Controlling Function of Management: Negatives & Positives

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Bateman−Snell: V. Controlling: Learning Introduction © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

Foundations of Management
• Managing
• The External Environment
and Organizational Culture
• Managerial Decision
Making

Planning: Delivering
Strategic Value
• Planning and Strategic
Management
• Ethics and Corporate
Responsibility
• International Management
• Entrepreneurship

Strategy Implementation

Organizing: Building Leading: Controlling:
a Dynamic Organization Mobilizing People Learning and Changing
• Organization Structure • Leadership • Managerial Control
• The Responsive • Motivating for Performance • Managing Technology and
Organization • Managing Teams Innovation
• Human Resources • Communicating • Creating and Managing
Management Change
• Managing the Diverse
Workforce
Bateman−Snell: V. Controlling: Learning Introduction © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

PART FIVE

Controlling: Learning
and Changing
In Parts One through Four, you learned about the
foundations of management, planning and strategy, and
the ways to implement plans by organizing, staffing,
and leading. Part Five concludes our discussion with
three chapters about controlling and changing what the
organization and its people are doing. Chapter 16 de-
scribes managerial control, including issues related to
culture, as well as techniques for ensuring that intended
activities are carried out and goals are accomplished.
The last two chapters focus on change and renewal.
Chapter 17 discusses technology and innovation, includ-
ing a strategic approach to new technologies and the cre-
ation of a culture for innovation. Chapter 18 examines an
ongoing challenge for the modern executive: becoming
world-class through the management of change. In this
chapter, we describe the nature of this challenge and ways
managers can deal with it. Some of the topics you learned
about in earlier chapters play central roles in the change
process. Chapter 18 should remind you how your under-
standing of them will benefit your managerial career.

571
Bateman−Snell: V. Controlling: Learning 16. Managerial Control © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

CHAPTER 16
Managerial Control
More than at any time in the past, companies will not be
able to hold themselves together with the traditional
methods of control: hierarchy, systems, budgets, and the
like . . . The bonding glue will increasingly become
ideological.
— Collins and Porras1

Use your good judgment in all situations. There will be no
additional rules.
— Nordstrom’s employee manual

LEARNING OBJECTIVES
After studying Chapter 16, you will be able to:
1 Explain why companies develop control systems for employees. p. 574
2 Summarize how to design a basic bureaucratic control system. p. 575
3 Describe the purposes for using budgets as a control device. p. 584
4 Define basic types of financial statements and financial ratios used as controls. p. 588
5 List procedures for implementing effective control systems. p. 594
6 Identify ways in which organizations use market control mechanisms. p. 599
7 Discuss the use of clan control in an empowered organization. p. 601
Bateman−Snell: V. Controlling: Learning 16. Managerial Control © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

CHAPTER OUTLINE
Bureaucratic Control Systems The Downside of Bureaucratic Control
Designing Effective Control Systems
The Control Cycle
Approaches to Bureaucratic Control The Other Controls: Markets and Clans
Management Audits Market Control
Budgetary Controls Clan Control: The Role of Empowerment and
Financial Controls Culture

Management Close-Up:
HOW DID ELATTUVALAPIL SREEDHARAN STEER A MASSIVE SUBWAY PROJECT?

If you have ever traveled through a big city—in the United In his late 60s, he was ready to retire from government
States or abroad—chances are you’ve ridden a subway work when he was offered the opportunity to head a
system—the Tube, Underground, BART, or Metro—at $2 billion subway project for the capital. A similar effort
least once. While it might not be your favorite form of had failed disastrously in Calcutta, partly because of po-
transportation because of the lack of scenery, consider litical infighting, leaving many people skeptical about the
how efficient it is at getting people from one place to project’s potential for success. But Sreedharan says that
another without tangling with ground-based traffic. he wanted better standards for his people, who are ac-
Then think about what a sprawling city would be like customed to the frustrations and inconveniences of liv-
without one. Gridlock would result. Until recently, New ing in a developing nation. So he took the job of
Delhi, the capital of India and home to about 14 million managing director of the Delhi Metro Rail Corp and
people, had no underground transportation. Above began what others thought an impossible task: design-
ground, hordes of motorcycles, ing and building a state-of-the-
exhaust-pumping cars and art subway system beneath
Elattuvalapil Sreedharan undertook a
trucks, motorized and hand- New Delhi. As director for a
management task that no one else

{ }
towed rickshaws—along with government-run bureau, he
wanted—and most thought was impossible
horse-drawn carts, motor- earns about one-twentieth of
to accomplish. As you read this chapter,
scooter riders, pedestrians, what he might make in the pri-
consider the types of controls that
and wandering sacred cows— vate sector. But he says that
Sreedharan put into place to ensure his
packed the streets so tightly success of the new system is
project’s success. What were they, and
that it was nearly impossible what counts to him most. “I am
why were they so important to the
to travel anywhere. Throw in working not for myself alone
outcome?
the occasional lumbering ele- but for society, the communi-
phant, and the traffic became truly chaotic. ty,” he explains. “I don’t take this job for the remunera-
Elattuvalapil Sreedharan, a government civil engineer, tion, but for the satisfaction of creating some really
good facility for the public.”2
wanted something better for the citizens of New Delhi.
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Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

574 Part Five Controlling: Learning and Changing

The design and construction of New Delhi’s subway system is a tremendous success story.
LO 1
So were the early years of Dell, which gained market share as it perfected an individualized
but rapid system for getting desktop and laptop PCs into the hands of consumers and busi-
ness users. But more recently, Dell has stumbled.3 Consumers have been more interested
in low prices from discounters than in Dell’s customization. Efforts to save money by out-
sourcing customer service led to widespread complaints about poor quality. Then the fed-
eral government announced that it was investigating financial irregularities in its reporting
systems. When Dell said it would restate its earnings, the NASDAQ stock market nearly
removed the company from its listing. How can a company that once was so successful run
into so many problems, and how can a construction success story such as New Delhi’s
occur even in a bureaucracy as ungainly as India’s? These examples are two sides of one
coin: control—a means or mechanism for regulating the behavior of organization mem-
bers. Left on their own, people may act in ways that they perceive to be beneficial to them
individually but that may work to the detriment of the organization as a whole. Even well-
intentioned people may not know whether they are directing their efforts toward the ac-
tivities that are most important. Thus, control is one of the fundamental forces that keep
the organization together and heading in the right direction.
Control is defined as any process that directs the activities of individuals toward
control
the achievement of organizational goals. It is how effective managers make sure that
Any process that directs
activities are going as planned. Some managers don’t want to admit it (see Table 16.1),
the activities of individuals
but control problems—the lack of controls or the wrong kinds of controls—frequently
toward the achievement of
cause irreparable damage to organizations. Ineffective control systems result in prob-
organizational goals.
lems ranging from employee theft to peeling tire tread problems. Research in Motion
was publicly embarrassed when failure to fully test a “noncritical system routine” for
updating its computer servers caused the e-mail service on its BlackBerry devices to
crash for hours throughout North America.4 Employees simply wasting time cost
U.S. employers billions of dollars each year!5
Control has been called one of the Siamese twins of management. The other twin is
planning. Some means of control are necessary because once managers form plans and
strategies, they must ensure that the plans are carried out. They must make sure that
other people are doing what needs to be done and not doing inappropriate things. If
plans are not carried out properly, management must take steps to correct the prob-
Control is
lem. This process is the primary control function of management. By ensuring cre-
essential for the
ativity, enhancing quality, and reducing cost, managers must figure out ways to
attainment of
control the activities in their organizations.
any management
Not surprisingly, effective planning facilitates control, and control facilitates plan-
objective.
ning. Planning lays out a framework for the future and, in this sense, provides a blue-
print for control. Control systems, in turn, regulate the allocation and use of resources
and, in so doing, facilitate the process of the next phases of planning. In today’s complex

TABLE 16.1 • Lax top management—senior managers do not emphasize or value the need for
Symptoms of an Out-of- controls, or they set a bad example.
Control Company
• Absence of policies—the firm’s expectations are not established in writing.
• Lack of agreed-upon standards—organization members are unclear about what
needs to be achieved.
• “Shoot the messenger” management—employees feel their careers would be at
risk if they reported bad news.
• Lack of periodic reviews—managers do not assess performance on a regular,
timely basis.
• Bad information systems—key data are not measured and reported in a timely
and easily accessible way.
• Lack of ethics in the culture—organization members have not internalized a
commitment to integrity.
Bateman−Snell: V. Controlling: Learning 16. Managerial Control © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

575
Managerial Control Chapter 16

TABLE 16.2
System Control Features and Requirements
Characteristics of Controls
Bureaucratic control Uses formal rules, standards, hierarchy, and legitimate
authority. Works best where tasks are certain and
workers are independent.
Market control Uses prices, competition, profit centers, and exchange
relationships. Works best where tangible output can
be identified and market can be established between
parties.
Clan control Involves culture, shared values, beliefs, expectations, and
trust. Works best where there is “no one best way” to do
a job and employees are empowered to make decisions.

SOURCES: W. G. Ouchi, “A Conceptual Framework for the Design of Organizational Control Mechanisms,” Management
Science 25 (1979), pp. 833–48; W. G. Ouchi, “Markets, Bureaucracies, and Clans,” Administrative Science Quarterly 25 (1980),
pp. 129–41; and Richard D. Robey and C. A. Sales, Designing Organizations (Burr Ridge, IL: Richard D. Irwin, 1994).

organizational environment, both functions have become more difficult to implement
while they have become more important in every department of the organization.
Managers today must control their people, inventories, quality, and costs, to mention
just a few of their responsibilities.
According to William Ouchi of the University of California at Los Angeles,
managers can apply three broad strategies for achieving organizational control: bu-
reaucratic control, market control, and clan control.6 Bureaucratic control is the bureaucratic control
use of rules, regulations, and formal authority to guide performance. It includes The use of rules,
such items as budgets, statistical reports, and performance appraisals to regulate regulations, and authority
behavior and results. Market control involves the use of pricing mechanisms to to guide performance.
regulate activities in organizations as though they were economic transactions.
market control
Business units may be treated as profit centers and trade resources (services or
Control based on the use
goods) with one another via such mechanisms. Managers who run these units may
of pricing mechanisms and
be evaluated on the basis of profit and loss. Clan control, unlike the first two
economic information to
types, does not assume that the interests of the organization and individuals natu-
regulate activities within
rally diverge. Instead, clan control is based on the idea that employees may share
organizations.
the values, expectations, and goals of the organization and act in accordance with
them. When members of an organization have common values and goals—and clan control
trust one another—formal controls may be less necessary. Clan control is based on Control based on the
many of the interpersonal processes described in the organization culture section norms, values, shared goals,
of Chapter 2, in Chapter 12 on leadership, and in Chapter 14 on groups and teams and trust among group
(e.g., group norms and cohesiveness). members.
Table 16.2 summarizes the main features of bureaucratic, market, and clan controls.
We use this framework as a foundation for our discussions throughout the chapter.

Bureaucratic Control Systems
Bureaucratic (or formal) control systems are designed to measure progress toward set LO 2
performance goals and, if necessary, to apply corrective measures to ensure that per-
formance achieves managers’ objectives. Control systems detect and correct signifi-
cant variations, or discrepancies, in the results of planned activities.

The Control Cycle
As Figure 16.1 shows, a typical control system has four major steps:
1. Setting performance standards.
2. Measuring performance.
3. Comparing performance against the standards and determining deviations.
4. Taking action to correct problems and reinforce successes.
Bateman−Snell: V. Controlling: Learning 16. Managerial Control © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

576 Part Five Controlling: Learning and Changing

Set
Measure Determine
performance Compare
performance deviation
standards

Meets
Standards
standards

Take
No Yes
corrective
action

Reinforce and
continue
FIGURE 16.1 work
The Control Process

Step 1: Setting Performance Standards Every organization has goals: prof-
itability, innovation, satisfaction of customers and employees, and so on. A standard is
standard
the level of expected performance for a given goal. Standards are targets that establish
Expected performance for
desired performance levels, motivate performance, and serve as benchmarks against
a given goal: a target that
which to assess actual performance. Standards can be set for any activity—financial ac-
establishes a desired
tivities, operating activities, legal compliance, charitable contributions, and so on.7
performance level,
We have discussed setting performance standards in other parts of the text. For ex-
motivates performance, and
serves as a benchmark ample, employee goal setting for motivation is built around the concept of specific,
against which actual measurable performance standards. Such standards should be challenging and should
performance is assessed. aim for improvement over past performance. Typically, performance standards are de-
rived from job requirements, such as increasing market share by 10 percent, reducing
costs 20 percent, and answering customer complaints within 24 hours. But perform-
ance standards don’t apply just to people in isolation—they frequently reflect the inte-
gration of both human and system performance. HealthPartners, a Bloomington,
Minnesota, nonprofit organization that operates clinics and a hospital and offers
health insurance plans, sets ambitious standards for patient care. To achieve a goal of
reducing diabetes complications by 30 percent, HealthPartners measured existing
practices and results, and then set up a standard protocol for exams and treatments, in-
cluding the requirement that any abnormal results receive an immediate response. To
encourage its physicians to follow the protocol, HealthPartners offers financial incen-
tives for compliance. In little more than a decade, HealthPartners exceeded its goal for
improved diabetes care. A local eye doctor commented that it was easy to tell which
diabetic patients have coverage through HealthPartners because so few of them suffer
diabetes-related damage to their retinas. HealthPartners has similar programs for
treatment of cardiovascular disease and depression and for improving the health status
of patients who are obese or smoke.8
Performance standards can be set with respect to (1) quantity, (2) quality, (3) time used,
Standards must
be set for all and (4) cost. For example, production activities include volume of output (quantity), de-
bottom-line fects (quality), on-time availability of finished goods (time use), and dollar expenditures
practices. for raw materials and direct labor (cost). Many important aspects of performance, such as
customer service, can be measured by the same standards—adequate supply and avail-
ability of products, quality of service, speed of delivery, and so forth.
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Management: Leading and and Changing Companies, 2009
Collaborating in a
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Edition

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Managerial Control Chapter 16

One word of caution: The
Sometimes quality standards involve meeting or exceeding standards set by
downside of establishing per- government agencies. Recently, the U.S. Food and Drug Administration proposed
formance targets and standards loosening its standards for the ingredients in products labeled “chocolate” to allow the
is that they may not be support- use of vegetable fats other than cocoa butter. If the rule change takes effect, candies
ed by other elements of the like Whoppers malted milk balls and PayDay Chocolatey Avalanche could put
control system. Each piece of “chocolate” in their names. Some true chocolate lovers are horrified, but Nick
the system is important and de- Malgieri, director of the baking program at the Institute of Culinary Education in
pends on the others, as is evi- New York, says, “No one is going to force a high-class chocolate maker to add vegetable
fat to chocolate.”9 At companies that seek a reputation for premium quality, the recipe
dent in the massive undertaking
standards can remain as strict as ever, and chocolate afficionados will be on the alert.
of designing and building New
Delhi’s subway system. Other-
wise, the system can get terribly out of balance.

Step 2: Measuring Performance The second step in the control process is to
measure performance levels. For example, managers can count units produced, days ab-
sent, papers filed, samples distributed, and dollars earned. Performance data commonly
are obtained from three sources: written reports, oral reports, and personal observations.
Written reports include computer printouts and on-screen reports. Thanks to com-
puters’ data-gathering and analysis capabilities and decreasing costs, both large and
small companies can gather huge amounts of performance data.

Management Close-Up: TAKING ACTION
Elattuvalapil Sreedharan has been a civil engineer for the Indian government for more than
half a century, so he understands the complexity of its bureaucracy. Where others had
stumbled in their attempts to undertake major improvements to the country’s infrastruc-
ture, Sreedharan was confident that he could succeed—if he was allowed to do things his
way. And that meant avoiding political systems to ensure that builders and overseers were
picked based on their technical expertise.
The subway project was a huge undertaking—blasting 90 tunnels and building 150
bridges throughout the city, but Sreedharan was undaunted. He selected his own team of
engineers and awarded contracts to prequalified construction bidders to minimize inter-
ference from government officials and politicians. He insisted on having the authority to
circumvent much of India’s governmental bureaucracy, an authority that was granted. In
addition, he declared that he was going to build this subway according to world standards,
not Indian ones. This meant using the best high-tech equipment available: German-made
precision machines to dig tunnels, state-of-the-art South Korean trains, and innovative
French signaling equipment. Sreedharan kept his organization lean, having engineers handle
their own correspondence, instead of hiring administrative assistants.
New Delhi’s subway system was completed three years ahead of schedule, within its
budget and using some of the best equipment in the world. The Indian government was so
impressed with Sreedharan’s performance that it immediately gave him another assign-
ment: to expand the network from 40 miles and 59 stations to 206 miles and a high-speed
rail link to the airport. Sreedharan accepted the challenge, although he admitted concern
about finishing this new project on time. So he split his team into three parts—each to
work on one of the new lines—and promised bonuses for the team that produced the best
results. “He’s nourishing a competitive spirit,” says Anuj Dayal of Metro Rail. “It’s part of
the management strategy.”10
• Why was it significant that Sreedharan actually set a higher performance standard for
his project than the government of India did?
• How might competition among the engineering teams affect the performance stan-
dards of the next project?
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Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

578 Part Five Controlling: Learning and Changing

One common example of oral reports occurs when a salesperson contacts his or her
immediate manager at the close of each business day to report the accomplishments,
problems, or customers’ reactions during the day. The manager can ask questions to
gain additional information or clear up any misunderstandings. When necessary, ten-
tative corrective actions can be worked out during the discussion.
Personal observation involves going to the area where activities take place and watch-
ing what is occurring. The manager can directly observe work methods, employees’
nonverbal signals, and the general operation. Personal observation gives a detailed
picture of what is going on, but it also has some disadvantages. It does not provide ac-
curate quantitative data; the information usually is general and subjective. Also, em-
ployees can misunderstand the purpose of personal observation as mistrust or lack of
confidence. Still, many managers believe in the value of firsthand observation. As you
learned in earlier chapters, personal contact can increase leadership visibility and up-
ward communication. It also provides valuable information about performance to sup-
plement written and oral reports.
Regardless of the performance measure used, the information must be provided to
managers on a timely basis. For example, consumer-goods companies such as General
Foods carefully track new-product sales in selected local markets first, so they can
make any necessary adjustments well before a national rollout. Information that is not
principle of exception
available is of little or no use to managers.
A managerial principle
stating that control is
Step 3: Comparing Performance with the Standard The third step in
enhanced by concentrating
the control process is comparing performance with the standard. In this process,
on the exceptions to or
the manager evaluates the performance. For some activities, relatively small devia-
significant deviations from
the expected result or tions from the standard are acceptable, while in others a slight deviation may be se-
standard. rious. In many manufacturing processes, a significant deviation in either direction
(e.g., drilling a hole that is too small or too large) is unacceptable. In other cases, a
deviation in one direction, such as
sales or customer satisfaction that fall
below the target level, is a problem,
but a deviation in the other, exceed-
ing the sales target or customer ex-
pectations, is a sign employees are
getting better-than-expected results.
As a result, managers who perform
the oversight must analyze and eval-
uate the results carefully.
The managerial principle of ex-
ception states that control is en-
hanced by concentrating on the
exceptions to, or significant devia-
tions from, the expected result or
standard. In other words, in com-
paring performance with the stan-
dard, managers need to direct their
attention to the exception. For ex-
ample, controlling the quality of
At Microscan, operators and
components produced on an assembly line might show that only 5 pieces per
assemblers are responsible for
1,000 fall out of line. To exercise effective control, the manager should investigate
the quality of their work.
these five components—the exceptions—further.11
With the principle of exception, only exceptional cases require corrective action.
This principle is important in controlling. The manager is not concerned with per-
formance that equals or closely approximates the expected results. Managers can save
much time and effort if they apply the principle of exception.
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Edition

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Managerial Control Chapter 16

Step 4: Taking Action to Correct Problems and Reinforce Successes
The last step in the control process is to take appropriate action when there are signif-
icant deviations. This step ensures that operations are adjusted to achieve the planned
results—or to continue exceed-
ing the plan if the manager de-
“Mistakes and problems are inevitable in complex enterprises. . . . We shouldn’t
termines that is possible. In expect heads of established organizations to be perfect, but we should expect them
cases in which significant vari- to catch and correct their mistakes quickly.”
ances are discovered, the man- —Rosabeth Moss Kanter, professor, Harvard Business School12
ager usually takes immediate
and vigorous action.
An alternative approach is for the corrective action to be taken, not by higher-ups,
but by the operator at the point of the problem. In computer-controlled production
technology, two basic types of control are feasible: specialist control and operator con-
trol. With specialist control, operators of computer-numerical-control (CNC) machines
must notify engineering specialists of malfunctions. With this traditional division of
labor, the specialist takes corrective action. With operator control, multiskilled opera-
tors can rectify their own problems as they occur. Not only is this second strategy
more efficient because deviations are controlled closer to their source, but it is also
more satisfying because operators benefit by having a more enriched job. At Microscan
System, which makes bar-code scanners, every employee is responsible for ensuring
the quality of his or her work, resulting in efficient operations. Engineers are respon-
sible for preventing and correcting problems in product and process design, and pro-
duction workers are responsible for preventing and correcting defects in the processes
they carry out.13
The selection of the corrective action depends on the nature of the problem. The
corrective action may involve a shift in marketing strategy (if, say, the problem is
lower-than-expected sales), a disciplinary action, a new way to check the accuracy of
manufactured parts, or a major modification to a process or system. Sometimes
managers learn they can get better results if they adjust their own practices. Yum
Brands, whose franchise restaurants include KFC, Taco Bell, Pizza Hut, and Long
John Silver’s, conducts regular surveys to learn whether employees feel strong com-
mitment to their jobs. These data are shared with managers to help them measure
their performance as leaders and motivators. Jonathan McDaniel, a Houston KFC
manager, once learned that his employees were unhappy with their work hours. He
began asking them ahead of time whether they wanted particular days off each
month—information that helped him create better schedules and end a cause of em-
ployee dissatisfaction.14

The Power of Collaboration
When corrective action is needed to solve a systemic problem, such as major delays in work
flow, often a team approach is most effective. A corrective action is more likely to have
greater acceptance in the organization if it is based on a common effort and takes into ac-
count multiple points of view. As we discussed in Chapter 14, teams often bring a greater di-
versity of resources, ideas, and perspectives to problem solving. Knowledgeable team
members can often prevent managers from simplistic solutions that don’t address the under-
lying causes of a problem. They are more likely to take into account the effects of any solu-
tion on other parts of the organization, preventing new problems from arising later. And they
may well develop solutions that managers might not have considered on their own. As a re-
sult, any corrective action that is finally adopted will probably be more effective. An important
added benefit of bringing employees together to develop corrective actions is that it helps
managers build and reinforce an organizationwide culture of high standards.
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Collaborating in a
Competitive World, Eighth
Edition

580 Part Five Controlling: Learning and Changing

Approaches to Bureaucratic Control
The three approaches to bureaucratic control are feedforward, concurrent, and feed-
back. Feedforward control takes place before operations begin and includes policies,
feedforward control
procedures, and rules designed to ensure that planned activities are carried out prop-
The control process used
erly. Examples include inspection of raw materials and proper selection and training of
before operations begin,
employees. Concurrent control takes place while plans are being carried out. It in-
including policies,
cludes directing, monitoring, and fine-tuning activities as they occur. Feedback con-
procedures, and rules
trol focuses on the use of information about results to correct deviations from the
designed to ensure that
planned activities are acceptable standard after they arise.
carried out properly.
Feedforward Control Feedforward control (sometimes called preliminary control)
concurrent control
is future oriented; its aim is to prevent problems before they arise. Instead of waiting
The control process used for results and comparing them with goals, a manager can exert control by limiting ac-
while plans are being tivities in advance. For example, companies have policies defining the scope within
carried out, including which decisions are made. A company may dictate that managers must adhere to clear
directing, monitoring, and
ethical and legal guidelines when making decisions. Formal rules and procedures also
fine-tuning activities as they
prescribe people’s actions before they occur. By stating that a financial officer must ap-
are performed.
prove expenditures over $1,000 or that only components that pass all safety tests can
be used in a product, management specifies in advance which actions can and cannot
feedback control
be taken. To prevent defaults, banks may require extensive loan documentation, re-
Control that focuses on the
views, and approvals by bank officers before authorizing a loan.15
use of information about
Recently, more managers have grown concerned about the organizational pitfalls
previous results to correct
of workplace romances, and some have sought a solution in feedforward controls. As
deviations from the
wonderful as it is to find love, problems can arise if romantic activities between a su-
acceptable standard.
pervisor and subordinate create a conflict of interest or charges of sexual harassment.
Other employees might interpret the relationship wrongly—that the company sanc-
tions personal relationships as a path to advancement. In addition, romantic ups-and-
downs can spill over into the workplace and affect everyone’s mood and motivation.
Controls aimed at preventing such problems in an organization include training in ap-
propriate behavior (including how to avoid sexual harassment) and even requiring ex-
ecutives and their romantic interests to sign “love contracts” in which they indicate
that the relationship is voluntary and welcome. A copy of the contract goes into the
company’s personnel files in case the attachment disintegrates and an unhappy em-
ployee wants to blame the company for having allowed it in the first place.16

Concurrent Control Concurrent control, which takes place while plans are car-
ried out, is the heart of any control system. On a manufacturing floor, all efforts are
directed toward producing the correct quantity and quality of the right products in the
specified amount of time. In an airline terminal, the baggage must get to the right air-
planes before flights depart. In factories, materials must be available when and where
needed, and breakdowns in the production process must be repaired immediately.
Concurrent control also is in effect when supervisors watch employees to ensure they
work efficiently and avoid mistakes.
Advances in information technology have created powerful concurrent controls.
Computerized systems give managers immediate access to data from the most remote
corners of their companies. For example, managers can update budgets instantly based
on a continuous flow of performance data. In production facilities, monitoring sys-
tems that track errors per hour, machine speeds, and other measures allow managers
to correct small production problems before they become disasters. Point-of-sale ter-
minals in store checkout lines send sales data back to a retailer’s headquarters to show
which products are selling in which locations.
For Jim Donald, CEO of Starbucks, store visits are a fundamental part of concur-
rent control. Donald spends most of his day observing and talking to managers, cor-
porate staff, and store employees. He visits about 10 stores a day while traveling, and
Bateman−Snell: V. Controlling: Learning 16. Managerial Control © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

581
Managerial Control Chapter 16

even while he’s at headquarters, he gets out to roughly 20 stores a week. During a visit,
he joins employees at work behind the counter, and he gets quality information from
sticking his head into areas as widely diverse as the restrooms and pastry display.
Donald says he learned from Wal-Mart founder Sam Walton, “If you want to know
what’s wrong with the business, ask the front line.”17

Feedback Control Feedback control is involved
when performance data have been gathered and analyzed
and the results have been returned to someone (or some-
thing) in the process to make corrections. When supervi-
sors monitor behavior, they are exercising concurrent
control. When they point out and correct improper per-
formance, they are using feedback as a means of control.
Timing is an important aspect of feedback control.
Long time lags often occur between performance and
feedback, such as when actual spending is compared
with the quarterly budget, instead of weekly or month-
ly, or when some aspect of performance is compared
with the projection made a year earlier. Yet, if feedback
on performance is not timely, managers cannot quickly
identify and eliminate the problem and prevent more In late spring 2005, carmaker
serious harm.18 General Motors was struggling
Some feedback processes are under real-time (concurrent) control, such as a with legacy costs, a shrinking
sales base, and negative cash
computer-controlled robot on an assembly line. Such units have sensors that continu- flow . . . not to mention foreign
ally determine whether they are in the correct position to perform their functions. If competition from Honda and
they are not, a built-in control device makes immediate corrections. Toyota.What control measures
might be lacking at GM?
In other situations, feedback processes require more time. Some companies that value Considering what you’ve read
innovation are applying social network analysis, which uses data from surveys to create di- about approaches to control,
agrams showing which employees collaborate with which colleagues. Employees who are what method might be
beneficial to GM?
at a hub of information sharing are the organization’s “innovation catalysts”—people who
actively participate in information sharing. Managers can use the social network analysis to
reward innovation catalysts, give them important assignments, and, in areas where not
enough collaboration is occurring, train and motivate employees to share knowledge.19

The Role of Six Sigma One of the most important quality-control tools to
emerge is Six Sigma, which we first discussed in Chapter 9. It is a particularly robust
and powerful application of feedback control. Six Sigma is designed to reduce defects
in all organization processes—not just product defects but anything that may result in
The bottom line
customer dissatisfaction, such as inadequate service, delayed delivery, and excessively
Quality
high prices due to high costs or inefficiency. The system was developed at Motorola in
the late 1980s, when the company found it was being beaten consistently in the com- Six Sigma aims for defect-free
petitive marketplace by foreign firms that were able to produce higher-quality prod- performance
ucts at a lower cost. Since then, the technique has been widely adopted and even
improved on by many companies, such as GE, Allied Signal, Ford, and Xerox.
Sigma is the Greek letter used in statistics to designate the estimated standard devia-
tion, or variation in a process. It indicates how often defects in a process are likely to occur.
The lower the sigma number, the higher the level of variation or defects; the higher the
sigma number, the lower the level of variation or defects. For example, as you can see in
Table 16.3, a two-sigma-level process has more than 300,000 defects per million opportu-
nities (DPMO)—not a very well-controlled process. A three-sigma-level process has
66,807 DPMO, which is roughly a 93 percent level of accuracy. Many organizations oper-
ate at this level, which on its face does not sound too bad, until we consider its implications—
for example, 7 items of airline baggage lost for every 100 processed. The additional costs
to organizations of such inaccuracy are enormous. As you can see in the table, even at just
Bateman−Snell: V. Controlling: Learning 16. Managerial Control © The McGraw−Hill
Management: Leading and and Changing Companies, 2009
Collaborating in a
Competitive World, Eighth
Edition

582 Part Five Controlling: Learning and Changing

TABLE 16.3 Sigma Level DPMO Is Four Sigma Good Enough?
Relationship between
Sigma Level and Defects 2 308,537 Consider these everyday examples of four
per Million Opportunities sigma quality . . .
3 66,807 • 20,000 lost articles of mail per hour
4 6,210 • Unsafe drinking water 15 minutes per day
5 233 • 5,000 incorrect surgical operations per week
6 3.4 • 200,000 wrong prescriptions each year
• No electricity for 7 hours each month

SOURCE: Tom Rancour and Mike McCracken, “Applying 6 Sigma Methods for Breakthrough Safety Performance,” Professional
Safety 45, no. 10 (October 2000), pp. 29–32. Reprinted with permission.

above a 99 percent defect-free rate, or 6,210 DPMO, the accuracy level is often
unacceptable—the statistical equivalent of about 50 dropped newborn babies a day.20
At a six-sigma level, a process is producing fewer than 3.4 defects per million,
which means it is operating at a 99.99966 percent level of accuracy. Six Sigma compa-
nies have not only close to zero product or service defects but also substantially lower
production costs and cycle times and much higher levels of customer satisfaction. The
methodology isn’t just for the factory floor, either. Hospitals that use Six Sigma have
reported lowering the incidence of patients mistakenly given the wrong medications.21
The Six Sigma approach is based on an intense statistical analysis of business
processes that contribute to customer satisfaction. For example, one of the processes
GE measured when it began using the process was product delivery time. Once the
defects or variations are measured, their causes are analyzed. Teams of employees then
work on designing and testing new processes that will reduce the causes of the varia-
tions. For example, if the team finds that delivery delays are caused by production bot-
tlenecks, it will work on eliminating those. When an improved process is installed, it
is analyzed again for remaining defects, and employees then work on reducing those.
This cycle continues until the desired quality level is achieved. In this way, the Six
Sigma process leads to continuous improvement in an organization’s operations.
Six Sigma has come under some criticism for not always delivering business re-
sults.22 One likely reason Six Sigma doesn’t always improve the bottom line is that it
focuses only on how to eliminate defects in a process, not whether the process is the
best one for the organization. So, for example, at 3M, a drive to improve efficiency
through Six Sigma has been blamed for slowing the flow of innovative ideas. At Home
Depot, Six Sigma has been credited with improving such processes as customer check-
out and deciding where to place products in stores, but some say the effort took store
workers away from customers. One way managers can apply the strengths of Six
Sigma and minimize the drawbacks is by setting different goals and control processes
for the company’s mature products than for its areas of innovation.

The Columbus Metropolitan Library used Six Sigma to the benefit of its workers, cus-

MANAGEMENT
MANAGEMENT CONTROL
Management control describes the means by which the actions of individuals or groups
within an organization are constrained to perform certain actions while avoiding other
actions in an effort to achieve organizational goals. Management control falls into two
broad categories—regulative and normative controls—but within these categories are
several types.

Table
Table 1
Types of Control
Types

View PDF

Regulative Normative
Regulative Controls Normative Controls
Bureaucratic Controls Team Norms
Bureaucratic Controls Team
Financial Organizational
Financial Controls Organizational Cultural Norms
Quality
Quality Controls

The following section addresses regulative controls including bureaucratic controls,
financial controls, and quality controls. The second section addresses normative
controls including team norms and organization cultural norms.

REGULATIVE
REGULATIVE CONTROLS

Regulative controls stem from standing policies and standard operating procedures,
leading some to criticize regulative controls as outdated and counter-productive. As
organizations have become more flexible in recent years by flattening organizational
hierarchies, expanding organizational boundaries to include suppliers in inventory
management and customers in new product development, forging cooperative alliances
with competitors, and developing virtual organizations in which employees are
geographically dispersed and may meet only a few time each year, critics point out that
regulative controls may prevent rather promote goal attainment.

There is some truth to this. Customer service representatives at Holiday Inn are limited
in the extent to which they can correct mistakes involving guests. They can move
guests to a different room if there is excessive noise in the room next to the guest's
room. In some instances, guests may get a gift certificate for an additional night at
another Holiday Inn if they have had a particularly bad experience. In contrast, customer
service representatives at Tokyo's Marriott Inn have the latitude to take up to $500 off a
customer's bill to solve complaints.

The actions of customer service representatives at both Holiday Inn and Marriott Inn
must follow policies and procedures, yet those at Marriott are likely to feel less
constrained and more empowered by Marriott's policies and procedures compared to
Holiday Inn customer service representatives. The key in terms of management control
is matching regulative controls such as policies and procedures with organizational
goals such as customer satisfaction. Each of the three types of regulative controls
discussed in the next few paragraphs has the potential to align or misalign
organizational goals with regulative controls. The challenge for managers is striking the
right balance between too much control and too little.

BUREAUCRATIC
BUREAUCRATIC CONTROLS

Bureaucratic controls stem from lines of authority and this authority comes with one's
position in the organizational hierarchy. The higher up the chain of command, the more
an individual will have authority to dictate policies and procedures. Bureaucratic controls
have gotten a bad name and often rightfully so. Organizations placing too much reliance
on chain of command authority relationships inhibit flexibility to deal with unexpected
events. However, there are ways managers can build flexibility into policies and
procedures that make bureaucracies as flexible and able to quickly respond to customer
problems as any other form of organizational control.

Consider how hospitals, for example, are structured along hierarchical lines of authority.
The BoardPage 491 | Top of Article

Table
Table 2
Definition
Definition and Examples of Regulative Controls

View PDF

Type
Type of Regulative
Definition Example
Control Definition Example
Employee
Employee
Bureaucratic Policies
Bureaucratic Controls Policies and operating procedures
handbook
Return
Return on
Financial Key
Financial Controls Key financial targets
investment
Acceptable
Acceptable levels of product or process
Quality Defects
Quality Controls Defects per million
variation

of Directors is at the top, followed by the CEO and then the Medical Director. Below
these top executives are vice presidents with responsibility for overseeing various
hospital functions such as human resources, medical records, surgery, and intensive
care units. The chain of command in hospitals is clear; a nurse, for example, would not
dare increase the dosage of a heart medication to a patient in an intensive care unit
without a physician's order. Clearly, this has the potential to slow reaction times—
physicians sometimes spread their time across hospital rounds for two or three
hospitals and also their individual office practice. Yet, it is the nurses and other direct
care providers who have the most contact with patients and are in the best position to
rapidly respond to changes in a patient's condition.

The question bureaucratic controls must address is: How can the chain of command be
preserved while also building flexibility and quick response times into the system? One
way is through standard operating procedures that delegate responsibility downward.
Some hospital respiratory therapy departments, for example, have developed standard
operating procedures (in health care terms, therapist-driven protocols or TDPs) with
input from physicians.

TDPs usually have branching logic structures requiring therapists to perform specific
tests prior to certain patient interventions to build safety into the protocol. Once
physicians approve a set of TDPs, therapists have the autonomy to make decisions
concerning patient care without further physicians' orders as long as these decisions
stay within the boundaries of the TDP. Patients need not wait for a physician to make
the next set of rounds or patient visits, write a new set of orders, enter the orders on the
hospitals intranet, and wait for the manager of respiratory therapy to schedule a
therapist to perform the intervention. Instead, therapists can respond immediately
because protocols are established that build in flexibility and fast response along with
safety checks to limit mistakes.

Bureaucratic control is thus not synonymous with rigidity. Unfortunately, organizations
have built rigidity into many bureaucratic systems, but this need not be the case. It is
entirely possible for creative managers to develop flexible, quick-response
bureaucracies.

FINANCIAL
FINANCIAL CONTROLS

Financial controls include key financial targets for which managers are held
accountable. These types of controls are common among firms that are organized as
multiple strategic business units (SBUs). SBUs are product, service, or geographic lines
having managers who are responsible for the SBU's profits and losses. These
managers are held responsible to upper management to achieve financial targets that
contribute to the overall profitability of the corporation.

Managers who are not SBU executives often have financial responsibility as well.
Individual department heads are typically responsible for keeping expenses within
budgeted guidelines. These managers, however, tend to have less overall responsibility
for financial profitability targets than SBU managers.

In either case, financial controls place constraints on spending. For SBU managers,
increased spending must be justified by increased revenues. For departmental
managers, staying within budget is typically one key measure of periodic performance
reviews. The role of financial controls, then, is to increase overall profitability as well as
to keep costs in line. To determine which costs are reasonable, some firms will
benchmark other firms in the same industry. Such benchmarking, while not always an
"apples-to-apples" comparison, provides at least some evidence to determine whether
costs are in line with industry averages.

QUALITY
QUALITY CONTROLS

Quality controls describe the extent of variation in processes or products that is
considered acceptable. For some companies, zero defects—no variation at all—is the
standard. In other companies, statistically insignificant variation is allowable.

Quality controls influence the ultimate product or service outcome offered to customers.
By maintaining consistent quality, customers can rely on a firm's product or service
attributes, but this also creates an interesting dilemma. An overemphasis on
consistency where variation is kept to the lowest levels may also reduce response to
unique customer needs. This is not a problem when the product or service is relatively
standardized such as a McDonald's hamburger, butPage 492 | Top of Article
Table
Table 3
Definition and Examples of Normative Controls
Definition

View PDF

Type
Type of Normative
Definition Example
Control Definition Example
Informal Task
Informal team rules and Task delegation based on team
Team
Team Norms
responsibilities member expertise
Organizational Shared Collaboration
Organizational Shared organizational values, Collaboration may be valued
Cultural Norms beliefs, and rituals more than individual "stars"

may pose a problem when customers have nonstandard situations for which a one-size-
fits-all solution is inappropriate. Wealth managers, for example, may create investment
portfolios tailored to a single client, but the process used to implement that portfolio
such as stock market transactions will be standardized. Thus, there is room within
quality control for both creativity; e.g., wealth portfolio solutions, and standardization;
e.g., stock market transactions.

NORMATIVE
NORMATIVE CONTROLS

Rather than relying on written policies and procedures as in regulative controls,
normative controls govern employee and managerial behavior through generally
accepted patterns of action. One way to think of normative controls is in terms how
certain behaviors are appropriate and others are less appropriate. For instance, a
tuxedo might be the appropriate attire for an American business awards ceremony, but
totally out of place at a Scottish awards ceremony, where a formal kilt may be more in
line with local customs. However, there would generally be no written policy regarding
disciplinary action for failure to wear the appropriate attire, thus separating formal
regulative controls for the more informal normative controls.

TEAM
TEAM NORMS

Teams have become commonplace in many organizations. Team norms are the
informal rules that make team members aware of their responsibilities to the team.
Although the task of the team may be formally documented and communicated, the
ways in which team members interact are typically developed over time as the team
goes through phases of growth. Even team leadership be informally agreed upon; at
times, an appointed leader may have less influence than an informal leader. If, for
example, an informal leader has greater expertise than a formal team leader, team
members may look to the informal leader for guidance requiring specific skills or
knowledge. Team norms tend to develop gradually, but once formed, can be powerful
influences over behavior.

ORGANIZATIONAL CULTURE NORMS
ORGANIZATIONAL

In addition to team norms, norms based on organizational culture are another type of
normative control. Organizational culture involves the shared values, beliefs, and rituals
of a particular organization. The Internet search firm, Google, Inc. has a culture in which
innovation is valued, beliefs are shared among employees that the work of the
organization is important, and teamwork and collaboration are common. In contrast, the
retirement specialty firm, VALIC, focuses on individual production for its sales agents,
de-emphasizing teamwork and collaboration in favor of personal effort and rewards.
Both of these example are equally effective in matching norms with organizational
goals; the key is thus in properly aligning norms and goals.

The broad categories of regulative and normative controls are present in nearly all
organizations, but the relative emphasis of each type of control varies. Within the
regulative category are bureaucratic, financial, and quality controls. Within the
normative category are team norms and organization cultural norms. Both categories of
norms can be effective and one is not inherently superior to the other. The managerial
challenge is to encourage norms that align employee behavior with organizational
goals.

SEE ALSO: Organizational Culture; Quality and Total Quality Management; Teams and
Teamwork

Scott B. Droege

FURTHER READING:
FURTHER

Barry, L.L. "The Collaborative Organization: Leadership Lessons from Mayo Clinic."
Organizational Dynamics 33, no. 3 (2004): 228–242.

Lalich, J. "Watch Your Culture." Harvard Business Review 82, no. 1 (2004): 34–39.

Rollag, K., S. Parise, and R. Cross. "Getting New Hires Up to Speed Quickly". MIT
Sloan Management Review 46, no. 2 (2005): 35–41.

Source
Source Citation
Droege, Scott B. "Management Control." Encyclopedia of Management. Ed. Marilyn M.
Helms. 5th ed. Detroit: Gale, 2006. 490-492. Gale Virtual Reference Library. Web. 9
May. 2011.
Document URL
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quality controls,
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management controls,
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