goals.

Should be identifiable indicators of performance.

Measuring Performance

Performance measurement is an ongoing process.

Performance measures must be valid indicators (e.g., sales, costs, units produced) of performance.

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Steps in the Control Process (cont’d)

Comparing Performance Against Standards

Define what is a permissible deviation from the performance standard.

Utilize the appropriate timetable for measurement.

Considering Corrective Action

Maintain the status quo (do nothing).

Correct the deviation to bring operations into compliance with the standard.

Change the standard if it was set too high or too low.

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FIGURE 14.4

Forms of Operations Control

Financial Control

Control of financial resources (e.g., revenues, shareholder investment) as they:

Flow into the organization

Are held by the organization as working capital and retained earnings

Flow out of the organization as payment of expenses.

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Financial Control (cont’d)

Budgetary Control

Budgets may be established at any organizational level.

Budgets are typically for one year or less.

Budgets may be expressed in financial terms, units of output, or other quantifiable factors.

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Purposes of Budgets

Help coordinate resources and projects.

Help define the established standards for control.

Provide guidelines about resources and expectations.

Evaluate the performance of managers and organizational units.

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Management Challenge Question

How can budgetary controls help prevent conflicts in organizations?

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Types of Budgets

Financial Budgets

Operating Budgets

Nonmonetary Budgets

Cash flow or cash budget

Capital expenditures budget

Balance sheet budget

Sales and revenue budget

Expense budget

Profit budget

Labor budget

Space budget

Production budget

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Table 14.1

Developing Budgets in Organizations

Types of Budget	What Budget Shows
Financial Budget	Sources and Uses of Cash
Cash-flow or cash budget	All sources of cash income and cash expenditures in monthly, weekly, or daily periods
Capital expenditures budget	Costs of major assets such as a new plant, machinery, or land
Balance sheet budget	Forecast of the organization’s assets and liabilities in the event all other budgets are met
Operating Budget	Planned Operations in Financial Terms
Sales or revenue budget	Income the organization expects to receive from normal operations
Expense budget	Anticipated expenses for organization during coming time period
Profit budget	Anticipated differences between sales or revenues and expenses
Nonmonetary Budget	Planned Operations in Nonfinancial Terms
Labor budget	Hours of direct labor available for use
Space budget	Square feet or meters of space available for various functions
Production budget	Number of units to be produced during the coming time period

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FIGURE 14.5

Developing Budgets in Organizations

Strengths and Weaknesses of Budgeting

Strengths

Budgets facilitate effective operational controls.

Budgets facilitate coordination and communication between departments.

Budgets establish records of organizational performance, which can enhance planning.

Weaknesses

Budgets can hamper operations if applied too rigidly.

Budgets can be time consuming to develop.

Budgets can limit innovation and change.

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Other Tools of Financial Control

Financial Statements

A financial statement is a profile of some aspect of an organization’s financial circumstances.

Balance sheet

A listing of assets (current and fixed), liabilities (short- and long-term), and stockholders’ equity at a specific point in time (typically year-ending) that summarizes the financial condition of the organization.

Income statement

Summary of financial performance—revenues less expenses as net income (i.e., profit or loss)—over a period of time, usually one year.

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Other Tools of Financial Control (cont’d)

Ratio Analysis

Is calculation of financial ratios to assess some aspect of the organization’s financial health.

Liquidity ratios show how readily the firm’s assets can be converted to cash.

Debt ratios reflect the firm’s ability to meet long-term financial obligations.

Return ratios show how much investment return the firm is generating relative to the value of its assets.

Coverage ratios estimate the ability of the firm to pay the interest expenses on money it has borrowed.

Operating ratios demonstrate the efficiency of the firm’s functional operations.

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Other Tools of Financial Control (cont’d)

Financial Audit

Is an independent appraisal of an organization’s accounting, financial, and operational systems.

External audits—financial appraisals conducted by experts who are not employees of the organization.

Internal audits—appraisals conducted by employees of the organization.

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Structural Control

Bureaucratic Control

A form of organizational control characterized by formal and mechanistic structural arrangements.

Decentralized Control

An approach to organizational control characterized by informal and organic structural arrangements.

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FIGURE 14.6

Organizational Control

Integrating Strategy and Control

Strategic Control

Aims at maintaining an effective alignment with the environment and achieving strategic goals.

Focuses on structure, leadership, technology, human resources, and informational and operational systems.

Focuses on the extent to which an implemented strategy achieves the organization’s goals.

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Integrating Strategy and Control (cont’d)

International Strategic Control

Focuses on whether to manage the global organization from a centralized or decentralized perspective.

Control Choice: Centralization or Decentralization

Centralization creates more control and coordination, whereas decentralization fosters adaptability and innovation.

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Managing Control in Organizations

Integration with planning

Flexibility

Accuracy

Timeliness

Characteristics of Effective Controls

Objectivity

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Managing Control in Organizations

Characteristics of Effective Control
Integration with Planning	The more control is linked to planning, the more effective the control system.
Flexibility	The control system must be flexible enough to accommodate change.
Accuracy	Inaccurate information results in bad decision making and inappropriate managerial actions.
Timeliness	A control system should provide information as often as necessary.
Objectivity	A control system must be free from bias and distortion.

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Inappropriate Focus

Overcontrol

C o n t r o

Too Much Accountability

Rewards for Inefficiency

Sources of Resistance to Control

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Resistance to Control

Overcontrol

Trying to control too many details affects employee behavior when employees perceive control attempts as unreasonable.

Inappropriate Focus

The control system may be too narrow or it may focus too much on quantifiable variables and leave no room for analysis or interpretation.

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Resistance to Control (cont’d)

Rewards for Inefficiency

Rewarding operational inefficiency can lead employees to behave in ways that are not in the best interests of the organization.

Too Much Accountability

Efficient controls are resisted by poorly performing employees.

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Overcoming Resistance to Control

Design controls properly integrated with organizational planning and aligned with the organization’s goals and standards.

Create flexible, accurate, timely, and objective controls.

Avoid overcontrol in implementation of controls.

Guard against controls that reward inefficiencies.

Encourage employee participation in the planning and implementing of control systems.

Develop a system of checks and balances to verify the accuracy of performance indicators.

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