Chapter 16 Managerial Control LEARNING OBJECTIVES 1 Explain why companies develop control systems. 2 Summarize how to design a basic bureaucratic control system. 3 Describe the purposes for using budgets as a control device. 4 Define basic types of financial statements and financial ratios used as controls. 5 List procedures for implementing effective control systems. 6 Identify ways in which organizations use market control mechanisms. 7 Discuss the use of clan control in an empowered organization. CHAPTER OUTLINE Bureaucratic Control Systems The Control Cycle Approaches to Bureaucratic Control Management Audits Budgetary Controls Financial Controls Problems with Bureaucratic Control Designing Effective Control Systems The Other Controls: Markets and Clans Market Control Clan Control: The Role of Empowerment and Culture CHAPTER RESOURCES Experiential Exercises 1. Safety Program 2. Feedforward, Concurrent, and Feedback Control Cases The Grizzly Bear Lodge Social Enterprise Beyond Counting: Alternate Ways to Measure Social Impact Lecturettes 1. Another Look at Budgets 2. Management by Objectives for Control KEY STUDENT QUESTIONS 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 intimidated 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 employee understands why the work is so important. Then discuss the fact that it is important to allow people to reach goals in their own way, as long as their methods aren’t harmful to the company. If a person is not reaching the goals you have set together, find out why before attempting to make a “correction.” Most managers assume that employees don’t reach their goals because of a lack of motivation, but in reality, employees may not have the correct training or resources to reach their goals, or they may simply believe other goals are more important, based on what managers have said earlier. Finally, emphasize that if a correction is needed, it should be done: as soon as possible after the behavior, in private, with a focus on what needs to be done (the correct actions and/or outcomes), with questions about, and extensive listening to, the employee’s view of the situation, with a clear explanation of what was not done or done incorrectly, with an offer of help as needed (and with a specific agreement about what help will be needed) with a follow-up timeline. 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 something that they’ve done wrong. If necessary, after the initial conversation, there can be a second conversation about the consequences of not changing, but that will change the tone, atmosphere and trust levels of the discussion. From the employee’s perspective, managerial control is restrictive and confining. What employees don’t realize is that managers increase their control levels in response to one of two things: 1) not knowing what the employee is doing, and 2) having the employee do the wrong things. For these reasons, employees need to understand the importance of communication and clarification. I typically tell my students that 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, especially when an employee feels that he or she is being given too much to do or assignments that conflict with each other. In this situation, the employee needs to lay out a specific timeline for all their work, consider how adding new assignments will affect current work projects, and take that information to his/her supervisor for discussion. 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 supposed to do because of they… Don't know why they do things Don't know how or what to do Think that the boss's way won't work Think their way is better Think something else is more important Get no positive rewards for doing things Are rewarded for doing something else Are punished for doing what they should do Know poor performance has no consequence CLASS ROADMAP POWERPOINTS Slide 1 Managerial Control Slide 2 Chapter Introduction Quote Slide 3 Learning Objectives Slide 4 Managerial Control Slide 5 Symptoms of an Out-of-Control Company MANAGEMENT IN ACTION Monitoring Employee Health and Controlling Costs The cost of providing employee health insurance is a major expense for most companies. Health problems caused by employee obesity cost U.S. companies about $73 billion every year. Companies are eager to find ways to reduce this outlay. One novel solution is to try to keep employees from getting sick or overweight in the first place. More than 80 percent of large U.S. companies now have wellness programs. How do employers measure the results of these efforts? One way is to use fitness trackers. Among the corporate giants that have given Fitbit devices to thousands of their employees are Bank of America, IBM, Target, Time Warner, and Barclays. Fitbit has even created a wellness division to train its corporate clients to better monitor and improve their employees’ overall health outcomes. Some companies also monitor employees’ use of email, social media, and the Internet, and physical location. What kinds of control measures and processes can best help a company manage its costs, including the cost of maintaining a healthy and productive workforce? INTRODUCTION LO 1: Explain why companies develop control systems for organizations Control is any process that directs the activities of individuals toward the achievement of organizational goals. Example 16.1 – Early control systems: Wedgwood Pottery, an English company, founded in 1759, was one of the first modern-day companies to implement and use formal control systems. Interestingly enough, one of the first control systems implemented by founder Josiah Wedgwood was his close friend, John Wesley, the founder of the Methodist church. By encouraging Wesley to preach on topics such as temperance, Wedgwood was able to get his workers to stop showing up for work drunk! But Wedgwood didn’t stop there. He created a detailed set of rules for the production of pottery and punished anyone who did not abide by them. When the company grew so large that Wedgwood could not personally supervise everyone’s work, he hired supervisors to make sure his rules were carried out. Wedgwood pottery is still in business today — go to www.wedgwood.com to see some of their products. Symptoms of an out-of-control company include: (Exhibit 16.1) Lax top management Absence of policies Lack of agreed-upon standards ‘Shoot the messenger’ management Lack of periodic reviews Bad information systems Lack of ethics in the culture Three broad strategies for achieving organizational control are: (Exhibit 16.2) Bureaucratic control is the use of rules, regulations, and formal authority to guide performance. Market control involves the use of pricing mechanisms to regulate activities in organizations as though they were economic transactions. Clan control is based on the norms, values, shared goals, and trust among group members. I. BUREACRATIC CONTROL SYSTEMS POWERPOINTS Slide 6 The Control Cycle Slide 7 Setting Performance Standards Slide 8 Social Enterprise Slide 9 Social Enterprise Questions Slide 10 Measuring Performance Slide 11 Principle of Exception and After-Action Reviews Slide 12 Questions for an After-Action Review Slide 13 Approaches to Bureaucratic Control Slide 14 The Role of Six Sigma Slide 15 Exhibit 16.5 The Role of Six Sigma Slide 16 Management Audits Slide 17 Exhibit 16.6 A Sales-Expense Budget Slide 18 Budgets Slide 19 Exhibit 16.7 Activity-Based Costing Slide 20 Financial Controls Slide 21 The Profit and Loss Statement Slide 22 The Profit and Loss Statement Example Slide 23 Financial Ratios Slide 24 The Downside of Bureaucratic Control Slide 25 Designing Effective Control Systems Slide 26 Balanced Scorecard Slide 27 Exhibit 16.11 Examples of Market Control Slide 28 The Case for Clan Control Slide 29 Management in Action Slide 30 Management in Action Questions Slide 31 In Review LO 2: Summarize how to design a basic bureaucratic control system. The control cycle has four major steps (Exhibit 16.3): Setting performance standards A performance standard is the level of expected performance for a given goal. Standard is expected performance for a given goal: a target that establishes the desired performance level motivates performance and serves as a benchmark against which actual performance is assessed Performance standards can be set with respect to: quantity quality time used cost One word of caution: the downside of establishing performance targets and standards is that they may not be supported by other elements of the control system. Example 16.2 – Performance standards: Call centers provide most of the customer contact these days for banks, communications services, insurance companies, etc. And many companies that use call centers will tell you that “extraordinary customer service” is one of their key values. But these same companies are likely to measure the performance of their call center employees on the number of calls they complete in an hour, not by the number of customer service inquiries that are successfully resolved! Measuring performance Performance data commonly are obtained from three sources: written reports oral reports personal observation. Comparing performance with the standard – the manager evaluates the performance. Principle of exception states that control is enhanced by concentrating on the exceptions, or significant deviations, from the expected result or standard. Taking corrective action – this step ensures that operations are adjusted where necessary to achieve the initially planned results. An after-action review is an open-minded discussion of (Exhibit 16.4): What were our intended results? What were our actual results? What caused our results? What can we do better next time? Approaches to bureaucratic control Feedforward control is the control process used before operations begin, including policies, procedures, and rules designed to ensure that planned activities are carried out properly. This is sometimes called preliminary control, is future-oriented; its aim is to prevent problems before they arise Concurrent control is the control process used while plans are being carried out, including directing, monitoring, and fine-tuning activities as they are performed. Feedback control is control that focuses on the use of information about previous results to correct deviations from the acceptable standard. Six Sigma is a form of feedback control designed to reduce defects throughout the organization (Exhibit 16.5) Multiple Generations at Work Timely Performance Reviews Some companies are doing away with annual performance evaluations in favor of continuous coaching and development of employees. Some attribute this change to Millennial employees’ desire for greater responsibility and a “feedback‐rich” culture in which learning is continuous. Others suggest that today’s fast-changing business environment requires more frequent dialogue between managers and employees to ensure alignment between employees’ skills and the firm’s business strategy. Management audits developed as a means for evaluating the effectiveness and efficiency of various systems within an organization, from social responsibility to accounting control. External audits occur when one organization evaluates another organization to Consider possible merger or acquisition Determine the soundness of a potential supplier Discover strengths and weaknesses of competitors Internal audits assess: What the company has done for itself. What the company has done for its customers or other recipients of its goods or services. Sustainability audits are an internal audit used to evaluate how well companies are serving all stakeholders and protecting the environment Sustainability audits and the triple bottom line—audits to evaluate how effectively they are serving all stakeholders and protecting the environment. LO 3: Describe the purposes for using budgets as a control device. D. Budgetary Controls 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. Fundamental budgetary considerations proceed through three stages: Establishing expectancies starts with the broad plan for the company and the estimate of sales, and it ends with budget approval and publications. Budgetary operations stage deals with finding out what is being accomplished and comparing the results with expectancies. The last stage involves taking corrective action when necessary. Example 16.3 – Budgeting software: ALG (Armstrong Laing Group) Software provides a number of budgeting and process improvement software packages to businesses. One of their more popular programs is Activity Analysis Software, a Web-based package that allows managers to plan and manage performance, while at the same time collecting data for activity-based costing. Types of budgets: Sales budget usually prepared by month, sales area, and product. (Table 16.4) Production budget is expressed in physical units. Cost budget is used for areas of the organization that incur expenses but bring in no revenue, such as accounting. Cash budget is prepared after all other budget estimates are completed. Capital budget is used for the cost of fixed assets. Master budget includes all major activities of the business. Accounting audits are procedures used to verify accounting reports and statements. 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 amount of time employees devote to particular activities. (Exhibit 16.7) LO 4: Define basic types of financial ratios used as control systems. E. Financial controls – two financial statements that help control overall organizational performance are: Balance sheet –a report that shows the financial picture of a company at a given time (Exhibit 16.8) This statement itemizes three elements: Assets – the values of the various items the corporation owns. Liabilities — the amount a corporation owes to various creditors. Stockholders’ equity – the amount accruing to the corporation’s owners. Profit and Loss statement – an itemized financial statement of the income and expenses of a company’s operations. (Exhibit 16.9) Financial ratio categories: Liquidity ratios indicate the company’s ability to pay short-term debts. The most common liquidity ratio is current assets to current liabilities, called current ratio or net working capital ratio. Leverage ratios show the relative amount of funds in the business supplied by creditors and shareholders. The debt-equity ratio indicates the company’s ability to meet its long-term financial obligation. Profitability ratios indicate management’s ability to generate a financial return on sales or investment. Return on investment (ROI) is a ratio of profit to capital used or a rate of return on capital. Using financial ratios causes management myopia – managers focus on short-term earnings and profits at the expense of longer-term strategic obligations. CONNECT The Right Ratio for the Job (Keyboard navigable alternate version available.) SUMMARY The goal of this activity is to explain the key financial ratios used in measuring an organization’s performance. Three categories of financial ratios are liquidity, leverage, and profitability. ACTIVITY The activity asks students to match questions with the ratio which address the inquiry. CLASS DISCUSSION IDEAS The instructor may wish to ask the class how the featured ratios may be used differently by the organization’s stakeholders, such as vendors, banks, investors, and employees. Would you be most concerned with particular ratios if you were an investor, vendor, or bank? Example 16.4 – Using financial ratios: Liquidity ratios are meant to help us determine how well a company can meet its short-term debt obligations. Cisco Systems, Inc. is an example of a company that is very well equipped to pay off its short-term obligations. From the balance sheet, we see that Cisco had 25,676,000 in current assets and 11,313,000 in current liabilities. We divide those numbers to find our current ratio of 2.27. Management in Action – Progress Report Privacy Concerns in Employee Tracking Sociometric Solutions is a start-up that uses sensors to record employees’ communications behavior and body language. The company showed a client pharmaceutical company that larger cafeteria tables encouraged more employee communication, leading to higher productivity. Companies should inform employees about what they monitor and obtain their individual consent, but surveillance can have a dark side. People feel stressed by negative reinforcement tools, like higher insurance premiums for those who fall short of health goals. Even intended positive reinforcement, such as financial and other rewards for meeting difficult challenges, can create pressure. Federal law requires consulting firms to provide only aggregated data to corporate clients, and not information about individuals. Companies can monitor social media but cannot force current or former employees to disclose their social media passwords. However, monitoring practices face few other constraints. Many worry that sophisticated tracking and recording devices can be misused. What downsides to employee tracking do you think are possible despite existing safeguards? What additional safeguards, if any, would you suggest? Student answers may vary, but they may focus on privacy, discrimination and employer overreach. Potential control methods may include independent review, perhaps by a governmental agency, employee access to the data that has been collected and the opportunity to correct or record a response and most extreme, the outlawing of collecting data that is not directly related to work. Do the potential benefits of biometric monitoring outweigh the potential for privacy violations? Why or why not? Students may point to discrimination, and that this could be a first step to more intrusive employer practices. Students favoring the use of monitoring may present that the employer should not be burdened by poor employee health choices and that promoting better health is a benefit to the employee and society in general. F. Problems with Bureaucratic Control Rigid bureaucratic behavior occurs when control systems prompt employees to stay out of trouble by following the rules. Tactical behavior – the most common type of tactical behavior is to manipulate information or report false performance data. 2. Resistance occurs for several reasons: a. Comprehensive control systems increase the accuracy of performance data and make employees more accountable for their actions. b. Control systems can change expertise and power structures. c. Control systems can change the social structure of the organization. LO 5: List procedures for implementing effective control systems. G. Designing Effective Control Systems Establish valid performance standards – tend to be expressed in quantitative terms; they are objective rather than subjective. Provide adequate information to employees. Ensure acceptability to employees by including standards that are possible to achieve and including employees in the process Maintain open communication Use multiple approaches A balanced scorecard is a control system combining four sets of performance measures: financial, customer, business process, and learning and growth (Exhibit 16.10). CONNECT ISeeIt! Animated Video: Balanced Scorecard SUMMARY The balanced scorecard framework ensures that a firm’s business activities are in support of its strategy. The balanced scorecard provides a mechanism that improves a firm’s control process by linking the firm’s goals to quantifiable measurements, allowing managers to evaluate the progress the firm is making toward achieving success. ACTIVITY Students view a three-minute animated video featuring a strategy map linking the four areas of the balanced scorecard. After the video, students answer multiple-choice questions that target the balanced scorecard concept. CLASS DISCUSSION IDEAS The instructor may have an extended discussion or in-class exercise through the facilitation of strategy mapping another issue at Starbucks or another organization that may be familiar to students. Example 16.5 – Designing control systems: The Mailers Council is the largest group of mailers and mailing associations in the nation. This group maintains the Postal Service can be operated more efficiently, support efforts aimed at containing postal costs, and has the ultimate objective of lower postal rates without compromising service. They will work with the Postal Service to develop a process for setting performance standards and measuring the Postal Service’s success in meeting them because such processes will help management improve its efficiency. II. THE OTHER CONTROLS: MARKETS AND CLANS LO 6: Identify ways in which organizations use market control mechanisms Market control involves the use of economic forces and the pricing mechanisms that accompany them to regulate performance. (Exhibit 16.11) Market controls at the corporate level are used to regulate independent business units. Market controls at the business unit level regulate exchanges among departments and functions. A transfer price is a price charged for a good or service provided to another unit within the organization. Market controls at the individual level provide a natural incentive for employees to enhance their skills and offer them to potential firms. Example 16.6 – Market controls: The website, www.onetonline.org, lists Bureau of Labor Statistics salary information for thousands of jobs as well as the potential career outlook for jobs. This can be useful for illustrating market control concepts of supply and demand as well as how companies might use benchmarking data to determine employee wages. For instance, the job of occupational therapist is predicted to grow much faster than average between 2010-2020 (29% or higher) and the median annual salary in the U.S. is $75,400. LO 7: Discuss the use of clan control in an empowered organization. B. Clan Control: The Role of Empowerment and Culture Bureaucratic controls don’t work well today because: Employees’ jobs have changed – nature of work is evolving. The nature of management has changed. The employment relationship has changed. Managers must empower employees by: putting control where the operation is using ‘real time’ rather than after-the-fact controls rebuilding the assumptions underlying management control to build on trust rather than distrust moving to control based on peer norms rebuilding the incentive systems to reinforce responsiveness and teamwork Clan control - creating relationships built on mutual respect and encouraging the employee to take responsibility for his or her actions Example 16.7 – Clan control: Atlas Copco Tools is a hand tool manufacturer, located in Sweden. Atlas Copco uses teams in production and assembly that work on flexible machinery, so any product can be produced on any machine in the team. These teams have workflow leaders to support them, but they are highly autonomous and well-integrated with other teams. By focusing on the total workflow process and customer needs, the teams are able to coordinate and control their work appropriately. Control is also aided by ready access to performance measures, posted on large screens in the workshop. These measures include planned and fulfilled deliveries, productive hours according to standards, and incoming orders. Finally, the employees at Atlas Copco have a strong loyalty to the company, and they have been willing to change and modify their processes as customer demands have changed. All of these elements contribute to the feeling of clan control at the plant. Management in Action – Onward Future Trends in Employee Monitoring Employers have a growing range of options for tracking, recording, and crunching employee data. For instance, a network of tiny sensors, installed in computers or lighting or heating fixtures, can detect people's motion and energy use in real time. Employees wear badges with RFID (radio frequency identification) technology, infrared detectors, and microphones tracking their speech and physical location at all times while at work (except the restroom, legally off limits). Some companies crunch all kinds of data—not just health or productivity statistics—and identify, for instance, who should be advised about the risk of diabetes or who might value a recommendation for an obstetrician. Credit scores, Internet search data, and even the stores where employees shop can identify healthy employees who keep doctors’ appointments and ride bikes to work, as well as those who buy video games and could use counseling about weight loss. How much should employers tell their employees about what data they are collecting and what they are using it for? Why? Unless the company is investigating illegal activities, most students will indicate that employers should share all of this information. If the information collected is important to performance, employees need that information to improve. Complete sharing of information will also promote greater trust in the employer. What effect do you think employees’ consent to monitoring has on their willingness to follow up on any recommendations their employer may send them? If the employee understands the purpose and relevance of the measure and believes the information is accurate, one may surmise greater acceptance than an “ambush” with data. Prior consent may make the collection appear more developmental than punitive. CONNECT Video Case: From Race Cars to Airplanes SUMMARY Control is defined as any process that directs the activities of individuals toward the achievement of organizational goals. Some managers don't want to admit it, but control problems—the lack of controls or the wrong kinds of controls—frequently cause irreparable damage to organizations. In this activity, students see how control systems from one industry (NASCAR racing) can help improve control systems in another. ACTIVITY Students are provided a brief concept review and a two-minute video describing how United Airlines is using NASCAR training for its ground crews. Students answer a series of multiple-choice questions to test their knowledge of control system terms. CLASS DISCUSSION IDEAS Expand on the video by probing what allows NASCAR pit crews to move so quickly and what methods need to be emulated on by United Airlines ground crews to achieve similar results. CONNECT Case Analysis Is There Empowerment at the Ritz Carlton? SUMMARY The concept of empowerment has become more popular in organizations and has become a necessary aspect of a manager’s repertoire of control. The case presents how Ritz-Carlton sets performance measures. The measures are based on the key factors behind the company’s success: its mystique, employee engagement, customer engagement, product service excellence, community involvement, and financial performance. Financial performance is viewed as the result of achieving the other goals. ACTIVITY The activity presents a short concept review followed by a case. After reading the case, students are to answer a series of multiple-choice questions centered on the firm’s control methods and employee empowerment. CLASS DISCUSSION IDEAS The instructor may ask if and how the methods used at Ritz-Carlton could be used at other organizations. The class might discuss the company’s ability to maintain its culture and approach since its purchase by Marriott International in 1998. CONNECT Click and Drag: Engaging Employees at the Ritz Carlton (Keyboard navigable alternate version available.) SUMMARY The goal of this activity is to demonstrate the importance of effective control systems. It revisits the Ritz-Carlton and its systems to promote quality through employee empowerment. In this offering, the question focus is on the criteria for effective control systems. ACTIVITY Students read the mini-case then match staff actions to control system criteria. CLASS DISCUSSION IDEAS This activity can be discussed in conjunction with the Ritz Carlton case presented earlier in the chapter. The exercise can be expanded on by discussing additional behaviors that would support the criteria featured. CONNECT Case Analysis: Does Legal Sea Foods Take a Balanced Approach to Control? SUMMARY Multiple controls are necessary for effective management. Control systems generally should include both financial and nonfinancial performance targets and incorporate aspects of preliminary, concurrent, and feedback control. In recent years, a growing number of companies have combined targets for managers into a balanced scorecard, a combination of four sets of performance measures: (1) financial, (2) customer satisfaction, (3) business processes (quality and efficiency), and (4) learning and growth. In this activity, students read about Legal Sea Foods and the controls it has in place. The firm is known for its dedication to high standards. The company views the use of control systems across all of its functions—supply chain, finance, information technology, and human resources—as the key to success. ACTIVITY This activity consists of a brief concept review, case, and three multiple-choice questions. CLASS DISCUSSION IDEAS Ask students what elements would be included in the balanced scorecard for Legal Sea Foods. Another discussion could involve examples of feedforward, concurrent, and feedback controls that are or could be used by Legal Sea Foods. BOTTOM LINE What happens in the absence of control? Without control, managers don’t know if employees understand what they are supposed to do and whether they are doing it. They don’t know if systems and processes are delivering what they are supposed to deliver. They don’t know whether they should be making changes to get better results. They don’t know whether they have problems, much less how to correct them. Give an example of a standard for sustainability. Answers will vary. The point is that any bottom-line practice should be measurable somehow. One set of ways to measure sustainability includes reductions in the use of energy and natural resources, including water. Sustainability also could be measured in terms of less pollution, lower carbon emissions, or switching to the use of more sustainable materials. 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 a reduction in costs relative to production with a high error rate. 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 activity delivering something customers value highly, or is it merely correcting problems made elsewhere or delivering something no one really cares about? Or in financial terms, is the cost producing something that customers will pay at least as much to receive? 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 support group is not delivering value for the money it costs the employer, then the employer will do better to outsource the work. Someone leading the department will, therefore, need to ensure that it is run as efficiently as possible (and offers superior service based on in-depth knowledge of the organization) so that the department can compete with outside vendors by not charging more than the market rate. By motivating this efficiency, market controls lower the department’s costs. 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 develop and longer to change, it’s easy for organizations to prefer bureaucratic controls when work is routine. When work is creative, employees need the freedom to make decisions on their own. Clan control ensures that they make decisions that are consistent with the company’s values and strategy. Bureaucratic control, in contrast, stifles the necessary creativity. SOCIAL ENTERPRISES Beyond Counting: Alternate Ways to Measure Social Impact In the case of TOMS, could you think of other ways this organization could assess its social impact? Student responses will vary, but many will bring up the fact that the number of loans and amount of funds is more important than other measures as money matters the most in these situations. An argument can also be made that more subjective measures are not as reliable an indicator as funding. Which of the three measures (IVC, PPI, or BIA) would you likely use to measure your enterprise's social impact? Student responses will again vary. Students should support their choice of IVC, PPI, or BIA with evidence from the scenario. LECTURETTES 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. Budgets 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. Budgets are established for a fixed time period, usually up to 18 months. Budgets reflect some level of management commitment to a project or activity. Budgets are developed for some type of proposal that is usually submitted by lower-level managers to upper-level managers review, possible revision, and approval. Budgets, under normal operating conditions, should not be altered. Budget changes are usually limited to those occasions wherein extenuating circumstances result in enforceable changes in operations. 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. Expense Budget — covers all items of expense, and are often used to control cost centers or revenue centers. Capital Expenditure Budget — is a summary of all major capital expenses, including such items as developmental costs, inventory costs, and capital expenditures. Capital expenditures for high-cost facilities and equipment may cover a period of several years, depending on the expected life of the equipment or the project. Cash Budget — is used to forecast both cash receipts and disbursements. This is an essential budget, especially for small businesses, because it manages the cash flow to be certain that critical cash expenses can be met. Non-monetary Resource Budget — itemizes the needed input of such non-monetary resources as man-hours, machine-time, and units of raw materials. Typically, these budgets can be translated into dollar terms for the purpose of determining the master budget and other budgetary documentation. THE BUDGETING PROCESS There are two basic types of budgeting processes: Top-down budgeting Bottom-up budgeting Top-Down Budgeting Some organizations utilize a top-down budgeting process wherein budgets are imposed by top management onto subordinates. Top-down budgeting is usually better for (1) making industry-wide economic projections ;(2) establishing corporate planning parameters; (3) determining corporate goals; and (4) planning overall resource availability. Bottom-up Budgeting Most organizations prefer to use a bottom-up budgeting process in which budgets are usually prepared by those who must operate within them. Thus, budgets are submitted by operational personnel to superiors for ultimate approval. Bottom-up budgeting is usually better for (1) operational plans; (2) alternate courses of operational action; (3) determining specific resource requirements; and (4) dealing with information on products and markets. Advantages of bottom-up budgeting include: (1) operational managers gain a more realistic view of their operational needs; (2) operational managers have greater knowledge as to what their needs will be; (3) operational managers are less apt to overlook operational details; (4) operational managers are more apt to accept budgets that they helped to develop; and (5) operational managers will have higher motivation to meet budgetary requirements that they helped to establish. ADVANTAGES OF BUDGETING The advantages of budgeting are that budgets: Help translate objectives and tasks required to achieve objectives into dollar terms. Serve as consistent and objective standards of performance. Can maximize resource allocations. Serve to coordinate and focus operational activities on the achievement of corporate goals. Make effective control devices DISADVANTAGES OF BUDGETS The disadvantages of budgeting include: It can be a time-consuming and costly process. Budget restrictions can be strong demotivators for innovative managers. Furthermore, budgets can: Result in overspending because budgets are usually expressed in inflationary and overstated terms. Encourage stupid behaviors, such as spending money simply because there is some in the budget. Cause conflict between departments, between peers, between workers and their superiors, and between managers and budgeting staff. Often focus on the wrong things, such as keeping within the budget limit, as opposed to doing what needs to be done. LECTURETTE 16.2: Management by Objectives for Control MANAGEMENT BY OBJECTIVES — WHAT IS IT? 1. Management-by-Objectives (MBO) is a process by which organization members can work together to establish mutual goals. MBO is based on the notion that people are committed to the attainment of goals that they help to establish. MBO is based on the contention that the future will confront the organization with change, and participants must coordinate their efforts to achieve overall organizational goals. MBO is based on the idea that good planning includes good mechanisms for control. Thus, MBO is a planning controlling, and motivating technique to focus managerial attention on the achievement of organizational goals. THE MBO PROCESS MBO car, be viewed as a process in four major stages: STAGE 1 Top management sets overall corporate objectives and disseminates them down through the organization for appropriate action. STAGE 2 Each individual manager formulates personal goals, within the parameters of the corporate goals, and forwards them to his or her superior. STAGE 3 Peer groups meet, compare individual goals, and establish group goals. This step is designed to integrate peer-group goals, eliminate conflicts, reduce duplications, and clarify responsibilities. STAGE 4 Frequent performance reviews are used to monitor performance, adjust plans, and establish an appropriate performance-reward correlation. SETTING OBJECTIVES 1. In order for MBO objectives to maximize performance factors for both the individual and the organization, it is important to: State objectives in clear, concise, objective, realistic, and measurable terms. Set objectives that is correct with respect to the end-states desired. Keep the process compatible with corporate policies, standing directives, and acceptable ethical practices. Challenge each individual to grow and develop without inducing excessive stress through unreasonable expectations. Keep the entire process open, creative, and stimulating. There are two basic categories of objectives: (1) performance objectives and (2) personal development objectives. Performance Objectives Routine Objectives — maintain the status quo. Improvement Objectives — overcome some problem or improve some performance factor. Innovative Objective — develop a creative approach to overcome some major barrier to performance. Personal Development Objectives Set some goal that will result in some form of personal growth and development. TARGET AREAS FOR CORPORATE OBJECTIVES Among the areas that can be selected for corporate objectives are: Market share Innovation Productivity Physical and financial resources Profitability Manager performance and development Worker performance and attitude Social responsibilities ADVANTAGES OF THE MBO PROCESS Management by Objectives: Helps to integrate objectives and effort. Focuses management attention on key target areas. Reduces duplication of effort and improves organizational communication. Appeals to the higher-order needs of managerial and professional personnel. DISADVANTAGES OF THE MBO PROCESS The main disadvantages of MBO are that it: Is time-consuming and expensive. Requires a great deal of time on the part of key managers. Becomes difficult to implement within a dynamic organization experiencing constant and increasing rates of change Involves many managerial and organizational activities that are difficult to measure. Is often difficult to compare managerial activities in some departments with those in others. Instructor Manual for Management: Leading and Collaborating in a Competitive World Thomas S. Bateman, Scott A. Snell, Robert Konopaske 9781259927645, 9781259546945
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