Chapter 16 Managerial Control Flashcards Preview

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Flashcards in Chapter 16 Managerial Control Deck (17):

What are four types of control systems?

bureaucratic control The use of rules, regulations, and authority to guide performance.

market control Control based on the use of pricing mechanisms and economic information to regulate activities within organizations.

clan control Control based on the norms, values, shared goals, and trust among group members.



bureaucratic が一番多い。



What are the main ideas behind Six Sigma quality-control tools?

Six Sigma aims for defect-free performance

Six Sigma is designed to reduce defects in all organization processes—not just product defects but anything that may result in customer dissatisfaction, such as inadequate service, delayed delivery, and excessively high prices due to high costs or inefficiency.


What are the steps in the bureaucratic control process sequence?


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.



Approaches to Bureaucratic Control

The three approaches to bureaucratic control are feedforward, concurrent, and feedback.

Feedforward control takes place before operations begin and includes policies, procedures, and rules designed to ensure that planned activities are carried out properly. Examples include inspection of raw materials and proper selection and training of employees.

Concurrent control takes place while plans are being carried out. It includes directing, monitoring, and fine-tuning activities as they occur.

Feedback control focuses on the use of information about results to correct deviations from the acceptable standard after they arise.




Budgetary Controls

budgeting/Types of Budgets

budgeting The process of investigating what is being done and comparing the results with the corresponding budget data to verify accomplishments or remedy differences; also called budgetary controlling.



There are many types of budgets. Some of the more common types are as follows:

Sales budget. Usually data for the sales budget include forecasts of sales by month, sales area, and product.

Production budget. The production budget commonly is expressed in physical units. Required information for preparing this budget includes types and capacities of machines, economic quantities to produce, and availability of materials.

Cost budget. The cost budget is used for areas of the organization that incur expenses but no revenue, such as human resources and other support departments. Cost budgets may also be included in the production budget. Costs may be fixed, or independent of the immediate level of activity (such as rent) or variable, rising or falling with the level of activity (such as raw materials).

Cash budget. The cash budget is essential to every business. It should be prepared after all other budget estimates are completed. The cash budget shows the anticipated receipts and expenditures, the amount of working capital available, the extent to which outside financing may be required, and the periods and amounts of cash available.

Capital budget. The capital budget is used for the cost of fixed assets like plant and equipment. Such costs are usually treated, not as regular expenses, but as investments because of their long-term nature and importance to the organization’s productivity.

Master budget. The master budget includes all the major activities of the business. It brings together and coordinates all the activities of the other budgets and can be thought of as a “budget of budgets.”


Financial Ratios


Liquidity ratios/current ratio/Leverage ratios/ debt-equity ratio/ Profitability ratios/return on investment (ROI) 

An effective approach for checking on the overall performance of an enterprise is to use key financial ratios. Ratios help indicate possible strengths and weaknesses in a company’s operations. Key ratios are calculated from selected items on the profit and loss statement and the balance sheet. We will briefly discuss three categories of financial ratios: liquidity, leverage, and profitability:


• Liquidity ratios. Liquidity ratios indicate a company’s ability to pay short-term debts. The most common liquidity ratio is current assets to current liabilities, called the current ratio or net working capital ratio. This ratio indicates the extent to which current assets can decline and still be adequate to pay current liabilities. Some analysts set a ratio of 2 to 1, or 2.00, as the desirable minimum. For example, referring back to Table 16.5, the liquidity ratio there is about 2.86 ($1,918,455/$667,204). The company’s current assets are more than capable of supporting its current liabilities.

current ratio A liquidity ratio that indicates the extent to which short-term assets can decline and still be adequate to pay short-term liabilities.


• Leverage ratios. Leverage ratios show the relative amount of funds in the business supplied by creditors and shareholders. An important example is the debt-equity ratio, which indicates the company’s ability to meet its long-term financial obligations. If this ratio is less than 1.5, the amount of debt is not considered excessive. In Table 16.5, the debt-equity ratio is only 0.35 ($618,600/$1,757,563). The company has financed its expansion almost entirely by issuing stock rather than by incurring significant long-term debt.

debt-equity ratio A leverage ratio that indicates the company’s ability to meet its long-term financial obligations.


• Profitability ratios. Profitability ratios indicate management’s ability to generate a financial return on sales or investment. For example, return on investment (ROI) is a ratio of profit to capital used, or a rate of return from capital (equity plus long-term debt). This ratio allows managers and shareholders to assess how well the firm is doing compared with other investments. For example, if the net income of the company in Table 16.5 were $300,000 this year, its return on capital would be 12.6 percent [$300,000/($1,757,563/$618,600)], normally a very reasonable rate of return.

return on investment (ROI) A ratio of profit to capital used, or a rate of return from capital.


The Downside of Bureaucratic Control

 rigid bureaucratic behavior/tactical behavior/resistance

While control systems are used to constrain people’s behavior and make their future behavior predictable, people are not machines that automatically fall into line as the designers of control systems intend. In fact, control systems can lead to dysfunctional behavior. A control system cannot be effective without consideration of how people will react to it. For effective control of employee behavior, managers should consider three types of potential responses to control: rigid bureaucratic behavior, tactical behavior, and resistance.


Rigid Bureaucratic Behavior

Rigid bureaucratic behavior occurs when control systems prompt employees to stay out of trouble by following the rules. Unfortunately, such systems often lead to poor customer service and make the entire organization slow to act.

例)At midnight, a patient with eye pains enters an emergency room at a hospital. At the reception area, he is classified as a nonemergency case and referred to the hospital’s eye clinic. Trouble is, the eye clinic doesn’t open until the next morning. When he arrives at the clinic, the nurse asks for his referral slip, but the emergency room doctor had forgotten to give it to him. The patient has to return to the emergency room and wait for another physician to screen him. The physician refers him back to the eye clinic and to a social worker to arrange payment. Finally, a third doctor looks into his eye, sees a small piece of metal, and removes it—a 30-second procedure.


Tactical Behavior

Control systems will be ineffective if employees engage in tactics aimed at “beating the system.” The most common type of tactical behavior is to manipulate information or report false performance data. People may produce two kinds of invalid data: about what has been done and about what can be done. False reporting about the past is less common, because it is easier to identify someone who misreports what happened than someone who gives an erroneous prediction or estimate of what might happen. Still, managers sometimes change their accounting systems to “smooth out” the numbers. Also, people may intentionally feed false information into a management information system to cover up errors or poor performance. 



More commonly, people falsify their predictions or requests for the future. When asked to give budgetary estimates, employees usually ask for larger amounts than they need. On the other hand, they sometimes submit unrealistically low estimates when they believe a low estimate will help them get a budget or a project approved.



Designing Effective Control Systems


5 characteresitics of effective contorl systems

1. Establish valid performance standards.
2. Provide adequate information to employees.
3. Ensure acceptablity to employees.
4. Maintain open communication.
5. Use multiple approaches.


1. Establish valid performance standards

The most effective standards tend to be expressed in quantitative terms; they are objective rather than subjective. Also, the measures should not be capable of being easily sabotaged or faked. Moreover, the system must incorporate all important aspects of performance

Michael Hammerのseven "deadly sins" of performance measurementを参照

2. Provide adequate information to employees

In general, a manager designing a control system should evaluate the information system in terms of the following questions:

1. Does it provide people with data relevant to the decisions they need to make?
2. Does it provide the right amount of information to decision makers throughout the organization?
3. Does it provide enough information to each part of the organization about how other, related parts of the organization are functioning?


3. Ensure acceptablity to employees

Employees are less likely to resist a control system and exhibit dysfunctional behaviors if they accept the system. They are more likely to accept systems that have useful performance standards but are not overcontrolling. Employees also will find systems more acceptable if they believe the standards are possible to achieve.

4. Maintain open communication

When deviations from standards occur, it is important that employees feel able to report the deviations so that the problem can be addressed. If employees come to feel that their managers want to hear only good news or, worse, if they fear reprisal for reporting bad news, even if it is not their fault, then any controls that are in place will be much less likely to be effective. 
5. Use multiple approaches

 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)

 (4) learning and growth. 

The goal is generally to broaden management’s horizon beyond short-term financial results so that the company’s long-term success is more likely. 



Michael Hammer's のseven "deadly sins" of performance measurement to avoid

1. Vanity(うぬぼれ)—using measures that are sure to make managers and the organization look good. For example, a company might measure order fulfillment in terms of whether products are delivered by the latest date promised by the organization, rather than by the tougher and more meaningful measure of when the customers request to receive the products.

2. Provincialism(地方人特有の偏狭な態度)—limiting measures to functional or departmental responsibilities, rather than the organization’s overall objectives. If a company’s transportation department measures only shipping costs, it won’t have an incentive to consider that shipping reliability (delivery on a given date) will affect performance at the company’s stores or distribution centers.

3. Narcissism(自己賛美)—measuring from the employee’s, manager’s, or company’s point of view, rather than the customer’s. For example, a maker of computer systems measured ontime shipping of each component; if 90 percent of the system’s components arrived at the customer on time, it was 90 percent on time. But from the customer’s point of view, the system wasn’t on time at all, because the customer needed all the components to use the system.

4. Laziness—not expending the effort to analyze what is important to measure. An electric power company simply assumed customers cared about installation speed, but in fact, customers really cared more about receiving an accurate installation schedule.
5. Pettiness(心の狭いこと)—measuring just one component of what affects business performance. An example would be clothing manufacturers that assume they should just consider manufacturing cost, rather than the overall costs of making exactly the right products available in stores when customers demand them.

6. Inanity(無意味/くだらなさ)—failing to consider the way standards will affect real-world human behavior and company performance. A fast-food restaurant targeted waste reduction and was surprised when restaurant managers began slowing down operations by directing their employees to hold off on cooking anything until orders were placed.

7. Frivolity(軽率)—making excuses for poor performance rather than taking performance standards seriously. In some organizations, more effort goes to blaming others than to correcting problems.


Market Control

Market control is the ability of buyers or sellers to influence the price, quantity, or other aspects of a market. The number of competitors is the key determinant of market control. More competitors mean less market control and fewer competitors mean greater market control.




Explain why companies develop control systems for employees.

Left to their own devices, employees may act in ways that do not benefit the organization. Control systems are designed to eliminate idiosyncratic behavior and keep employees directed toward achieving the goals of the firm. Control systems are a steering mechanism for guiding resources, for helping each individual act on behalf of the organization.


Summarize how to design a basic bureaucratic control system.

The design of a basic control system involves four steps:

(1) setting performance standards

(2) measuring performance

 (3) comparing performance with the standards

(4) eliminating unfavorable deviations by taking corrective action.

Performance standards should be valid and should cover issues such as quantity, quality, time, and cost. Once performance is compared with the standards, the principle of exception suggests that the manager needs to direct attention to the exceptional cases that have significant deviations. Then the manager takes the action most likely to solve the problem.


Describe the purposes for using budgets as a control device.

Budgets combine the benefits of feedforward, concurrent, and feedback controls. They are used as an initial guide for allocating resources, a reference point for using funds, and a feedback mechanism for comparing actual levels of sales and expenses with their expected levels. Recently, companies have modified their budgeting processes to allocate costs over basic processes (such as customer service) rather than to functions or departments. By changing the way they prepare budgets, many companies have discovered ways to eliminate waste and improve business processes.


Identify ways in which organizations use market control mechanisms.

Market controls can be used at the level of the corporation, the business unit or department, or the individual. At the corporate level, business units are evaluated against one another based on profitability. At times, less profitable businesses are sold while more profitable businesses receive more resources. Within business units, transfer pricing may be used to approximate market mechanisms to control transactions among departments. At the individual level, market mechanisms control the wage rate of employees and can be used to evaluate the performance of individual managers.


List procedures for implementing effective control systems.

To maximize the effectiveness of controls, managers should

(1) establish valid performance standards

 (2) provide adequate information to employees

(3) ensure acceptability, (4) maintain open communication

 (5) see that multiple approaches are used (such as bureaucratic, market, and clan control).


Define basic types of financial statements and financial ratios used as controls.

The basic financial statements are the balance sheet and the profit and loss statement. The balance sheet compares the value of company assets to the obligations the company owes to owners and creditors. The profit and loss statement shows company income relative to costs incurred. In addition to these statements, companies look at liquidity ratios (whether the company can pay its short-term debts), leverage ratios (the extent to which the company is funding operations by going into debt), and profitability ratios (profit relative to investment). These ratios provide a goal for managers as well as a standard against which to evaluate performance.


Discuss the use of clan control in an empowered organization.

Approaching control from a centralized, mechanistic viewpoint is increasingly impractical. In today’s organizations, it is difficult to program “one best way” to approach work, and it is often difficult to monitor performance. To be responsive to customers, companies must harness the expertise of employees and give them the freedom to act on their own initiative. To maintain control while empowering employees, companies should

(1) use self-guided teams

 (2) allow decision making at the source of the problems

(3) build trust and mutual respect

 (4) base control on a guiding framework of norms

 (5) use incentive systems that encourage teamwork.