Chapter

Managerial Control

McGraw-Hill/Irwin
Management, 7/e

Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Control
Control is essential for the attainment of any

management objective
Control is any process that directs the
activities of individuals toward the
achievement of organizational goals

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Characteristics of Control
Managers can apply three broad strategies for

achieving organizational control

Bureaucratic control is the use of rules, regulations,
and formal authority to guide performance
Market Control involves the use of pricing
mechanisms to regulate activities in organizations as
though they were economic transactions
Clan control I based on the idea that employees may
share the values, expectations, and goals of the
organization and act in accordance with them

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Bureaucratic Control Systems:

The Control Cycle
A typical bureaucratic control system has

four major steps

Setting performance standards
Measuring performance
Comparing performance against the standard
and determining deviations
Taking corrective action

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Approaches to Bureaucratic
Control
There are three approaches to bureaucratic

control
Feed forward Control takes place before operations
begin and includes policies, procedures, and rules
designed to ensure that planned activities are
carried out properly
Concurrent control takes place while plans are
being carried out and includes directing,
monitoring, and fine-tuning activities
Feedback control focuses on the use of information
about results to correct deviations from the
acceptable standard after they arise

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Management Audits
Management audits are an evaluation of the

effectiveness and efficiency of various

systems within an organization
Management audits may be
External this occurs when one organization
evaluates another organization
Internal these are a periodic assessment of a
companys own planning, organizing, leading,
and controlling processes

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Budgetary Controls
Budgetary control is the process of finding

out whats being done and comparing the

results with the corresponding budget data to
verify accomplishments or remedy
differences
This is one of the most widely recognized and
commonly used methods of managerial
control
It is commonly called budgeting

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Budgetary Control

Budgetary control begins with an estimate of

sales and expected income

One of the primary considerations is the
length of the budget period

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Types of Budgets spc3m

Sales budget - Usually data for the sales budget are

prepared by month, sales area, and product

Production budget - The production budget commonly is
expressed in physical units
Cost budget - The cost budget is used for areas of the
organization that gain expenses but no revenue, such as
human resources and other support departments
Cash budget - The cash budget shows the estimated
receipts and expenditures, the amount of working capital
available, the extent to which outside financing may be
required, and the periods and amounts of cash available
Capital budget - The capital budget is used for the cost
of fixed assets like plant and equipment
Master budget - The master budget includes all the major
activities of the business

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Financial Controls
Two financial statements that help control

overall organizational performance are:

Balance sheet shows the financial picture of a

company at a given time

Profit and loss statement is an itemized financial
statement of the income and expenses of a
companys operations
Financial ratios are also an effective approach

for checking on the overall performance of

the enterprise

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The Downside of Bureaucratic

Control
A control system cannot be effective without consideration of

how people will react to it. Three types of responses

Rigid bureaucratic behavior occurs when

control systems prompt employees to stay out

of trouble by following the rules rather than
doing the right thing
Tactical behavior leads to ineffective behavior
because employees try to beat the system
Resistance to control occurs because
Control systems uncover mistakes, threaten job security

and status, and decrease autonomy

Control systems can change expertise and power structures
Control systems can change the social structure of an
organization
Control systems may be seen as an invasion of privacy

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Designing Effective Control

Systems
Effective control systems maximize potential

benefits and minimize dysfunctional behaviors

Five characteristics of effective control systems
They are based on valid performance standards
They communicate sufficient information to
employees
They are acceptable to employees
They use multiple approaches
They recognized the relationship between
authorization and control

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Market Control
Market controls involve the use of economic

forces and the pricing mechanisms that

accompany them to regulate performance
System is based on the principle that as output
from an individual, department, or business unit
creates value to other people, a price can be
negotiated for its exchange
Two effects of this occur
Price becomes an indicator of the value of the

product or service
Price competition has the effect of controlling
productivity and performance

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Market Controls
At the corporate level market controls are

used to regulate independent business units

At the business unit level market controls are
used to regulate exchanges among
departments and functions
Transfer price is the price charged by one unit
for a product or service provided to another
unit within the organization

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Market Controls
Market controls are

used at the
individual level to
determine wage
levels for the skills
that employees
possess.

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Clan Control: The Role of

Empowerment and Culture
Managers are discovering that control

systems based solely on bureaucratic and

market mechanisms are insufficient for
directing todays workforce because
Employees jobs have changed
The nature of management has changed
The employment relationship has changed

Because of this empowerment has become a

necessary aspect of a managers repertoire of

control

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Clan Control: The Role of

Empowerment and Culture
Clan control involves creating relationships built

on mutual respect and encouraging each

individual to take responsibility for his or her
actions
Employees work within a guiding framework of
values, and they are expected to use good
judgment
The emphasis in an empowered organization is on
satisfying customers, not on pleasing the boss
Clan control takes a long time to develop and an
even longer time to change