Chapter 16
Organizational Control in a Complex
Business Environment
Pamela S. Lewis
Stephen H. Goodman
Patricia M. Fandt
Slides Prepared by
Bruce R. Barringer
University of Central Florida
©2001 South-Western College Publishing
Learning Objectives
Slide 1 of 3
1.Define and discuss the importance of
organizational control.
2.Identify the sequence of steps to be
undertaken in a thorough control system.
3.Identify the factors that are important
considerations in the design of a control
system.
4.Describe the various characteristics of
effective control.
© 2001 South-Western Publishing
Transparency 16-2
Learning Objectives
Slide 2 of 3
5.Identify the factors that help determine the
proper amount of control.
6.Define feedforward control, concurrent
control, and feedback control.
7.Describe the difference between the
philosophies of bureaucratic control and
organic control.
© 2001 South-Western Publishing
Transparency 16-3
Learning Objectives
Slide 3 of 3
8.Describe some of the more important
techniques and methods for establishing
financial control.
9.Discuss some of the ethical issues related to
the control of employee behavior.
© 2001 South-Western Publishing
Transparency 16-4
Organizational Control Defined
The systematic process through which
managers regulate organizational activities to
make them consistent with the expectations
established in plans and to help them achieve
all predetermined standards of performance.
© 2001 South-Western Publishing
Transparency 16-5
Process of Control
Slide 1 of 3
• Setting Standards for Performance
– Whenever possible, the standards should be set
in a manner that allows them to be compared
with actual performance.
• Measuring Actual Performance
– An organization must decide:
• What to measure.
• When to measure.
• How frequently to measure.
© 2001 South-Western Publishing
Transparency 16-6
Process of Control
Slide 2 of 3
• Comparing Actual Performance With
Standards
– This step involves determining if actual
performance compared to standards falls within
acceptable limits.
• Responding to Deviations
– If the deviation from performance is
unacceptable, then corrective action is
warranted. If the deviation is acceptable, no
correction action is necessary.
© 2001 South-Western Publishing
Transparency 16-7
Process of Control
Slide 3 of 3
If deviations are
acceptable
Take no
corrective
action
Set
performance
standards
Measure
actual
performance
Compare
performance
with
standards
If deviations are
unacceptable
Take
corrective
action
© 2001 South-Western Publishing
Transparency 16-8
Designing Quality and Effectiveness
into the Control System
Factors to consider when designing a
control system:
The amount of variety in the control system
The ability to anticipate problems
The sensitivity of the measuring device
The composition of the feedback reports
© 2001 South-Western Publishing
Transparency 16-9
Design Factors Affecting Control
System Quality
Slide 1 of 3
• The Amount of Variety in the Control System
– Variety refers to the number of activities,
processes, or items that are measured and
controlled.
– Law of requisite variety
• Control systems must have enough variety to cope
with the variety in the systems they are trying to
control.
© 2001 South-Western Publishing
Transparency 16-10
Design Factors Affecting Control
System Quality
Slide 2 of 3
• Ability to Anticipate Problems
– If a deviation can be anticipated before it
occurs, corrective action can be instituted more
quickly and the negative consequences of the
deviation reduced.
• Sensitivity of the Measuring Device
– Care must be taken to use a device that is
sensitive enough to adequately measure the
system being controlled.
© 2001 South-Western Publishing
Transparency 16-11
Design Factors Affecting Control
System Quality
Slide 3 of 3
• Composition of Feedback Reports
– Variance reporting
• Highlighting only those things that fail to
meet the established standards.
– Management by exception
• Focusing on the elements that are not
meeting the standards.
© 2001 South-Western Publishing
Transparency 16-12
Control System Design Issues
Slide 1 of 2
Control Process Steps
Design Considerations
Design factors
Step 1: Set standards
of performance
- Variety
- Anticipation
- Sensitivity
- Feedback reporting
Effectiveness criteria
Step 2: Measure
actual
performance
© 2001 South-Western Publishing
- Related to strategy
- Complete
- Use objective and subjective
measures
- Timely
- Acceptable
Transparency 16-13
Control System Design Issues
Slide 2 of 2
Control Process Steps
Step 3: Compare
performance with
standards
Step 4: Respond to
deviations
© 2001 South-Western Publishing
Design Considerations
Select proper amount
- Cost
- Reliability
- Process importance
Select focal point
- Feedforward focus
- Concurrent focus
- Feedback focus
- Multiple focus
Transparency 16-14
Criteria for Effective Control
Slide 1 of 3
• Is Related to Organizational Strategy
– A control system should measure what is
important now and what will be important in
the future.
• Utilizes All Steps in the Control Process
– To be effective, a control system must employ
all of the steps in the control process.
© 2001 South-Western Publishing
Transparency 16-15
Criteria for Effective Control
Slide 2 of 3
• Composed of Objective and Subjective
Measures
– Effective control systems typically require
managers to blend quantitative (objective) and
qualitative (subjective) performance measures.
• Incorporates Timeliness in Feedback
Reporting
– Timeliness is the degree to which the control
system provides information when it is needed.
© 2001 South-Western Publishing
Transparency 16-16
Criteria for Effective Control
Slide 3 of 3
• Acceptable to a Diverse Work Force
– To be effective, organizational controls must be
accepted by employees.
– The control system should motivate workers to
recognize standards and act to achieve them.
© 2001 South-Western Publishing
Transparency 16-17
Selecting the Proper Amount of
Control
Slide 1 of 3
• Costs in the Control System
– Two basic categories of costs need to be
considered:
• The costs associated with the information
needed to perform the control process.
• The costs associated with undesirable
deviations from standards.
© 2001 South-Western Publishing
Transparency 16-18
Selecting the Proper Amount of
Control
Slide 2 of 3
• Reliability of the System
– Reliability refers to the probability that the
object or process being controlled will
consistently behave in an acceptable manner.
– The basic premise is that the more reliable the
process, the less control that is needed.
© 2001 South-Western Publishing
Transparency 16-19
Selecting the Proper Amount of
Control
Slide 3 of 3
• Importance of the Process Being Controlled
– The more important the object or process being
controlled, the greater the amount of control
that should be exercised.
© 2001 South-Western Publishing
Transparency 16-20
Selecting the Focal Point for Control
Slide 1 of 2
• Feedforward (Preventive) Control
– Focuses on detecting undesirable material,
financial, or human resources that serve as
inputs to the transformation process.
• Concurrent Control
– Focuses on the transformation process to ensure
that it is functioning properly.
© 2001 South-Western Publishing
Transparency 16-21
Selecting the Focal Point for Control
Slide 2 of 2
• Feedback Control
– Focuses on discovering undesirable output and
implementing corrective action.
• Multiple Focal Points
– Most organizations use several control systems
focused on various phases of the transformation
process.
© 2001 South-Western Publishing
Transparency 16-22
Control Focal Points
Control system
Feedforward
control
Inputs
© 2001 South-Western Publishing
Concurrent
control
Transformation
process
Feedback
control
Outputs
Transparency 16-23
Managerial Control Philosophies
Bureaucratic
Control
Organic Control
Use of formal
mechanisms to influence
behavior, assess
performance, and correct
unacceptable deviations
from standards.
Reliance upon social
values, traditions, shared
beliefs, flexible authority,
and trust to assess
performance and correct
unacceptable deviations.
© 2001 South-Western Publishing
Transparency 16-24
Factors Favoring Bureaucratic vs.
Organic Controls
Bureaucratic
Control
Organic Control
Task-oriented
management style
Relationship-oriented
management style
Culture favors decision
making at the top
Culture encourages
employee participation
Employees that lack
education and experience
Highly educated, highly
trained employees
Performance that can be
quantified and measured
Performance that is
difficult to measure
© 2001 South-Western Publishing
Transparency 16-25
Mechanisms for Financial Control
Slide 1 of 3
• Financial Statements
– Balance sheet
• Summary of an organization’s financial
position at a given point in time, showing
assets, liabilities, and owner’s equity.
– Income statement
• Summary of an organization’s financial
performance over a given time interval,
showing revenues, expenses, and bottomline profit or loss.
© 2001 South-Western Publishing
Transparency 16-26
Mechanisms for Financial Control
Slide 2 of 3
• Financial Ratios
– Liquidity ratios
• Indicators of the firm’s ability to meet its
short-term debt obligations.
– Profitability ratios
• Indicators of the relative effectiveness, or
profitability, of the organization.
© 2001 South-Western Publishing
Transparency 16-27
Mechanisms for Financial Control
Slide 3 of 3
• Financial Ratios (cont.)
– Debt ratios
• Indicators of the firm’s ability to handle
long-term debt.
– Activity ratios
• Indicators of performance with respect to
key activities defined by management.
© 2001 South-Western Publishing
Transparency 16-28
Ethical Issues in the Control of a
Diverse Work Force
• Drug Testing
• Undercover Surveillance
• Computer Monitoring
© 2001 South-Western Publishing
Transparency 16-29
Guidelines for the Successful
Manager of the Future
Slide 1 of 4
• Develop a control system for each
important product, service, process, or
activity within the organization.
• Incorporate sufficient variety, sensitivity,
anticipation capability, and feedback into
the control system.
© 2001 South-Western Publishing
Transparency 16-30
Guidelines for the Successful
Manager of the Future
Slide 2 of 4
• Gauge the control system’s effectiveness by
considering its relationship to corporate
strategy, its completeness, the degree to
which it incorporates objective and
subjective performance measures, its
timeliness, and its acceptability to
individuals within the organization.
© 2001 South-Western Publishing
Transparency 16-31
Guidelines for the Successful
Manager of the Future
Slide 3 of 4
• Determine the appropriate points within the
organization where control systems should
be focused.
• Understand the intricacies of the financial
data contained in the organization’s
financial statements, and use various
financial control techniques to assess the
firm’s financial health.
© 2001 South-Western Publishing
Transparency 16-32
Guidelines for the Successful
Manager of the Future
Slide 4 of 4
• Adopt a philosophy of control that is
consistent with the management style,
corporate culture, employee
professionalism, and performance measures
present within the organization.
© 2001 South-Western Publishing
Transparency 16-33