MGT Assignment Basic Elements of Control in Rganization

Basic Elements of Control
chapter
20
LE ARN I N G O B J E C T I V E S
After studying this chapter, you should be able to: 1. Explain the purpose of control, identify different types of control, and describe the steps in the control process. 2. dentify and explain the three forms of operations control. !. "escribe budgets and other tools for financial control. #. dentify and distinguish bet$een t$o opposing forms of structural control. %. "iscuss the relationship bet$een strategy and control, including international strategic control. &. dentify characteristics of effecti'e control, $hy people resist control, and ho$ managers can o'ercome this resistance.
Jamie Dimon, CEO of J. P.Morgan Chase, is using a variety of control measures to reduce costs and boost profits at the company.
( )*++, -.*( )*+ Chasing Dimons Dream for J. P. Morgan Chase

aste !ill hurt our customers. Cars, phones, clubs, per"s#!hat$s that got to do !ith customers%&
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0amie "imon, a ne$ 1BA, and industry 'eteran *andy 4eill spent 12 years transforming Citigroup, through ac5uisitions, into the largest financial corporation in the 6nited *tates. +he relationship e'entually soured, though, and "imon $as fired. ,e then re'itali7ed Ban8 2ne before selling it to 0. 3. 1organ Chase in 200#. 2ne year later, he $as CE2 of 0. 3. 1organ Chase, no$ the thirdlargest 6.*. ban8. "imon9s dream is to surpass his former employer, $hich has re'enues %0 percent greater than Chase9s.
Specially prepared for d03371341 on 21 Apr, 2010
3A)+ * : ' (he Controlling Process
;et "imon isn9t <ust a dreamer, he9s a doer. (irst, he $ill increase o'ersight and control of Ban8 2ne9s operations and expenses. ,e expects cost sa'ing measures to free up =! billion annually by 200>. +he cash $ill then finance ne$ 'entures ranging from more A+1 machines to the creation of ne$ products. 4ith additional re'enues and impro'ed fundamentals, stoc8 price should rise, freeing further funds for ne$ gro$th. (inally, "imon $ants to build a Citi?li8e financial empire, merging $ith firms to <umpstart gro$th in underser'ed regional and international mar8ets. 2nce the basics are right, says "imon, @you earn the right to do a deal.A
A large organi7ation @can get arrogant and full of hubris and lose focus, li8e the )oman Empire,A according to "imon. 0. 3. 1organ Chase had high sales, but $as spending much more than frugal Ban8 2ne, leading to ho?hum profits. Also, the company "imon inherited under$ent multiple mergers $ith little attempt at integration, resulting in a collection of incompatible systems. )esults from different di'isions $ere combined, so @strong businesses $ere subsidi7ing $ea8 ones, but the numbers didn9t <ump out at you,A says C(2 1ichael Ca'anagh. @4ith the results mashed together, it $as easy for managers to hide.A "imon9s operational o'ersight co'ers 'irtually e'ery aspect of 0. 3. 1organ Chase. ,ere9s a sample: B "imon re'ie$s each operating unit monthly. 1anagers must first submit a %0? page report sho$ing financial ratios and results, sales of e'ery product, and e'en the detailed expenses of e'ery $or8er. +hen "imon and the leaders spend hours combing through the data, $ith the CE2 as8ing tough 5uestions and demanding fran8 ans$ers. B "imon prepares a detailed @to doA list e'ery $ee8. @ ma8e my list by business, by person, and try to thin8 about $hat might be a'oiding, $hat ha'e to do,A he relates. @ t9s hard to see the truth/it9s e'en harder to do something about it.A B "imon slashes bloated budgets. @4aste $ill hurt our customers,A says "imon. @Cars, phones, clubs, per8s/$hat9s that got to do $ith customersCA ,e has eliminated fresh flo$ers, la'ish expense accounts, o'ersi7ed offices, and the in?house gym. "imon once as8ed a line of limousine dri'ers to gi'e the names of the managers they $ere $aiting for. ,e then called each executi'e, yelling into the phone, @+oo good for the sub$ayCA and @4hy don9t you try $al8ingCA "imon denies the story, yet limo use is $ay do$n. B "imon loo8s at compensation too. )egional ban8 managers at 0. 3. 1organ Chase once earned =2 million annually, compared to Ban8 2ne9s modest =#00,000. @ 9d tell people they $ere $ay o'erpaid,A the blunt "imon says. @And guess $hatC +hey already 8ne$ it.A 3ay $as cut 20 to %0 percent for most staff, yet almost all stayed on. -o$ a strict pay?for?performance formula 8eeps compensation in line. B "imon gathers outcome data from each manager. @ n a big company, it9s easy for people to b.s. you. A lot of them ha'e been practicing for decades,A "imon claims. ,e as8s lo$?le'el staffers for information and calls suppliers for a

C,A3+E) 20 ' )asic Elements of Control
candid performance criti5ue. *te'e Blac8, co?head of in'estment ban8ing, says, @ f you <ust $ant to run your business on your o$n and report results, you $on9t li8e $or8ing for 0amie.A B "imon belie'es that + is central to the firm9s long?term strategy and once cancelled a long?running contract $ith B1 for information ser'ices. @4hen you9re outsourcing . . . people don9t care. 4e $ant patriots, not mercenaries,A "imon adds. ,e $ill pay =2 billion for technology de'eloped in?house o'er the next year, but considers it money $ell spent. "imon9s long?run goal isn9t merely controlD it9s gro$th. @ t9s offensi'e . . . to be called a cost cutter,A he notes. A company analyst describes the changes, saying, @ t9s the thousand?mile march, and not e'eryone $ill sur'i'e.A "imon 8eeps the company focused on the ultimate goal, a firm that can ri'al Citigroup and dominate 6.*. ban8ing.1
0amie "imon is almost single?handedly rema8ing 0. 3. 1organ Chase. Among other things, he is bringing compensation in line $ith industry standards, cutting costs, streamlining operations, and slashing budgets. ,e is also setting clear targets for profitability and gro$th, and managers throughout the company are then being held accountable for meeting these targets. At the heart of all these efforts is a comprehensi'e control system that helps him monitor all aspects of performance. n a nutshell, effecti'e control helps managers li8e 0amie "imon decide $here they $ant their business to go, point it in that direction, and monitor results to 8eep it
on trac8. neffecti'e control, on the other hand, can result in a lac8 of focus, $ea8 direction, and poor o'erall performance. As $e discuss in Chapter 1, control is one of the four basic managerial functions that pro'ide the organi7ing frame$or8 for this boo8. +his is the first of three chapters de'oted to this important area. n the first section of the chapter $e explain the purpose of control. 4e then loo8 at types of control and the steps in the control process. +he rest of the chapter examines the four le'els of control that most organi7ations must employ to remain effecti'e: operations, financial, structural, and strategic control. 4e conclude by discussing the characteristics of effecti'e control, noting $hy some people resist control and describing $hat organi7ations can do to o'ercome this resistance. +he remaining t$o chapters in this part focus on managing operations and managing information.
The Na"#re of Con"ro$
Control is the regulation of organi7ational acti'ities so that some targeted element of performance remains $ithin acceptable limits. 4ithout this regulation, organi7ations ha'e no indication of ho$ $ell they are performing in relation to their goals. Control, li8e a ship9s rudder, 8eeps the organi7ation mo'ing in the proper direction. At any point in time, it compares $here the organi7ation is in terms of performance Efinancial, producti'e, or other$iseF to $here it is supposed to be. Gi8e a rudder, control pro'ides an organi7ation $ith a mechanism for ad<usting its course if performance falls outside of acceptable boundaries. (or example, (edEx has a performance goal of deli'ering HH.I percent of its pac8ages on time. f on?time
control +he regulation of organi7ational acti'ities in such a $ay as to facilitate goal attainment

deli'eries fall to HH.% percent, control systems $ill signal the problem to managers, so that they can ma8e necessary ad<ustments in operations to regain the target le'el of performance.2 An organi7ation $ithout effecti'e control procedures is not li8ely to reach its goals/or, if it does reach them, to 8no$ that it hasJ
The P#r&ose of Con"ro$
As (igure 20.1 illustrates, control pro'ides an organi7ation $ith $ays to adapt to en'ironmental change, to limit the accumulation of error, to cope $ith organi7ational complexity, and to minimi7e costs. +hese four functions of control are $orth a closer loo8. A'a&"ing "o En(ironmen"a$ Change n today9s complex and turbulent business en'ironment, all organi7ations must contend $ith change.! f managers could establish goals and achie'e them instantaneously, control $ould not be needed. But bet$een the time a goal is established and the time it is reached, many things can happen in the organi7ation and its en'ironment to disrupt mo'ement to$ard the goal/or e'en to change the goal itself. A properly designed control system can help managers anticipate, monitor, and respond to changing circumstances.# n contrast, an improperly designed system can result in organi7ational performance that falls far belo$ acceptable le'els. (or example, 1ichigan?based 1etalloy, a #&?year?old, family?run metal?casting company, signed a contract to ma8e engine?seal castings for -2K, a big 0apanese auto parts ma8er. 1etalloy $as satisfied $hen its first %,000?unit production run yielded #,HI% acceptable castings and only 1% defecti'e ones. -2K, ho$e'er, $as 5uite unhappy $ith this performance and insisted that 1etalloy raise its standards. n short, global 5uality standards in most industries are such that customers demand near?perfection from their suppliers. A properly designed control system can help managers li8e those at 1etalloy stay better attuned to rising standards. Limi"ing "he A))#m#$a"ion of Error *mall mista8es and errors do not often seriously damage the financial health of an organi7ation. 2'er time, ho$e'er, small
errors may accumulate and become 'ery serious. (or example, 4histler Corporation, a large radar detector manufacturer, $as once faced $ith such rapidly escalating demand that 5uality essentially became irrele'ant. +he defect rate rose from # percent to H percent to 1% percent and e'entually reached 2% percent. 2ne day, a manager reali7ed that 100 of the firm9s 2%0 employees $ere spending all their time fixing defecti'e units and that =2 million $orth of in'entory $as a$aiting repair.
Adapt to en'ironmental change Gimit the accumulation of error Control helps the organi7ation Cope $ith organi7ational complexity 1inimi7e costs (igure 20.1 +,E 36)32*E 2( C2-+)2G
Control is one of the four basic management functions in organi*ations. (he control function, in turn, has four basic purposes. Properly designed control systems can fulfill each of these purposes.

,ad the company ade5uately controlled 5uality as it responded to increased demand, the problem $ould ne'er ha'e reached such proportions. *imilarly, (leet$ood Enterprises, a large manufacturer of recreational 'ehicles, suffered because its managers did not ade5uately address se'eral small accounting and production problems years ago. As these small problems gre$ into large ones, the firm struggled $ith ho$ to correct them.% Co&ing +i"h Organi,a"iona$ Com&$e-i". 4hen a firm purchases only one ra$ material, produces one product, has a simple organi7ation design, and en<oys constant demand for its product, its managers can maintain control $ith a 'ery basic and simple system. But a business that produces many products from myriad ra$ materials and has a large mar8et area, a complicated organi7ation design, and many competitors needs a sophisticated system to maintain ade5uate control. 4hen large firms merge, the short?term results are often disappointing. +he typical reason for this is that the ne$ enterprise is so large and complex that the existing control systems are simply inade5uate. ,e$lett?3ac8ard and Compa5 Computer faced <ust this problem $hen ,3 ac5uired Compa5 and had to address myriad issues to transform the t$o firms into one. Minimi,ing Cos"s 4hen it is practiced effecti'ely, control can also help reduce costs and boost output. (or example, .eorgia?3acific Corporation, a large $ood products company, learned of a ne$ technology that could be used to ma8e thinner blades for its sa$s. +he firm9s control system $as used to calculate the amount of $ood that could be sa'ed from each cut made by the thinner blades relati'e to the costs used to replace the existing blades. +he results ha'e been impressi'e/the $ood that is sa'ed by the ne$ blades each year fills I00 rail cars. As .eorgia?3acific disco'ered, effecti'e control systems can eliminate $aste, lo$er labor costs, and impro'e output per unit of input. n their bids to further reduce costs, businesses are cutting bac8 on e'erything from health insurance co'erage to o'ernight shipping to business lunches for clients.&
T.&es of Con"ro$
+he examples of control gi'en thus far ha'e illustrated the regulation of se'eral organi7ational acti'ities, from producing 5uality products to coordinating complex organi7ations. 2rgani7ations practice control in a number of different areas and at different le'els, and the responsibility for managing control is $idespread. Areas of Con"ro$ Control can focus on any area of an organi7ation. 1ost organi7ations define areas of control in terms of the four basic types of resources they use: physical, human, information, and financial.> Control of physical resources includes
in'entory management Estoc8ing neither too fe$ nor too many units in in'entoryF, 5uality control Emaintaining appropriate le'els of output 5ualityF, and e5uipment control Esupplying the necessary facilities and machineryF. Control of human resources includes selection and placement, training and de'elopment, performance appraisal, and compensation. Control of information resources includes sales and mar8eting forecasting, en'ironmental analysis, public relations, production scheduling, and economic forecasting.I (inancial control in'ol'es managing the organi7ation9s debt so
@)ight no$, e'erything loo8s 2.K. in terms of

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1ichael Bair, Boeing Nice 3resident

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that it does not become excessi'e, ensuring that the firm al$ays has enough cash on hand to meet its obligations but does not ha'e excess cash in a chec8ing account, and ensuring that recei'ables are collected and bills are paid on a timely basis. n many $ays, the control of financial resources is the most important area, because financial resources are related to the control of all the other resources in an organi7ation. +oo much in'entory leads to storage costsD poor selection of personnel leads to termination and rehiring expensesD inaccurate sales forecasts lead to disruptions in cash flo$s and other financial effects. (inancial issues tend to per'ade most control?related acti'ities. +he crisis in the 6.*. airline industry precipitated by the terrorist attac8s on *eptember 11, an economic do$nturn that reduced business tra'el, and rising fuel costs can be fundamentally traced bac8 to financial issues. Essentially, airline re'enues dropped $hile their costs increased. Because of high labor costs and other expenses, the airlines ha'e faced ma<or problems in ma8ing appropriate ad<ustments. H 6nited Airlines, for instance, spends o'er half of its re'enues on laborD in contrast, 0etBlue spends only 2% percent of its re'enues on labor.10 Le(e$s of Con"ro$ 0ust as control can be bro8en do$n by area, (igure 20.2 sho$s that it can also be bro8en do$n by le'el $ithin the organi7ational system. Operations control focuses on the processes the organi7ation uses to transform resources into products or ser'ices.11 Ouality control is one type of operations control. Financial control is concerned $ith the organi7ation9s financial resources. 1onitoring recei'ables to ma8e sure customers are paying their bills on time is an example of financial control. Structural control is concerned $ith ho$ the elements of the organi7ation9s structure are ser'ing their intended purpose. 1onitoring the administrati'e ratio to ma8e sure staff expenses do not become excessi'e is an example of structural control. (inally, strategic control focuses on ho$ effecti'ely the organi7ation9s corporate, business, and functional strategies are succeeding in helping the organi7ation meet its goals. (or example, if a corporation has been unsuccessful in implementing its strategy of related di'ersification, its managers need to identify the reasons and either change the strategy or rene$ their efforts to implement it. 4e discuss these four le'els of control more fully later in this chapter. Res&onsi0i$i"ies for Con"ro$ +raditionally, managers ha'e been responsible for o'erseeing the $ide array of control systems and concerns in organi7ations. +hey
operations control (ocuses on the processes the organi7ation uses to transform resources into products or ser'ices financial control Concerned $ith the organi7ation9s financial resources
structural control Concerned $ith ho$ the elements of the organi7ation9s structure are ser'ing their intended purpose strategic control (ocuses on ho$ effecti'ely the organi7ation9s strategies are succeeding in helping the organi7ation meet its goals (igure 20.2 GENEG* 2( C2-+)2G
Managers use control at several different levels. (he most basic levels of control in organi*ations are strategic, structural, operations, and financial control. Each level must be managed properly if control is to be most effective.
*trategic control *tructural control 2perations control (inancial control

decide $hich types of control the organi7ation $ill use, and they implement control systems and ta8e actions based on the information pro'ided by control systems. +hus ultimate responsibility for control rests $ith all managers throughout an organi7ation. 1ost larger organi7ations also ha'e one or more speciali7ed managerial positions called controller. A controller is responsible for helping line managers $ith their control acti'ities, for coordinating the organi7ation9s o'erall control system, and for gathering and assimilating rele'ant information. 1any businesses that use an ,?form or 1?form organi7ation design ha'e se'eral controllers: one for the corporation and one for each di'ision. +he <ob of controller is especially important in organi7ations $here control systems are complex.12 n addition, many organi7ations are also beginning to use operating employees to help maintain effecti'e control. ndeed, employee participation is often used as a 'ehicle for allo$ing operating employees an opportunity to help facilitate organi7ational effecti'eness. (or example, 4histler Corporation increased employee participation in an effort to turn its 5uality problems around. As a starting point, the 5uality control unit, formerly responsible for chec8ing product 5uality at the end of the assembly process, $as eliminated. -ext, all operating employees $ere encouraged to chec8 their o$n $or8 and told that they $ould be responsible for correcting their o$n errors. As a result, 4histler has eliminated its 5uality problems and is no$ highly profitable once again.
S"e&s in "he Con"ro$ Pro)ess

)egardless of the type or le'els of control systems an organi7ation needs, there are four fundamental steps in any control process.1! +hese are illustrated in (igure 20.!. Es"a0$ishing S"an'ar's +he first step in the control process is establishing standards. A control standard is a target against $hich subse5uent performance $ill be compared.1# Employees at a +aco Bell fast?food restaurant, for example, $or8 to$ard the follo$ing ser'ice standards: 1. A minimum of H% percent of all customers $ill be greeted $ithin ! minutes of their arri'al.
controller A position in organi7ations that helps
line managers $ith their control acti'ities control standard A target against $hich subse5uent performance $ill be compared (igure 20.! *+E3* - +,E C2-+)2G 3)2CE**
+aving an effective control system can help ensure that an organi*ation achieves its goals. ,mplementing a control system, ho!ever, is a systematic process that generally proceeds through four interrelated steps.
Establish standards 1easure performance Compare performance against standards 1aintain the status 5uo Correct the de'iation Change standards "etermine need for correcti'e action 12!#

2. 3reheated tortilla chips $ill not sit in the $armer more than !0 minutes before they are ser'ed to customers or discarded. !. Empty tables $ill be cleaned $ithin % minutes after being 'acated. *tandards established for control purposes should be expressed in measurable terms. -ote that standard 1 abo'e has a time limit of ! minutes and an ob<ecti'e target of H% percent of all customers. n standard !, the ob<ecti'e target of @allA empty tables is implied. Control standards should also be consistent $ith the organi7ation9s goals. +aco Bell has organi7ational goals in'ol'ing customer ser'ice, food 5uality, and restaurant cleanliness. A control standard for a retailer li8e ,ome "epot should be consistent $ith its goal of increasing its annual sales 'olume by 2% percent $ithin fi'e years. A hospital trying to shorten the a'erage hospital stay for a patient $ill ha'e control standards that reflect current a'erages. A uni'ersity reaffirming its commitment to academics might adopt a standard of graduating I0 percent of its student athletes $ithin fi'e years of their enrollment. Control standards can be as narro$ or as broad as the le'el of acti'ity to $hich they apply and must follo$ logically from organi7ational goals and ob<ecti'es. A final aspect of establishing standards is to identify performance indicators. 3erformance indicators are measures of performance that pro'ide information that is directly rele'ant to $hat is being controlled. (or example, suppose an organi7ation is follo$ing a tight schedule in building a ne$ plant. )ele'ant performance indicators could be buying a site, selecting a building contractor, and ordering e5uipment. 1onthly sales increases are not, ho$e'er, directly rele'ant. 2n the other hand, if control is being focused on re'enue, monthly sales increases are rele'ant,
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$hereas buying land for a ne$ plant is less rele'ant. Meas#ring Performan)e +he second step in the control process is measuring performance. 3erformance measurement is a constant, ongoing acti'ity for most organi7ations. (or control to be effecti'e, performance measures must be 'alid. "aily, $ee8ly, and monthly sales figures measure sales performance, and production performance may be expressed in terms of unit cost, product 5uality, or 'olume produced. Employees9 performance is often measured in terms of 5uality or 5uantity of output, but for many <obs measuring performance is not so straightfor$ard. A research and de'elopment scientist at 1erc8, for example, may spend years $or8ing on a single pro<ect before achie'ing a brea8through. A manager $ho ta8es o'er a business on the brin8 of failure may need months or e'en years to turn things around. Nalid performance measurement, ho$e'er difficult to obtain, is ne'ertheless 'ital in maintaining effecti'e control, and performance indicators usually can be de'eloped. +he scientist9s progress, for example, may be partially assessed by peer re'ie$,
Establishing standards, measuring performance, comparing performance against standards, and correcting deviations are parts of the control process. ,n the European -nion, all eggs must no! be electronically mar"ed for identification. (his mar"ing system provides information about the environment in !hich the chic"en !as raised, the country !here the eggs !ere produced, and the specific producer !ho brought the eggs to mar"et. (his information, in turn, is useful in monitoring .uality and eliminating any public health ha*ards that might arise.
@4e 8no$ $hat measures $e need to ta8e to impro'e the company.A

2samu 1asu8o, 3resident of 1itsubishi
E )usiness ee", 2ctober 2#, 200%, p. %&F

and the manager9s success may be e'aluated by her ability to con'ince creditors that she $ill e'entually be able to restore profitability. Com&aring Performan)e Agains" S"an'ar's +he third step in the control process is comparing measured performance against established standards. 3erformance may be higher than, lo$er than, or identical to the standard. n some cases comparison is easy. +he goal of each product manager at .eneral Electric is to ma8e the product either number one or number t$o Eon the basis of total salesF in its mar8et. Because this standard is clear and total sales are easy to calculate, it is relati'ely simple to determine $hether this standard has been met. *ometimes, ho$e'er, comparisons are less clear?cut. f performance is lo$er than expected, the 5uestion is ho$ much de'iation from standards to allo$ before ta8ing remedial action. (or example, is increasing sales by >.H percent $hen the standard $as I percent close enoughC +he timetable for comparing performance to standards depends on a 'ariety of factors, including the importance and complexity of $hat is being controlled. (or longer?run and higher?le'el standards, annual comparisons may be appropriate. n other circumstances, more fre5uent comparisons are necessary. (or example, a business
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$ith a se'ere cash shortage may need to monitor its on?hand cash reser'es daily. Consi'ering Corre)"i(e A)"ion +he final step in the control process is determining the need for correcti'e action. "ecisions regarding correcti'e action dra$ hea'ily on a manager9s analytic and diagnostic s8ills. (or example, as healthcare costs ha'e risen, many firms ha'e sought $ays to 8eep their o$n expenses in chec8. *ome ha'e reduced benefitsD others ha'e opted to pass on higher costs to their employees.1% After comparing performance against control standards, one of three actions is appropriate: maintain the status 5uo Edo nothingF, correct the de'iation, or change the standards. 1aintaining the status 5uo is preferable $hen performance essentially matches the standards, but it is more li8ely that some action $ill be needed to correct a de'iation from the standards. *ometimes, performance that is higher than expected may also cause problems for organi7ations. (or example, $hen "aimlerChrysler first introduced its 3+ Cruiser, demand $as so strong that customers $ere placed on $aiting lists, and many customers $ere $illing to pay more than the suggested retail price to obtain a car. +he company $as reluctant to increase production, primarily because it 8ne$ demand $ould e'entually drop. At the same time, ho$e'er, it did not $ant to alienate potential customers. Conse5uently, the firm decided to simply reduce its ad'ertising. +his curtailed demand a bit and limited customer frustration. Changing an established standard usually is necessary if it $as set too high or too lo$ at the outset. +his is apparent if large numbers of employees routinely beat the standard by a $ide margin or if no employees e'er meet the standard. Also, standards that seemed perfectly appropriate $hen they $ere established may need to be ad<usted because circumstances ha'e since changed.
hat are the basic purposes and types of control used in organi*ations% ,dentify a goal you have set for yourself /such as raising your grade point average or buying a car0 and then outline a control frame!or" patterned after 1igure 23.4 for achieving that goal.
concept
C,ECK Specially prepared for d03371341 on 21 Apr, 2010
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O&era"ions Con"ro$
2ne of the four le'els of control practiced by most organi7ations, operations control, is concerned $ith the processes the organi7ation uses to transform resources into products or ser'ices. As (igure 20.# sho$s, the three forms of operations control/preliminary, screening, and postaction/occur at different points in relation to the transformation processes used by the organi7ation.
Pre$iminar. Con"ro$
Preliminary control concentrates on the resources/financial, material, human, and information/the organi7ation brings in from the en'ironment. 3reliminary control attempts to monitor the 5uality or 5uantity of these resources before they enter the organi7ation. (irms li8e 3epsiCo and .eneral 1ills hire only college graduates for their management training programs, and e'en then only after applicants satisfy se'eral inter'ie$ers and selection criteria. n this $ay, they control the 5uality of the human resources entering the organi7ation. 4hen *ears orders merchandise to be manufactured under its o$n brand name, it specifies rigid standards of 5uality, thereby controlling physical inputs. 2rgani7ations also control financial and information resources. (or example, pri'ately held companies li8e 63* and 1ars limit the extent to $hich outsiders can buy their stoc8, and tele'ision net$or8s 'erify the
accuracy of ne$s stories before they are broadcast.
S)reening Con"ro$
Screening control focuses on meeting standards for product or ser'ice 5uality or 5uantity during the actual transformation process itself. *creening control relies hea'ily on feedbac8 processes. (or example, in a "ell Computer assembly factory, computer system components are chec8ed periodically as each unit is being assembled. +his is done to ensure that all the components that ha'e been assembled up to that point are $or8ing properly. +he periodic 5uality chec8s pro'ide feedbac8 to $or8ers so that they 8no$ $hat, if any, correcti'e actions to ta8e. Because they are useful in identifying the cause of problems, screening controls tend to be used more often than other forms of control. 1ore and more companies are adopting screening controls because they are an effecti'e $ay to promote employee participation and catch problems early in the o'erall transformation process. (or example, Corning adopted screening controls for use in manufacturing tele'ision glass. n the past, finished tele'ision screens $ere inspected only after they $ere finished. 6nfortunately, o'er # percent of them $ere later returned by customers because of defects. -o$ the glass screens are inspected at each step in the production process, rather than at the end, and the return rate from customers has dropped to .0! percent.
Pos"a)"ion Con"ro$
Postaction control focuses on the outputs of the organi7ation after the transformation process is complete. Corning9s old system $as postaction control/final inspection after the product $as completed. Although Corning abandoned its postaction control
operations control (ocuses on the processes the organi7ation uses to transform resources into products or ser'ices
1inal inspections are a common part of postaction control systems. Maria Martine*, for e5ample, is sho!n here inspecting batches of Chi.uita brand bananas that have been gro!n on a plantation in Panama and are being prepared for e5port. 6he carefully assesses their !eight, si*e, and appearance to ensure that they meet the company$s standards.
preliminary control Attempts to monitor the 5uality or 5uantity of financial, physical, human, and information resources before they actually become part of the system

system, this still may be an effecti'e method of control, primarily if a product can be manufactured in only one or t$o steps or if the ser'ice is fairly simple and routine. Although postaction control alone may not be as effecti'e as preliminary or screening control, it can pro'ide management $ith information for future planning. (or example, if a 5uality chec8 of finished goods indicates an unacceptably high defect rate, the production manager 8no$s that he or she must identify the causes and ta8e steps to eliminate them. 3ostaction control also pro'ides a basis for re$arding employees. )ecogni7ing that an employee has exceeded personal sales goals by a $ide margin, for example, may alert the manager that a bonus or promotion is in order. 1ost organi7ations use more than one form of operations control. (or example, ,onda9s preliminary control includes hiring only 5ualified employees and specifying strict 5uality standards $hen ordering parts from other manufacturers. ,onda uses numerous screening controls in chec8ing the 5uality of components during assembly of cars. A final inspection and test dri'e as each car rolls off the assembly
%5
line is part of the company9s postaction control.1& ndeed, most successful organi7ations employ a $ide 'ariety of techni5ues to facilitate operations control.
postaction control 1onitors the outputs or results of the organi7ation after the transformation process is complete (igure 20.# (2)1* 2( 23E)A+ 2-* C2-+)2G
Most organi*ations develop multiple control systems that incorporate all three basic forms of control. 1or e5ample, the publishing company that produced this boo" screens inputs by hiring only .ualified employees, typesetters, and printers /preliminary control0. ,n addition, .uality is chec"ed during the transformation process, such as after the manuscript is typeset /screening control0, and the outputs#printed and bound boo"s#are chec"ed before they are shipped from the bindery /postaction control0.
3reliminary control (ocus is on inputs to the organi7ational system. nputs +ransformation 2utputs *creening control (ocus is on ho$ inputs are being transformed into outputs. 3ostaction control (ocus is on outputs from the organi7ational system. (eedbac8 screening control )elies hea'ily on feedbac8 processes during the transformation process financial control Concerned $ith the organi7ation9s financial resources Distinguish bet!een preliminary, screening, and postaction control. Describe ho! a college or university is li"ely to use each type of operations control to monitor student progress.
concept
C,ECK
6inan)ia$ Con"ro$
Financial control is the control of financial resources as they flo$ into the organi7ation Ere'enues, shareholder in'estmentsF, are held by the organi7ation E$or8ing capital, retained earningsF, and flo$ out of the organi7ation Epay, expensesF. Businesses must manage their finances so that re'enues are sufficient to co'er costs and still return a profit to the firm9s o$ners. -ot?for?profit organi7ations such as uni'ersities ha'e the same concerns: +heir re'enues Efrom tax dollars or tuitionF must co'er operating expenses and o'erhead. 6.*. auto ma8ers (ord and .eneral 1otors ha'e come to reali7e that they ha'e to reduce the costs of paying employees they do not need but $hom they are obligated to 8eep due to longstanding labor agreements.
(ord has offered to co'er the full costs of a college education for certain of its employees if they $ill resignD .1, for its part, has offered lump?sum payments of 'arying amounts to some of its $or8ers in return for their resignations.1> A complete discussion of financial management is beyond the scope of this boo8, but $e $ill examine the control pro'ided by budgets and other financial control tools.
%! 3A)+ * : ' (he Controlling Process B#'ge"ar. Con"ro$

A budget is a plan expressed in numerical terms.1I 2rgani7ations establish budgets for $or8 groups, departments, di'isions, and the $hole organi7ation. +he usual time period for a budget is one year, although brea8do$ns of budgets by the 5uarter or month are also common. Budgets are generally expressed in financial terms, but they may occasionally be expressed in units of output, time, or other 5uantifiable factors. 4hen "isney launches the production of a ne$ animated cartoon feature, it creates a budget for ho$ much the mo'ie should cost. *e'eral years ago, $hen mo'ies li8e (he 7ion 8ing $ere ra8ing in hundreds of millions of dollars, "isney executi'es $ere fairly flexible about budget o'erruns. But, on the heels of se'eral animated flops, such as 9tlantis: (he 7ost Empire and (reasure Planet, the company had to ta8e a much harder line on budget o'erruns.1H Because of their 5uantitati'e nature, budgets pro'ide yardstic8s for measuring performance and facilitate comparisons across departments, bet$een le'els in the organi7ation, and from one time period to another. Budgets ser'e four primary purposes. +hey help managers coordinate resources and pro<ects Ebecause they use a common denominator, usually dollarsF. +hey help define the established standards for control. +hey pro'ide guidelines about the organi7ation9s resources and expectations. (inally, budgets enable the organi7ation to e'aluate the performance of managers and organi7ational units. T.&es of B#'ge"s 1ost organi7ations de'elop and ma8e use of three different 8inds of budgets/financial, operating, and nonmonetary. +able 20.1 summari7es the characteristics of each of these. A financial budget indicates $here the organi7ation expects to get its cash for the coming time period and ho$ it plans to use it. Because financial resources are critically important, the organi7ation needs to 8no$ $here those resources $ill be coming from and ho$ they are to be used. +he financial budget pro'ides ans$ers to both these 5uestions. 6sual sources of cash include sales re'enue, short? and long?term loans, the sale of assets, and the issuance of ne$ stoc8.
T.&es of B#'ge" 7ha" B#'ge" Sho+s 1inancial )udget 6ources and -ses of Cash Cash?flo$ or cash budget All sources of cash income and cash expenditures in monthly, $ee8ly, or daily periods Capital expenditures budget Costs of ma<or assets such as a ne$ plant, machinery, or land Balance sheet budget (orecast of the organi7ation9s assets and liabilities in the e'ent all other budgets are met Operating )udget Planned Operations in 1inancial (erms *ales or re'enue budget ncome the organi7ation expects to recei'e from normal operations Expense budget Anticipated expenses for the organi7ation during the coming time period 3rofit budget Anticipated differences bet$een sales or re'enues and expenses ;onmonetary )udget Planned Operations in ;onfinancial (erms Gabor budget ,ours of direct labor a'ailable for use *pace budget *5uare feet or meters of space a'ailable for 'arious functions 3roduction budget -umber of units to be produced during the coming time period +able 20.1 "ENEG23 -. B6".E+* 2).A- PA+ 2-*
Organi*ations use various types of budgets to help manage their control functions. (he three ma<or categories of budgets are financial,
operating, and nonmonetary. (here are several different types of budgets in each category. (o be most effective, each budget must be carefully matched !ith the specific function being controlled.
budget A plan expressed in numerical terms

(or years Exxon $as 'ery conser'ati'e in its capital budgeting. As a result, the firm amassed a huge financial reser'e but $as being o'erta8en in sales by )oyal "utchQ*hell. But executi'es at Exxon $ere then able to use their reser'es to help finance the firm9s merger $ith 1obil, creating Exxon1obil, and to regain the number?one sales position. *ince that time, the firm has become more aggressi'e in capital budgeting to stay ahead of its European ri'al. An operating budget is concerned $ith planned operations $ithin the organi7ation. t outlines $hat 5uantities of products or ser'ices the organi7ation intends to create and $hat resources $ill be used to create them. B1 creates an operating budget that specifies ho$ many of each model of its personal computer $ill be produced each 5uarter. A nonmonetary budget is simply a budget expressed in nonfinancial terms, such as units of output, hours of direct labor, machine hours, or s5uare?foot allocations. -onmonetary budgets are most commonly used by managers at the lo$er le'els of an organi7ation. (or example, a plant manager can schedule $or8 more effecti'ely 8no$ing that he or she has I,000 labor hours to allocate in a $ee8, rather than trying to determine ho$ to best spend =I&,#%1 in $ages in a $ee8. De(e$o&ing B#'ge"s +raditionally, budgets $ere de'eloped by top management and the controller and then imposed on lo$er?le'el managers. Although some organi7ations still follo$ this pattern, many contemporary organi7ations no$ allo$ all managers to participate in the budget process. As a starting point, top management generally issues a call for budget re5uests, accompanied by an indication of o'erall patterns the budgets may ta8e. (or example, if sales are expected to drop in the next year, managers may be told up front to prepare for cuts in operating budgets. As (igure 20.% sho$s, the heads of each operating unit typically submit budget re5uests to the head of their di'ision. An operating unit head might be a department manager in a manufacturing or $holesaling firm or a program director in a
(igure 20.% "ENEG23 -. B6".E+* 2).A- PA+ 2-*
Most organi*ations use the same basic process to develop budgets. Operating units are re.uested to submit their budget re.uests to divisions. (hese divisions, in turn, compile unit budgets and submit their o!n budgets to the organi*ation. 9n organi*ational budget is then compiled for approval by the budget committee, controller, and CEO.
2perating unit budget re5uests "i'ision budget re5uests 2rgani7ational budget B 3repared by budget committee B Appro'ed by budget committee, controller,
and CE2

social ser'ice agency. +he di'ision heads might include plant managers, regional sales managers, or college deans. +he di'ision head integrates and consolidates the budget re5uests from operating unit heads into one o'erall di'ision budget re5uest. A great deal of interaction among managers usually ta8es place at this stage, as the di'ision head coordinates the budgetary needs of the 'arious departments. "i'ision budget re5uests are then for$arded to a budget committee. +he budget committee is usually composed of top managers. +he committee re'ie$s budget re5uests from se'eral di'isions, and once again, duplications and inconsistencies are corrected. (inally, the budget committee, the controller, and the CE2 re'ie$ and agree on the o'erall budget for the organi7ation, as $ell as specific budgets for each operating unit. +hese decisions are then communicated bac8 to each manager. S"reng"hs an' 7ea8nesses of B#'ge"ing Budgets offer a number of ad'antages, but they also ha'e $ea8nesses. 2n the plus side, budgets facilitate effecti'e control. 3lacing dollar 'alues on operations enables managers to monitor operations better and pinpoint problem areas. Budgets also facilitate coordination and communication bet$een departments because they express di'erse acti'ities in a common denominator EdollarsF. Budgets help maintain records of organi7ational performance and are a logical complement to planning. n other $ords, as managers de'elop plans, they should simultaneously consider control measures to accompany them. 2rgani7ations can use budgets to lin8 plans and control by first de'eloping budgets as part of the plan and then using those budgets as part of control. 2n the other hand, some managers apply budgets too rigidly. Budgets are intended to ser'e as frame$or8s, but managers sometimes fail to recogni7e that changing circumstances may $arrant budget ad<ustments. +he process of de'eloping budgets can also be 'ery time consuming. (inally, budgets may limit inno'ation and change. 4hen all a'ailable funds are allocated to specific operating budgets, it may be impossible to procure additional funds to ta8e ad'antage of an unexpected opportunity. ndeed, for these 'ery reasons, some organi7ations are $or8ing to scale bac8 their budgeting systems. Although most organi7ations are li8ely to continue to use budgets, the goal is to ma8e them less confining and rigid.
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O"her Too$s for 6inan)ia$ Con"ro$

Although budgets are the most common means of financial control, other useful tools are financial statements, ratio analysis, and financial audits. 6inan)ia$ S"a"emen"s A financial statement is a profile of some aspect of an organi7ation9s financial circumstances. +here are commonly accepted and re5uired $ays that financial statements must be prepared and presented.20 +he t$o most basic financial statements prepared and used by 'irtually all organi7ations are a balance sheet and an income statement. +he balance sheet lists the assets and liabilities of the organi7ation at a specific point in time, usually the last day of an organi7ation9s fiscal year. (or example, the balance sheet may summari7e the financial condition of an organi7ation on "ecember !1, 200>. 1ost balance sheets are di'ided into current assets Eassets that are relati'ely li5uid, or easily con'ertible into cashF, fixed assets Eassets that are longer term in nature and less li5uidF, current liabilities Edebts and other obligations that must be paid in the near futureF, long?term liabilities Epayable o'er an
balance sheet Gist of assets and liabilities of an organi7ation at a specific point in time financial statement A profile of some aspect of an organi7ation9s financial circumstances

%*
extended period of timeF, and stoc8holders9 e5uity Ethe o$ners9 claim against the assetsF. 4hereas the balance sheet reflects a snapshot profile of an organi7ation9s financial position at a single point in time, the income statement summari7es financial performance o'er a period of time, usually one year. (or example, the income statement might be for the period 0anuary 1, 200>, through "ecember !1, 200>. +he income statement summari7es the firm9s re'enues less its expenses to report net income Eprofit or lossF for the period. nformation from the balance sheet and income statement is used in computing important financial ratios. Ra"io Ana$.sis (inancial ratios compare different elements of a balance sheet or income statement to one another. Ratio analysis is the calculation of one or more financial ratios to assess some aspect of the financial health of an organi7ation. 2rgani7ations use a 'ariety of different financial ratios as part of financial control. (or example, li.uidity ratios indicate ho$ li5uid Eeasily con'erted into cashF an organi7ation9s assets are. Debt ratios reflect ability to meet long?term financial obligations. =eturn ratios sho$ managers and in'estors ho$ much return the organi7ation is generating relati'e to its assets. Coverage ratios help estimate the organi7ation9s ability to co'er interest expenses on borro$ed capital. Operating ratios indicate the effecti'eness of specific functional areas rather than of the total organi7ation. 4alt "isney is an example of a company that relies hea'ily on financial ratios to 8eep its financial operations on trac8.21 6inan)ia$ A#'i"s Audits are independent appraisals of an organi7ation9s accounting, financial, and operational systems. +he t$o ma<or types of financial audits are the external audit and the internal audit. E5ternal audits are financial appraisals conducted by experts $ho are not employees of the organi7ation.22 External audits are typically concerned $ith determining that the organi7ation9s accounting procedures and financial statements are compiled in an ob<ecti'e and 'erifiable fashion. +he organi7ation contracts $ith a certified public accountant EC3AF for this ser'ice. +he C3A9s main ob<ecti'e is to 'erify for stoc8holders, the )*, and other interested parties that the methods by $hich the organi7ation9s financial managers and accountants prepare documents and reports are legal and proper. External audits are so important that publicly held corporations are re5uired by la$ to ha'e external audits regularly, as assurance to in'estors that the financial reports are reliable. 6nfortunately, fla$s in the auditing process played a ma<or role in the do$nfall of Enron and se'eral other ma<or firms. +he problem can be traced bac8 partially to the auditing groups9 problems $ith conflicts of interest and e'entual loss of ob<ecti'ity. (or instance, Enron $as such an important client for its auditing firm, Arthur Andersen, that the auditors started letting the firm ta8e liberties $ith its accounting systems for fear that if they $ere too strict, Enron might ta8e its business to another auditing firm. n the aftermath of the resulting scandal, Arthur Andersen $as forced to close its doors, Enron is a shell of its former self, indictments continue to be handed do$n, and the entire future of the accounting profession has been called into 5uestion.2! *ome organi7ations are also starting to employ external auditors to re'ie$ other aspects of their financial operations. (or example, some auditing firms no$ speciali7e in chec8ing corporate legal bills. An auditor for the (ireman9s (und nsurance Company unco'ered se'eral thousands of dollars in legal fee errors. 2ther
income statement A summary of financial performance o'er a period of time ratio analysis +he calculation of one or more financial ratios to assess some aspect of the organi7ation9s financial health audit An independent appraisal of an organi7ation9s accounting, financial, and operational
systems

auditors are beginning to speciali7e in real estate, employee benefits, and pension plan in'estments. 4hereas external audits are conducted by external accountants, an internal audit is handled by employees of the organi7ation. ts ob<ecti'e is the same as that of an external audit/to 'erify the accuracy of financial and accounting procedures used by the organi7ation. nternal audits also examine the efficiency and appropriateness of financial and accounting procedures. Because the staff members $ho conduct them are a permanent part of the organi7ation, internal audits tend to be more expensi'e than external audits. But employees, $ho are more familiar $ith the organi7ation9s practices, may also point out significant aspects of the accounting system besides its technical correctness. Garge organi7ations li8e ,alliburton and (ord ha'e an internal auditing staff that spends all its time conducting audits of different di'isions and functional areas of the organi7ation. *maller organi7ations may assign accountants to an internal audit group on a temporary or rotating basis. +he findings of an internal auditor led to the recent financial scandal at 4orld? Com. +he firm9s ne$ CE2 as8ed an internal auditor to spot?chec8 'arious records related to capital expenditures. *he subse5uently disco'ered that the firm9s chief financial officer $as misapplying ma<or expenses: nstead of treating them as current expenses, he $as treating them as capital expenditures. +his treatment, in turn, made the firm loo8 much more profitable than it really $as. +he C(2 $as fired, but it $ill ta8e 4orldCom a long time to sort out the =!.I billion it has so far found to ha'e been handled improperly.2#
%/
S"r#)"#ra$ Con"ro$
2rgani7ations can create designs for themsel'es that result in 'ery different approaches to control. +$o ma<or forms of structural control, bureaucratic control and decentrali7ed control, represent opposite ends of a continuum, as sho$n in (igure 20.&.2% +he six dimensions sho$n in the figure represent perspecti'es adopted by the t$o extreme types of structural control. n other $ords, they ha'e different goals, degrees of formality, performance expectations, organi7ation designs, re$ard systems, and le'els of participation. Although a fe$ organi7ations fall precisely at one extreme or the other, most tend to$ard one end but may ha'e specific characteristics of either.
B#rea#)ra"i) Con"ro$
Bureaucratic control is an approach to organi7ation design characteri7ed by formal and mechanistic structural arrangements. As the term suggests, it follo$s the bureaucratic model. +he goal of bureaucratic control is employee compliance. 2rgani7ations that use it rely on strict rules and a rigid hierarchy, insist that employees meet minimally acceptable le'els of performance, and often ha'e a tall structure. +hey focus their re$ards on indi'idual performance and allo$ only limited and formal employee participation.
hat are the basic "inds of budgets used in most organi*ations% >iven that financial control relies so heavily on numbers, ho! can problems li"e those at Enron occur%
concept
C,ECK
bureaucratic control A form of organi7ational control characteri7ed by formal and mechanistic structural arrangements

-BC tele'ision applies structural controls that reflect many elements of bureaucracy.
%1
+he organi7ation relies on numerous rules to regulate employee tra'el, expense accounts, and other expenses. A ne$ performance appraisal system precisely specifies minimally acceptable le'els of performance for e'eryone. +he organi7ation9s structure is considerably taller than those of the other ma<or net$or8s, and re$ards are based on indi'idual contributions. 3erhaps most significantly, many -BC employees ha'e argued that they ha'e too small a 'oice in ho$ the organi7ation is managed. n another example, a large oil company recently made the decision to allo$ employees to $ear casual attire to $or8. But a committee then spent $ee8s de'eloping a 20?page set of guidelines on $hat $as and $as not acceptable. (or example, denim pants are not allo$ed. *imilarly, athletic shoes may be $orn as long as they are not $hite. And all shirts must ha'e a collar. -ordstrom, the department store chain, is also mo'ing to$ard bureaucratic control as it $or8s to centrali7e all of its purchasing in an effort to lo$er costs.2& *imilarly, ,ome "epot is mo'ing more to$ard bureaucratic control to cut its costs and more effecti'ely compete $ith its hard?charging ri'al, Go$e9s.2>
De)en"ra$i,e' Con"ro$
Decentralized control, in contrast, is an approach to organi7ational control characteri7ed by informal and organic structural arrangements. As (igure 20.& sho$s, its goal is employee commitment to the organi7ation. Accordingly, it relies hea'ily on group norms and a strong corporate culture, and gi'es employees the responsibility
"imension Employee compliance .oal of control approach *trict rules, formal controls, rigid hierarchy "irected to$ard minimum le'els of acceptable performance +all structure, top?do$n influence "irected at indi'idual performance Gimited and formal Employee commitment .roup norms, culture, self?control "irected to$ard enhanced performance abo'e and beyond the minimum (lat structure, shared influence "irected at group performance Extended and informal 3erformance expectations "egree of formality 2rgani7ation design )e$ard system 3articipation Bureaucratic Control "ecentrali7ed Control (igure 20.& 2).A- PA+ 2-AG C2-+)2G
Organi*ational control generally falls some!here bet!een the t!o e5tremes of bureaucratic and decentrali*ed control. ;)C television uses bureaucratic control, !hereas 7evi 6trauss uses decentrali*ed control.
decentrali*ed control An approach to organi7ational control based on informal and organic structural arrangements

for controlling themsel'es. Employees are encouraged to perform beyond minimally
*2
acceptable le'els. 2rgani7ations using this approach are usually relati'ely flat. +hey direct re$ards at group performance and fa'or $idespread employee participation. Ge'i *trauss practices decentrali7ed control. +he firm9s managers use groups as the basis for $or8 and ha'e created a culture $herein group norms help facilitate high performance. )e$ards are subse5uently pro'ided to the higher?performing groups and teams. +he company9s culture also reinforces contributions to the o'erall team effort, and employees ha'e a strong sense of loyalty to the organi7ation. Ge'i9s has a flat structure, and po$er is $idely shared. Employee participation is encouraged in all areas of operation.2I Another company that uses this approach is *outh$est Airlines. 4hen *outh$est made the decision to @go casual,A the firm resisted the temptation to de'elop dress guidelines. nstead, managers decided to allo$ employees to exercise discretion o'er their attire and to deal $ith clearly inappropriate situations on a case?by?case basis.
S"ra"egi) Con"ro$
.i'en the ob'ious importance of an organi7ation9s strategy, it is also important that the organi7ation assess ho$ effecti'e that strategy is in helping the organi7ation meet its goals.2H +o do this re5uires that the organi7ation integrate its strategy and control systems. +his is especially true for the global organi7ation.
In"egra"ing S"ra"eg. an' Con"ro$

Strategic control generally focuses on fi'e aspects of organi7ations/structure, leadership, technology, human resources, and information and operational control systems. (or example, an organi7ation should periodically examine its structure to determine $hether it is facilitating the attainment of the strategic goals being sought. *uppose a firm using a functional E6?formF design has an established goal of achie'ing a 20 percent sales gro$th rate per year. ,o$e'er, performance indicators sho$ that it is currently gro$ing at a rate of only 10 percent per year. "etailed analysis might re'eal that the current structure is inhibiting gro$th in some $ay Efor example, by slo$ing decision ma8ing and inhibiting inno'ationF and that a di'isional E1?formF design is more li8ely to bring about the desired gro$th Eby speeding decision ma8ing and promoting inno'ationF.
,dentify the fundamental differences bet!een bureaucratic and decentrali*ed control. hat are the most obvious advantages and disadvantages of bureaucratic versus decentrali*ed control%
concept
C,ECK
strategic control Control aimed at ensuring that the organi7ation is maintaining an effecti'e alignment $ith its en'ironment and mo'ing to$ard achie'ing its strategic goals
,ntel has remained at the forefront of its industry for many years. One "ey ingredient to ,ntel$s long?term success has been its focus on strategic control. 9s part of its current strategic initiatives, ,ntel has opened a ne! fabrication plan in Chandler, 9ri*ona. (hese !or"ers are constructing a clean room& at the ne! facility. /9 clean room is a sterile climate?controlled room used to
develop and manufacture delicate electronic components.0

n this $ay, strategic control focuses on the extent to $hich implemented strategy achie'es the organi7ation9s strategic goals. f, as outlined abo'e, one or more a'enues of implementation are inhibiting the attainment of goals, that a'enue should be changed. Conse5uently, the firm might find it necessary to alter its structure, replace 8ey leaders, adopt ne$ technology, modify its human resources, or change its information and operational control systems. Kohl9s department stores essentially redefined ho$ to compete effecti'ely in the midtier retailing mar8et and $as on tra<ectory to lea'e competitors li8e *ears and "illards in its dust. But then the firm inexplicably stopped doing many of the 'ery things that had led to its success/such as 8eeping abreast of current styles, maintaining lo$ in'entories, and 8eeping its stores neat and clean/and began to stumble. -o$, managers are struggling to re<u'enate Kohl9s strategic focus and get it bac8 on trac8.!0 (echnology (ool"it pro'ides another interesting example of strategic control, one $ith a more positi'e spin to it.
*3
@Kohl9s single?handedly turned the department

store industry on its ear, a condition that lasted until ri'als $o8e up and said, R,ey, can do that, too9.
Kurt Barnard, president, )etail (orecasting

E-69 (oday, April I, 200%, p. B1F
+echnology +ool8it
*trategic Control +hrough + at (edEx

(edEx is committed to accurate and speedy deli'ery, along $ith excellent customer ser'ice. nformation systems are 'ital to support the firm9s complex operations and enable the deli'ery of & million pac8ages daily. + coordinates H0,000 'ehicles, &>> airplanes, and 200,000 employees in 220 countries, $hile also ensuring that the firm meets it goals of accuracy, speed, and ser'ice. )ob Carter, chief information officer of (edEx, defines the company9s business by saying, @4e engineer time. 4e . . . allo$ you to engineer time to ma8e things happen along time schedules that $eren9t possible LbeforeM.A (or example, +exas?based 1otion Computing passes customer orders to a Chinese factory. +he finished 3C is transported by (edEx directly to the consumer in about fi'e days. *cott Ec8ert, 1otion9s CE2, says, @4e ha'e no in'entory tied up in the process any$here. (ran8ly, our business is enabled by (edEx.A (edEx CE2 (red *mith famously said that information about a pac8age is as important as the pac8age itself. *o (edEx de'eloped an extensi'e online trac8ing system. )ecently, according to Carter, (edEx @too8 the $hole trac8ing mechanism and turned it around so that as opposed to ha'ing to trac8 a pac8age, you say, R $ant to 8no$ $hat9s coming to me today.9 ;ou can go out there no$ and see e'ery inbound pac8age, regardless of $hether you 8ne$ someone $as sending it.A (edEx $as the first to recogni7e the strategic 'alue
of information systems, $hile ri'al 63* lagged. Carter claims, @ thin8 it9s easier to copy than it is to inno'ate.A 4hile ac8no$ledging that both (edEx and 63* offer some of the same information features, he differentiates the t$o firms. @4e9'e been in a battle on customerbased technology,A Carter says. @L(edExM tends to focus slightly less on operational technology. 4e focus a little more on re'enue?generating, customer?satisfactiongenerating, strategic?ad'antage technology.A Carter adds, @+he 8ey focus of my <ob is dri'ing technology that increases the top line.A ,e puts the emphasis on effecti'eness, 5uality, and satisfaction rather than on @bottom?lineA efficiency and cost control. 4ith a successful inno'ation team and a budget of =1 billion per year, (edEx9s + $ill be a source of strategic ad'antage and control for some time to come.
)eferences: .eoffrey Col'in, @+he (edEx Edge,A 1ortune, April !, 200&, pp. >>SI#D "ean (oust, @+a8ing 2ff Gi8e RA )oc8et *hip,9A )usiness ee", April !, 200&, p. >&D @(or Hth Consecuti'e ;ear, (edEx )ecogni7ed as 2ne of 1ortune$s R100 Best Companies to 4or8 (or,9& )usiness ire, 0anuary 10, 200&, home.business$ire.com on 1ay 2!, 200&.
*4 3A)+ * : ' (he Controlling Process In"erna"iona$ S"ra"egi) Con"ro$

Because of both their relati'ely large si7e and the increased complexity associated $ith international business, global organi7ations must ta8e an especially pronounced strategic 'ie$ of their control systems. 2ne 'ery basic 5uestion that has to be addressed is $hether to manage control from a centrali7ed or a decentrali7ed perspecti'e.!1 6nder a centrali7ed system, each organi7ational unit around the $orld is responsible for fre5uently reporting the results of its performance to head5uarters. 1anagers from the home office often 'isit foreign branches to obser'e firsthand ho$ the units are functioning. B3, 6nile'er, 3rocter T .amble, and *ony all use this approach. +hey belie'e centrali7ed control is effecti'e because it allo$s the home office to 8eep better informed of the performance of foreign units and to maintain more control o'er ho$ decisions are made. (or example, B3 disco'ered that its Australian subsidiary $as not billing its customers for charges as 5uic8ly as $ere its competitors. By shortening the billing cycle, B3 no$ recei'es customer payments fi'e days faster than before. 1anagers belie'e that they disco'ered this o'ersight only because of a centrali7ed financial control system. 2rgani7ations that use a decentrali7ed control system re5uire foreign branches to report less fre5uently and in less detail. (or example, each unit may submit summary performance statements on a 5uarterly basis and pro'ide full statements only once a year. *imilarly, 'isits from the home office are less fre5uent and less concerned $ith monitoring and assessing performance. B1, (ord, and *hell all use this approach. Because (ord practices decentrali7ed control of its design function, European designers ha'e de'eloped se'eral inno'ati'e automobile design features. 1anagers belie'e that if they had been more centrali7ed, designers $ould not ha'e had the freedom to de'elop their ne$ ideas.
Managing Con"ro$ in Organi,a"ions
Effecti'e control, $hether at the operations, financial, structural, or strategic le'el, successfully regulates and monitors organi7ational acti'ities. +o use the control process, managers must recogni7e the characteristics of effecti'e control and understand ho$ to identify and o'ercome occasional resistance to control.!2
Chara)"eris"i)s of Effe)"i(e Con"ro$

Control systems tend to be most effecti'e $hen they are integrated $ith planning and $hen they are flexible, accurate, timely, and ob<ecti'e. In"egra"ion +i"h P$anning Control should be lin8ed $ith planning. +he more
explicit and precise this lin8age, the more effecti'e the control system is. +he best $ay to integrate planning and control is to account for control as plans de'elop. n other $ords, as goals are set during the planning process, attention should be paid to de'eloping standards that $ill reflect ho$ $ell the plan is reali7ed. 1anagers at
+o! are strategy and control most commonly integrated% ,n !hat !ays are domestic and international control issues similar, and in !hat !ays do they differ%
concept
C,ECK Specially prepared for d03371341 on 21 Apr, 2010
Champion *par8 3lug Company decided to broaden their product line to include a full range of automoti'e accessories/a total of 21 ne$ products. As part of this plan, managers decided in ad'ance $hat le'el of sales they $anted to reali7e from each product for each of the next fi'e years. +hey established these sales goals as standards against $hich actual sales $ould be compared. +hus, by accounting for their control system as they de'eloped their plan, managers at Champion did an excellent <ob of integrating planning and control. 6$e-i0i$i". +he control system itself must be flexible enough to accommodate change. Consider, for example, an organi7ation $hose di'erse product line re5uires >% different ra$ materials. +he company9s in'entory control system must be able to manage and monitor current le'els of in'entory for all >% materials. 4hen a change in product line changes the number of ra$ materials needed, or $hen the re5uired 5uantities of the existing materials change, the control system should be flexible enough to handle the re'ised re5uirements. +he alternati'e/designing and implementing a ne$ control system/is an a'oidable expense. Champion9s control system included a mechanism that automatically shipped products to ma<or customers to 8eep their in'entories at predetermined le'els. +he firm had to ad<ust this system $hen one of its biggest customers decided not to stoc8 the full line of Champion products. Because its control system $as flexible, though, modifying it for the customer $as relati'ely simple. A))#ra). 1anagers ma8e a surprisingly large number of decisions based on inaccurate information. (ield representati'es may hedge their sales estimates to ma8e themsel'es loo8 better. 3roduction managers may hide costs to meet their targets. ,uman resource managers may o'erestimate their minority recruiting prospects to meet affirmati'e action goals. n each case, the information that other managers recei'e is inaccurate, and the results of inaccurate information may be 5uite dramatic. f sales pro<ections are inflated, a manager might cut ad'ertising Ethin8ing it is no longer neededF or increase ad'ertising Eto further build momentumF. *imilarly, a production manager una$are of hidden costs may 5uote a sales price much lo$er than desirable. 2r a human resources manager may spea8 out publicly on the effecti'eness of the company9s minority recruiting, only to find out later that these prospects ha'e been o'erestimated. n each case, the result of inaccurate information is inappropriate managerial action. Time$iness +imeliness does not necessarily mean 5uic8ness. )ather, it describes a control system that pro'ides information as often as is necessary. Because Champion has a $ealth of historical data on its spar8plug sales, it does not need information on spar8plugs as fre5uently as it needs sales feedbac8 for its ne$er products. )etail organi7ations usually need sales results daily so that they can manage cash flo$ and ad<ust ad'ertising and promotion. n contrast, they may re5uire information about physical in'entory only 5uarterly or annually. n general, the more uncertain and unstable the circumstances, the more fre5uently measurement is needed. O09e)"i(i". +he control system should pro'ide information that is as ob<ecti'e as possible. +o appreciate this, imagine the tas8 of a manager responsible for control of his organi7ation9s human resources. ,e as8s t$o plant managers to submit
*5
reports. 2ne manager notes that morale at his plant is @o8ay,A that grie'ances are

@about $here they should be,A and that turno'er is @under control.A +he other reports that absenteeism at her plant is running at # percent, that 1& grie'ances ha'e been filed this year Ecompared $ith 2# last yearF, and that turno'er is 12 percent. +he second report $ill almost al$ays be more useful than the first. 2f course, managers also need to loo8 beyond the numbers $hen assessing performance. (or example, a plant manager may be boosting producti'ity and profit margins by putting too much pressure on $or8ers and using poor?5uality materials. As a result, impressi'e short?run gains may be o'ershado$ed by longer?run increases in employee turno'er and customer complaints.
*!
Resis"an)e "o Con"ro$
1anagers sometimes ma8e the mista8e of assuming that the 'alue of an effecti'e control system is self?e'ident to employees. +his is not al$ays so, ho$e'er. 1any employees resist control, especially if they feel o'ercontrolled, if they thin8 control is inappropriately focused or re$ards inefficiency, or if they are uncomfortable $ith accountability. O(er)on"ro$ 2ccasionally, organi7ations try to control too many things. +his becomes especially problematic $hen the control directly affects employee beha'ior. An organi7ation that instructs its employees $hen to come to $or8, $here to par8, $hen to ha'e morning coffee, and $hen to lea'e for the day exerts considerable control o'er people9s daily acti'ities. ;et many organi7ations attempt to control not only these but other aspects of $or8 beha'ior as $ell. 2f particular rele'ance in recent years is some companies9 efforts to control their employees9 access to pri'ate e?mail and the nternet during $or8 hours. *ome companies ha'e no policies go'erning these acti'ities, some attempt to limit it, and some attempt to forbid it altogether. !! +roubles arise $hen employees percei'e these attempts to limit their beha'ior as being unreasonable. A company that tells its employees ho$ to dress, ho$ to arrange their des8s, and ho$ to $ear their hair may meet $ith more resistance. Employees at Chrysler $ho dro'e non?Chrysler 'ehicles used to complain because they $ere forced to par8 in a distant par8ing lot. 3eople felt that these efforts to control their personal beha'ior E$hat 8ind of car to dri'eF $ere excessi'e. 1anagers e'entually remo'ed these controls and no$ allo$ open par8ing. *ome employees at Abercrombie T (itch argue that the firm is guilty of o'ercontrol because of its strict dress and grooming re5uirements/for example, no nec8laces or facial hair for men and only natural nail polish and earrings no larger than a dime for $omen. Gi8e$ise, Enterprise )ent?A?Car has a set of !0 dress?code rules for $omen and 2& rules for men. +he firm $as recently sued by one former employee $ho $as fired because of the color of her hair.!# Ina&&ro&ria"e 6o)#s +he control system may be too narro$, or it may focus too much on 5uantifiable 'ariables and lea'e no room for analysis or interpretation. A sales standard that encourages high?pressure tactics to maximi7e short?run sales may do so at the expense of good$ill from long?term customers. *uch a standard is too narro$. A uni'ersity re$ard system that encourages faculty members to publish large numbers of articles but fails to consider the 5uality of the $or8 is also inappropriately focused. Employees resist the intent of the control system by focusing their efforts only at the performance indicators being used.

Re+ar's for Ineffi)ien). magine t$o operating departments that are approaching the end of their fiscal years. "epartment 1 expects to ha'e =2%,000 of its budget left o'erD department 2 is already =10,000 in the red. As a result, department 1 is li8ely to ha'e its budget cut for the next year E@+hey had money left, so they ob'iously got too much to begin $ithAF, and department 2 is li8ely to get a budget increase E@+hey ob'iously ha'en9t been getting enough moneyAF. +hus department
1 is punished for being efficient, and department 2 is re$arded for being inefficient. E-o $onder departments commonly hasten to deplete their budgets as the end of the year approachesJF As $ith inappropriate focus, people resist the intent of this control and beha'e in $ays that run counter to the organi7ation9s intent. Too M#)h A))o#n"a0i$i". Effecti'e controls allo$ managers to determine $hether employees successfully discharge their responsibilities. f standards are properly set and performance accurately measured, managers 8no$ $hen problems arise and $hich departments and indi'iduals are responsible. 3eople $ho do not $ant to be ans$erable for their mista8es or $ho do not $ant to $or8 as hard as their boss might li8e therefore resist control. (or example, American Express has a system that pro'ides daily information on ho$ many calls each of its customer ser'ice representati'es handles. f one representati'e has typically $or8ed at a slo$er pace and handled fe$er calls than other representati'es, that indi'idual9s deficient performance can no$ more easily be pinpointed.
O(er)oming Resis"an)e "o Con"ro$
3erhaps the best $ay to o'ercome resistance to control is to create effecti'e control to begin $ith. f control systems are properly integrated $ith organi7ational planning and if the controls are flexible, accurate, timely, and ob<ecti'e, the organi7ation $ill be less li8ely to o'ercontrol, to focus on inappropriate standards, or to re$ard inefficiency. +$o other $ays to o'ercome resistance are encouraging employee participation and de'eloping 'erification procedures. En)o#rage Em&$o.ee Par"i)i&a"ion Chapter 1! notes that participation can help o'ercome resistance to change. By the same to8en, $hen employees are in'ol'ed $ith planning and implementing the control system, they are less li8ely to resist it. (or instance, employee participation in planning, decision ma8ing, and 5uality control at the Che'rolet .ear and Axle plant in "etroit has resulted in increased employee concern for 5uality and a greater commitment to meeting standards. De(e$o& Verifi)a"ion Pro)e'#res 1ultiple standards and information systems pro'ide chec8s and balances in control and allo$ the organi7ation to 'erify the accuracy of performance indicators. *uppose a production manager argues that she failed to meet a certain cost standard because of increased prices of ra$ materials. A properly designed in'entory control system $ill either support or contradict her explanation. *uppose that an employee $ho $as fired for excessi'e absences argues that he $as not absent @for a long time.A An effecti'e human resource control system should ha'e records that support the termination. )esistance to control declines because these 'erification procedures protect both employees and management. f the production manager9s claim about the rising cost of ra$ materials is supported by the in'entory control records, she $ill not be held solely accountable for failing to meet the cost standard, and some action probably $ill be ta8en to lo$er the cost of ra$ materials.
*%
hat are the essential characteristics of effective control% =ecall an incident in !hich you resisted control. hat !as done, or !hat might have been done better, to help overcome your resistance%
concept
C,ECK
*ummary of Gearning 2b<ecti'es and Key 3oints

1. Explain the purpose of control, identify different types of control, and describe the steps in the control process. B Control is the regulation of organi7ational acti'ities so that some targeted element of performance remains $ithin acceptable limits. B Control pro'ides $ays to adapt to en'ironmental change, to limit the accumulation of errors, to cope
$ith organi7ational complexity, and to minimi7e costs. B Control can focus on financial, physical, information, and human resources and includes operations, financial, structural, and strategic le'els. B Control is the function of managers, the controller, and, increasingly, of operating employees. B *teps in the control process are B to establish standards of expected performance B to measure actual performance B to compare performance to the standards B to e'aluate the comparison and ta8e appropriate action 2. dentify and explain the three forms of operations control. B 2perations control focuses on the processes the organi7ation uses to transform resources into products or ser'ices. B 3reliminary control is concerned $ith the resources that ser'e as inputs to the system. B *creening control is concerned $ith the transformation processes used by the organi7ation. B 3ostaction control is concerned $ith the outputs of the organi7ation. B 1ost organi7ations need multiple control systems because no one system can pro'ide ade5uate control. !. "escribe budgets and other tools for financial control. B (inancial control focuses on controlling the organi7ation9s financial resources. B +he foundation of financial control is budgets, $hich are plans expressed in numerical terms. B 1ost organi7ations rely on financial, operating, and nonmonetary budgets. B (inancial statements, 'arious 8inds of ratios, and external and internal audits are also important tools organi7ations use as part of financial control. #. dentify and distinguish bet$een t$o opposing forms of structural control. B *tructural control addresses ho$ $ell an organi7ation9s structural elements ser'e their intended purpose. B +$o basic forms of structural control are bureaucratic and decentrali7ed control. B Bureaucratic control is relati'ely formal and mechanistic. B "ecentrali7ed control is informal and organic. B 1ost organi7ations use a form of organi7ational control some$here bet$een total bureaucratic and total decentrali7ed control. %. "iscuss the relationship bet$een strategy and control, including international strategic control. B *trategic control focuses on ho$ effecti'ely the organi7ation9s strategies are succeeding in helping the organi7ation meet its goals. B +he integration of strategy and control is generally achie'ed through organi7ation structure, leadership, technology, human resources, and information
and operational control systems. B nternational strategic control is also important for multinational organi7ations. B +he foundation of international strategic control is $hether to practice centrali7ed or decentrali7ed control.
Building Effecti'e +ime?1anagement *8ills

&. dentify characteristics of effecti'e control, $hy people resist control, and ho$ managers can o'ercome this resistance. B 2ne $ay to increase the effecti'eness of control is to fully integrate planning and control. B +he control system should also be as flexible, accurate, timely, and ob<ecti'e as possible. B Employees may resist organi7ational controls because of o'ercontrol, inappropriate focus, re$ards for inefficiency, and a desire to a'oid accountability. B 1anagers can o'ercome this resistance by impro'ing the effecti'eness of controls and by allo$ing employee participation and de'eloping 'erification procedures.
**
"iscussion Ouestions
:#es"ions for Re(ie+
1. 4hat is the purpose of organi7ational controlC 4hy is it importantC 2. 4hat are the different le'els of controlC 4hat are the relationships bet$een the different le'elsC !. "escribe ho$ a budget is created in most organi7ations. ,o$ does a budget help a manager $ith financial controlC #. "escribe the differences bet$een bureaucratic and decentrali7ed control. 4hat are the ad'antages and disad'antages of eachC
:#es"ions for Ana$.sis

%. ,o$ can a manager determine $hether his or her firm needs impro'ement in controlC f impro'ement is needed, ho$ can the manager tell $hat type of control needs impro'ement Eoperations, financial, structural, or strategicFC "escribe some steps a manager can ta8e to impro'e each of these types of control. &. 2ne company uses strict performance standards. Another has standards that are more flexible. 4hat are the ad'antages and disad'antages of each systemC >. Are the differences in bureaucratic control and decentrali7ed control related to differences in organi7ation structureC f so, ho$C f not, $hy notC E+he terms do sound similar to those used to discuss the organi7ing process.F
E-er)ise O(er(ie+
+ime?management s8ills/a manager9s ability to prioriti7e $or8, to $or8 efficiently, and to delegate appropriately/ play a ma<or role in the control functionD that is, a manager can use time?management s8ills to control his
or her o$n $or8 more effecti'ely. +his exercise $ill help demonstrate the relationship bet$een time?management s8ills and control.
:#es"ions for A&&$i)a"ion

I. 1any organi7ations today are in'ol'ing lo$er?le'el employees in control. .i'e at least t$o examples of specific actions that a lo$er?le'el $or8er could do to help his or her organi7ation better adapt to en'ironmental change. +hen do the same for limiting the accumulation of error, coping $ith organi7ational complexity, and minimi7ing costs. H. "escribe $ays that the top management team, midle'el managers, and operating employees can participate in each step of the control process. "o all participate e5ually in each step, or are some steps better suited for personnel at one le'elC Explain your ans$er. 10. nter'ie$ a $or8er to determine $hich areas and le'els of control exist for him or her on the <ob. "oes the $or8er resist efforts at controlC 4hy or $hy notC
E-er)ise Tas8
4ith the information abo'e as context, do the follo$ing: 1. 3rioriti7e the $or8 that needs to be done by sorting the information abo'e into three categories: 'ery timely, moderately timely, and less timely. 2. Are importance and timeliness the same thingC !. 4hat additional information must you ac5uire before you can begin to prioriti7e this $or8C #. ,o$ $ould your approach differ if your assistant $ere in todayC
*/
E-er)ise Ba)8gro#n'
;ou are a middle manager in a small manufacturing plant. +oday is 1onday, and you ha'e <ust returned from a $ee8 of 'acation. +he first thing you disco'er is that your assistant $ill not be in today. ,is aunt died, and he is out of to$n at the funeral. ,e did, ho$e'er, lea'e you the follo$ing note:
"ear Boss: *orry about not being here today. $ill be bac8 tomorro$. n the meantime, here are some things you need to 8no$: 1s. .lins8i Lyour bossM $ants to see you today at #:00. +he shop ste$ard $ants to see you as soon as possible about a labor problem. 1r. Bateman Lone of your big customersM has a complaint about a recent shipment. 1s. (erris Lone of your ma<or suppliersM $ants to discuss a change in deli'ery schedules. 1r. 3rescott from the Chamber of Commerce $ants you to attend a brea8fast meeting on 4ednesday to discuss our expansion plans. +he legal office $ants to discuss our upcoming 2*,A inspection. ,uman resources $ants to 8no$ $hen you can inter'ie$ someone for the ne$ super'isor9s position. 0ac8 4illiams, the machinist you fired last month, has been hanging around the par8ing lot, and his presence is ma8ing some employees uncomfortable.
Building Effecti'e +echnical *8ills

E-er)ise O(er(ie+
+echnical s8ills are the s8ills necessary to accomplish or understand the specific 8ind of $or8 being done in an organi7ation. +his exercise gi'es you practice in technical s8ills related to building a budget and e'aluating the effecti'eness of a budget.
E-er)ise Ba)8gro#n'
Although corporate budgets are much more complicated, the steps in creating a personal budget and creating a corporate budget are much the same. Both begin $ith estimations of inflo$ and outflo$. +hey both compare actual results $ith estimated results. And both end $ith the de'elopment of a plan for correcti'e action.
E-er)ise Tas8
1. 3repare your estimated expenditures and income for one month. +his is a budgeted amount, not the amount you actually spend. nstead, it should represent a typical month or a reasonable minimum. (or example, is =200 a reasonable amount to spend on groceriesC Estimate your necessary monthly expenses for tuition, rent, car payments, childcare, food, utilities, and so on. +hen estimate your income from all sources, such as $ages, allo$ance, loans, and funds borro$ed on credit cards. Calculate the totals. 2. 4rite do$n all of your actual expenses o'er the last month. +hen $rite do$n all your actual income. f you do not ha'e exact figures, estimate as closely as you can. Calculate the totals. !. Compare your estimates to your actual expenses and actual income. Are there any discrepanciesC f so, $hat caused these discrepanciesC #. "id you expect to ha'e a surplus or a deficit for the monthC "id you actually ha'e a deficit or a surplusC 4hat are your plans for ma8ing up any deficit or managing any surplusC %. "o you regularly use a personal budgetC s a personal budget li8ely to be helpfulC 4hy or $hy notC

*1
C,A3+E)CG2* -.CA*E
IS TOO M;C< CONTROL <;RTING DELL=
1ichael "ell @bro8e the paradigm about ho$ to run a computer business,A says professor "a'id ;offie. Among "ell9s inno'ations: direct selling to customers to a'oid payments to retailers, flexible manufacturing for customi7ation at a lo$ cost, and <ust?in?time in'entory to 8eep expenses lo$. t9s clear that "ell9s phenomenal success o'er the last t$o decades $as due to its tightly disciplined operations and relentless controls. ,o$e'er, the future loo8s less promising. Customers are floc8ing
to retail stores for the latest electronic gear, $hich "ell does not carry. +he 3C ma8er9s customer satisfaction ratings ha'e fallen and complaints are up. Cutthroat competition in des8top 3Cs, $hich account for o'er half of "ell9s sales, has s5uee7ed profit margins to a thin !.I percent. n (ebruary 200&, "ell announced that expected sales gro$th for the upcoming 5uarter $ould be around > percent, a drastic drop from last year9s 1& percent. s too much control hurting "ellC 2n the positi'e side, "ell9s @'alue?pricedA business model means the firm has done a good <ob of controlling costs. "ell9s ne$ -orth Carolina plant, opened in 2ctober 200%, can produce 3Cs #0 percent faster $ith !0 percent less do$ntime. 6nli8e older factories, $here e5uipment must be retooled for different types of computers, the ne$ plant can build any of "ell9s #0 computer models at any time. (actory designer )ichard Komm says, @2ther factories ha'e a processdri'en flo$. L+his plantM is focused on one thing: ,o$ do $e get La computerM to the customer in the shortest amount of timeCA Automated robots are not as efficient as humans in certain tas8s, such as pac8ing small, delicate items. nstead, robots perform the hea'y lifting, such as placing finished machines in shipping boxes. Automating the hea'ier tas8s lo$ers the in<ury rate, reducing claims for $or8ers9 compensation. Excellent 5uality control also reduces costs. +eams of three $or8ers help to build a 3C. Each indi'idual has a speciali7ed set of tas8s, $hich eases training, speeds assembly, and reduces errors by !0 percent. Each team includes a tester $ho performs a 5uic8 chec8 $hen e'ery machine is finished to see that it9s $ired correctly and $ill boot. 1achines that pass inspection $ill undergo more extensi'e testing, but the 5uic8 test allo$s rapid spotting of gross defects. 1ost defects are no$ caught in # minutes rather than &0, and the o'erall defect rate is lo$er. @+he faster you get feedbac8 to the operator, the fe$er defects,A says Komm. 2n the negati'e side, some
belie'e that "ell has gone too far in its 5uest for control. *ome home users, $ho ma8e up the ma<ority of "ell customers but are half as profitable as business users, are dissatisfied. +hey complain that much of "ell9s customer support staff is located in ndia, ma8ing communications difficult at times. Nery long $ait times are another concern. @Consumers $ant to ha'e their ca8e and eat it too,A says *tephen "u88er, CE2 of 3C ma8er emachines, nc. @+hey $ant that =!00 3C but expect the same support that came $ith a machine that 10 years ago cost =2,%00.A .i'en today9s industry en'ironment, that desire is unrealistic. "ell9s least expensi'e des8top model retails for =2HH, $hich $ould yield a mere =12 in profits, not enough to support much customer ser'ice. +o control costs, "ell introduced different le'els of customer ser'ice to those $ho pay for pricier models. A buyer of the top?of?the?line :3* model typically $aits less than fi'e minutes for phone ser'ice, $hile buyers of =2HH models may be put on hold for one to t$o hours. "ell also plans to sell 'arying le'els of ser'ice contracts at 'arious prices. *ome standard features $ill disappear. *ometime in 200&, @free shippingA on lo$?end models $ill include deli'ery only to a local post office. ,ome deli'ery $ill cost extra. An e'en bigger concern is "ell9s lac8 of inno'ation. +he company has al$ays assumed that price is paramount, leading to an emphasis on inexpensi'e, commodity?li8e products. ,o$e'er, buyers today $ant tablet 3Cs, portable music and 'ideo players, digital photography, and more. "ell spends less on research and de'elopment than ri'al Apple Computers, despite being four times larger. 3rofessor ;offie says, @1ichael bro8e the paradigm,A but adds, @+hey ha'en9t been so great at finding the next paradigm.A 4ith competitors imitating "ell9s best tactics and gaining on "ell in price and producti'ity, industry expert 1ar8 *tahlman says, @"ell is singing the
/2
same old song. t9s time for them to change.A 3erhaps "ell could afford to gi'e up a little control in exchange for a little more creati'ity, flexibility, and customer ser'ice. 3erhaps they can9t afford not to.
CASE :;ESTIONS 1. 4hat ad'antages does "ell gain from its tight control systemC 4hat disad'antages does the company experienceC 2. 4hich types of operations controls are mentioned in this caseC .i'e examples of each type. !. Are "ell9s control systems effecti'eC n your opinion, $hat could "ell do to ma8e its control systems more effecti'eC Explain your responses. CASE RE6ERENCES
Amanda Cantrell, @"ell to .et *er'ed by A1",A Money,1ay 1I, 200&, $$$ .cnnmoney.com on 1ay 2!, 200&D Gouise Gee, @,anging 6p on "ellCA )usiness ee", 2ctober 10, 200%, $$$.business$ee8.com on 1ay >, 200&D Gouise Gee, @ t9s "ell 's. +he "ell 4ay,A )usiness ee", 1arch &, 200&, pp. &1S&2D Christopher -ull, @"ude, ;ou9re .etting a "ell/E'ery (i'e *econds,A )usiness 2.3, "ecember 1, 200%, $$$.money .cnn.com on 1ay 1%, 200&.
1. 4ould you $ant to $or8 for 0amie "imonC 4hy or $hy notC 2. ,o$ similar or dissimilar is "imon9s management style to the style you might expect to ha'e as a managerC !. Assume that you are a consultant hired by "imon. ,e has as8ed you to candidly criti5ue his management of 0. 3. 1organ Chase. 4hat $ould you ha'e to sayC #. Can you foresee a time $hen "imon might need to change his approach to organi7ational controlC 4hat are the factors that might dictate such a changeC %. 4ould "imon9s approach to control $or8 in other industriesC 4hy or $hy notC
;2 6 1 A K E + , E C A G G Chasing Dimons Dream for J. P. Morgan Chase

1. + ( +he first step in the control process is measuring performance. 2. + ( 1anagers use nonmonetary budgets to 5uantify resources, such as hours of labor and units of output, into financial terms. !. + ( +he goal of bureaucratic control is compliance. #. + ( A timely control system is not necessarily a 5uic8 control system. %. + ( Nerification procedures lo$er resistance to control. &. 4hich of the follo$ing le'els of control focuses on
/3
the processes organi7ations use to transform resources into products or ser'icesC A. (inancial B. *tructural C. 2perations ". *trategic E. 1anagerial >. 4hen performance matches the standards, a manager should A. correct the de'iation. B. change the standards. C. lo$er employee resistance. ". reduce o'erperformance. E. maintain the status 5uo. I. Bruce $or8s in a company that produces sensiti'e electronic e5uipment. ,e is confident the components he buys to ma8e this e5uipment is of high 5uality, but he 8no$s he must 8eep a close eye on the production process itself to a'oid damaging these components as the e5uipment is assembled. Bruce needs to emphasi7e $hich form of controlC A. 3ostaction B. *creening C. 3reliminary ". 1anagerial E. +echnical H. 2f $hat benefit to a manager is ratio analysisC A. t helps the manager 8no$ $hether the organi7ation is nondiscriminatory. B. t gi'es the manager a picture of some aspect of the financial health of the firm. C. t allo$s for an independent appraisal of the organi7ation9s control system. ". t summari7es the financial performance of the organi7ation o'er the past year. E. t a'oids the common trap of o'ercontrol. 10. Bernadette $ants to build an effecti'e control system. *he should try to include all of the follo$ing characteristics E:CE3+ A. integrated $ith planning. B. timely. C. accurate. ". rigid. E. ob<ecti'e.
Tes" Pre&&er
Choose the correct ans$er. Ans$ers are found at the bac8 of the boo8.
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MGT Assignment Basic Elements of Control in Rganization

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Basic Elements of Control

( )*++, -.*( )*+ Chasing Dimons Dream for J. P. Morgan Chase

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3A)+ * : ' (he Controlling Process

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The Na"#re of Con"ro$

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( )++, -.( )*+ Chasing Dimons Dream for J. P. Morgan Chase

trategic control tructural control 2perations control (inancial control

4 3A)+ : ' (he Controlling Process In"erna"iona$ S"ra"egi) Con"ro$