Chapter 16 Control. Basics of Control. Chapter 16. The Control Process. 1. describe the basic control process.

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1 Chapter 16 MGMT3 Chuck Williams Designed & Prepared by B-books, Ltd. 1 Basics of After reading this section, you should be able to: 1. describe the basic control process. 2 The Process Begins by establishing clear standards of of performance Involves comparing actual performance to to desired performance 1 Takes corrective action to to repair performance deficiencies But control isn t Is Is a dynamic, cybernetic process always worthwhile or or possible Consists of of feedback control, concurrent control, feedforward control 3 1

2 Setting Standards 1. A good standard must enable goal achievement 2. Listening to customers or observing competitors 3. Benchmarking other companies Determine what to benchmark. Identify the companies against which to benchmark. Collect data to determine other companies performance standards Corrective Action Identify performance deviations Analyze those deviations Develop and implement programs to correct them Identify Process 1.3 Correct Analyze 5 Dynamic, Cybernetic Process Set Standards Develop & Implement Program for Corrective Action Measure Performance Compare with Standards 1.4 Analyze Deviations Identify Deviations 6 2

3 Feedback, Concurrent, and Feedforward Feedback Gather information about performance deficiencies after they occur Concurrent Gather information about performance deficiencies as asthey occur 1.5 Monitor performance inputs rather Feedforward than outputs to to prevent or or minimize performance deficiencies before they occur 7 Feedforward Guidelines for Using Feedforward Plan and analyze thoroughly Be discriminating as as you select input variables Keep the feedforward system dynamic. Don t let let it it become a matter of of habit Develop a model of of the control system Collect data on on input variables regularly Assess data on on input variables regularly Take action on on what you learn. 8 Loss Is control worthwhile? Maybe, maybe not. Managers must assess the regulation costs and the cybernetic feasibility. 9 3

4 Methods After reading these sections, you should be able to: 2. discuss the various methods that managers can use to maintain control. 3. describe the behaviors, processes, and outcomes that today s managers are choosing to control their organizations. 10 Methods Bureaucratic Objective Normative Concertive Self Bureaucratic Top-down control Use rewards and punishment to influence employee behaviors Use policies and rules to control employees Often inefficient and highly resistant to change 12 4

5 Adding from the Top When current CEO Paul Hanrahan first joined energy provider AES, an executive told him, We don t have procedures use your common sense. For years, the decentralized structure and entrepreneurial atmosphere helped drive AES to rapid growth and success. In 2002, however, a liquidity crisis involving short term debt and lax accounting standards almost sunk the company. While much of the freedom and experimentation remains, Hanrahan has added some structure as well. New finance, human resources, and business development divisions were established. And in 2008, AES s accounting practices were finally brought into compliance with the Sarbanes-Oxley Act. Source: M. Gunther, A Powerful Comeback, Fortune, 26 October Objective Objective Behavior Use of of observable measures of of worker behavior or or outputs to to assess performance and influence behavior Regulation of of the the behaviors and actions that workers perform on on the the job job 2.2 Regulation Output of of workers results or or outputs through rewards and incentives 14 Effective Output 1. Output control measures must be reliable, fair, and accurate. 2. Employees and managers must believe that they can produce the desired results The rewards or incentives tied to outcome control measure must be dependent on achieving established standards of performance. 15 5

6 Normative Normative Created by: careful selection of employees observing experienced employees & listening to stories about the company Concertive Concertive Regulation of of workers behavior and decisions through work group values and beliefs Autonomous work groups operate without managers group members control processes, output, and behaviors Self- Also known as self-management Employees control their own behavior Employees make decisions within well-established boundaries Managers teach others the skills they need to maximize work effectiveness Employees set goals and monitor their own progress

7 What to? Balanced Scorecard Budgets, Cash Flow, EVA Customer Defections Quality Waste and Pollution 3 19 The Balanced Scorecard Customer Perspective Internal Perspective Innovation and Learning Perspective Financial Perspective Advantages of the Balanced Scorecard 1. Forces managers to set goals and measure performance in each of the four areas 2. Minimizes the chances of suboptimization performance improves in one area at the expense of others

8 The Balanced Scorecard: Southwest Airlines 3.1 Sources: G. Anthes, ROI Guide: Balanced Scorecard, Computer World, 17 February 2003, available online at article.do?command=viewarticlebasic&articleid=78512&intsrc=article_pots_bot [accessed 5 September 2008]. 22 Image100/Jupiterimages The Financial Perspective Cash flow analysis Balance sheets Predicts how changes in in a business will will affect its its ability to to take in in more cash than it it pays out out Provide a snapshot of of a company s financial position at at a particular time 3.2 Show Income what has happened to to an an organization s statements income, expenses, and net net profit over a period of of time Used Financial to to track liquidity, efficiency, and ratios profitability over time compared to to other businesses in in its its industry 23 Basic Accounting Tools Steps for a Basic Cash Flow Analysis 1. Forecast sales 2. Project changes in anticipated cash flows 3. Project anticipated cash outflows 4. Project net cash flows by combining anticipated cash inflows and outflows 24 8

9 Basic Accounting Tools Parts of of a Basic Balance Sheet 1. Assets Current assets Fixed assets 2. Liabilities Current liabilities Long-term liabilities 3. Owner s equity Stock Additional paid in capital Retained earnings 25 Basic Accounting Tools Basic Income Statement SALES REVENUE - sales returns and allowances + other income = NET REVENUE - cost of goods sold = GROSS PROFIT - total operating expenses = INCOME FROM OPERATIONS - interest expense = PRETAX INCOME - income tax = NET INCOME 26 Financial Ratios LIQUIDITY RATIOS Current Ratio Quick (Acid Test) Ratio LEVERAGE RATIOS Debt to to Equity Debt Coverage EFFICIENCY RATIOS Inventory Turnover Average Collections Period PROFITABILITY RATIOS Gross Profit Margin Return on Equity 27 9

10 3.2 Common Kinds of Budgets Revenue Budgets Expense Budgets Profit Budgets Cash Budgets Capital Expenditure Budgets Variable Budgets Used to to project or or forecast future sales Used to to determine spending on supplies, projects, or or activities Used by profit centers, which have profit and loss responsibility Used to to forecast the cash a company will have for expenses Used to to forecast large, long-lasting investments Used to to project costs across varying levels of of sales/revenues 28 Economic Value Added (EVA) Economic Value Added The amount by by which company profits exceed the cost of of capital in in a given year Common Costs of of Capital Long-term bank loans Interest paid to to bondholders Dividends and growth in in stock value that accrue to to shareholders Economic Value Added (EVA) Calculate net operating profit after tax (NOPAT) Identify how much capital the company has invested Determine the cost paid for capital Multiply capital used (step 2) 2) times cost of of capital (step 3) 3) Subtract total dollar cost of of capital from net profit after taxes $3,500,000 $16,800,000 10% (10% x $16,800,000) = $1,680,000 $3,500,000 net net profit -$1,680,000 cost of of capital $1,820,000 EVA 30 10

11 Big Results from Little Changes Small changes to a process can have significant results, especially in large companies like Home Depot. In trying to find new ways to cut back on expenses, Home Depot decided to change the brand of the coffee they served at their help desk for professional contractors (note: they didn t eliminate the coffee entirely). They managed to save $500,000. Several $500,000 changes can really add up. Source: C. Tome, C-Suite Strategies, The Colvin Interview: Renovating Home Depot, interview by G. Colvin, Fortune, 31 August Why Is EVA Important? Shows whether a business, division, department, profit center, or product is paying for itself Makes managers at all levels pay closer attention to their segment of the business 3.2 Encourages managers and workers to be creative in looking for ways to improve EVA performance 32 Cost-Cutting Guidelines Here are some guidelines for cost-cutting: 1. Instead of implementing one-off cost-cuts, examine the entire process involved in a job and ask how it can be made more efficient. 2. Try bartering with other companies. Exchange low margin cost products for things that you would normally pay cash for. 3. Offer to split the savings with employees. 4. Reducing expenses at the cost of quality can have adverse effects. 5. Leasing as opposed to buying equipment can reduce costs and have tax benefits. 6. Establish contract terms with your distributors that allow you to renegotiate prices annually. Source: T. Meyers, frugal is back, Entrepreneur, March

12 The Customer Perspective ling Customer Defections 3.3 Monitoring customer defections: identify which customers are leaving the company measuring the rate at which they are leaving Obtaining a new customer costs ten times as much as keeping a current one Customers who have left are likely to tell you what you are doing wrong Understanding why a customer leaves can help fix problems and make changes 34 The Internal Perspective ling Quality Excellence Value 3.4 Conformance to to Expectations 35 The Internal Perspective ling Quality

13 ling Waste and Pollution Good housekeeping Material/product substitution Process modification ling Waste and Pollution Waste Prevention & Reduction Recycle & Reuse Waste Treatment 3.5 Waste Disposal 38 13