Chapter 18

Monitoring and Controlling

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Learning Objectives
18.1 Explain the nature and importance of control.
18.2 Describe the three steps in the control process.
18.3 Explain how organizational and employee performance
are measured.
18.4 Describe tools used to measure organizational
performance.

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What Is Controlling and Why Is It Important?
• Even when managers carefully plan, a program or
decision may be poorly or improperly implemented if an
effective control system has not been established.
• Controlling: management function that involves
monitoring, comparing, and correcting work performance.

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Why Is Controlling Important?
• Controlling ensures that everything is going as planned
and goals are being met. Exhibit 18-1 shows the link
between planning and controlling.
1. Controlling serves as the final link in the functional chain
of management.
2. Controlling is also important to employee empowerment.
The development of an effective control system may
minimize potential problems.
3. Finally, controls serve to protect the company and its
assets.

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Exhibit 18.1 Planning-Controlling Link

Exhibit 18.1 shows how controlling provides a critical link back to planning.

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The Control Process
• Control process: a three-step process of measuring
actual performance, comparing actual performance against
a standard, and taking managerial action to correct
deviations or inadequate standards.

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Exhibit 18.2 The Control Process

Exhibit 18.2 illustrates the three-step control process.

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Step 1: Measuring Actual Performance
1. How We Measure. Measurement is frequently achieved
through four common sources of information such as:
a. Personal observation
b. Statistical reports
c. Self-monitoring computers
d. Oral reports
e. Written reports
2. What We Measure. What we measure is probably more
critical than how we measure. What is measured often
determines the area(s) in which employees will attempt to
excel.

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Step 2: Comparing Actual Performance
Against the Standard
1. Comparing determines the degree of variation between
actual performance and the standard.
2. Of critical importance to the control process is
determining the range of variation. The range of
variation is the acceptable parameters of variance
between actual performance and the standard. (See
Exhibit 18-3.)
3. An example of comparing actual performance to
standards is presented in Exhibit 18-4.

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Exhibit 18.3 Acceptable Range of Variation

Exhibit 18.3 illustrates the acceptable range of variation.

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Exhibit 18.4 Green Earth Gardening
Supply—June Sales
Product Standard Actual Over (Under)
Vegetable plants 1,075 913 (162)
Perennial flowers 630 634 4
Annual flowers 800 912 112
Herbs 160 140 (20)
Flowering bulbs 170 286 116
Flowering bushes 225 220 (5)
Heirloom seeds 540 672 132
Total 3,600 3,777 177

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Step 3: Taking Managerial Action
• Correct actual performance
– Immediate corrective action: corrective action that
corrects problems at once to get performance back on
track
– Basic corrective action: corrective action that looks at
how and why performance deviated before correcting
the source of deviation

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Revise the Standard
• If performance consistently exceeds the goal, then a
manager should look at whether the goal is too easy and
needs to be raised.
• Managers must be cautious about revising a standard
downward.

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Managerial Decisions in Controlling
• The control process is a continuous flow among measuring,
comparing, and managerial action. Depending on the
results, a manager’s decision is to do nothing, correct the
performance, or revise the standard.
• Exhibit 18-5 summarizes the manager’s decisions in the
control process.

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Exhibit 18.5 Managerial Decisions in the
Control Process

Exhibit 18.5 summarizes the decisions a manager makes in controlling.

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What is Organizational Performance?
• Performance: the end result of an activity. Managers are
concerned with:
• Organizational performance: the accumulated results of
all the organization’s work activities.

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 Measures of Organizational Performance
• Employees need to recognize the connection between what
they do and the outcomes.
• Organizational Productivity: the amount of goods or
services produced divided by the inputs needed to generate
that output.
• Organizational effectiveness: a measure of how
appropriate organizational goals are and how well those
goals are being met.
• Industry and Company Rankings. Industry and company
rankings are often used as a measure to describe
organizational effectiveness. Exhibit 18-6 lists some of the
more popular industry rankings used to measure
organizational performance.
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Exhibit 18.6: Popular Industry and Company Rankings

Fortune IndustryWeek Forbes Customer

(www.fortune.com) (www.industrywee (www.forbes.co Satisfaction Indexes
k.com) m)
Fortune 500 IndustryWeek 1000 World’s Largest American Customer
Public Companies Satisfaction Index—
University of Michigan
Business School

Global 500 IndustryWeek US blank Customer Satisfaction

500 Measurement
Association
World’s Most 50 Best blank blank
Admired Companies Manufacturers
100 Best IndustryWeek Best blank blank
Companies to Work Plants
For
100 Fastest- blank blank blank
Growing Companies

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 Controlling for Employee Performance
1. Managers need to provide their employees with feedback, so the
employees know where they stand in job performance.
2. Using Disciplinary Actions. Managers are responsible for making sure
employees’ work efforts are of the quantity and quality needed to
accomplish organizational goals. Managers can use disciplinary
actions to enforce the organization’s work standards and regulations.
Exhibit 18-7 lists some common types of work discipline problems and
examples of each. To ensure that the minimum penalty appropriate to the
offense is imposed, managers can use progressive disciplinary action.
Progressive disciplinary actions typically involve five steps:
a) Oral warning
b) Initial written warning
c) Final written warning
d) Termination review or suspension
e) A dismissal letter stating the reason for dismissal

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Exhibit 18.7: Types of Discipline Problems
and Examples of Each

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Feedforward/Concurrent/Feedback Controls
• Feedforward control: control that takes place before a
work activity is done
• Concurrent control: control that takes place while a work
activity is in progress
• Management by walking around: a term used to
describe when a manager is out in the work area
interacting directly with employees
• Feedback control: control that takes place after a work
activity is done.

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Exhibit 18.8 Types of Control

Exhibit 18.8 shows the three kinds of control.

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 Financial Controls 1 of 2
• Traditional Financial Control Measures (See Exhibit 18-9)
A. Financial ratios are calculated by taking numbers from the
organization’s primary financial statements—the income statement and
the balance sheet. Financial ratios can be organized into four
categories:
1. Liquidity ratios measure an organization’s ability to meet its current
debt obligations.
2. Leverage ratios examine the organization’s use of debt to finance its
assets and whether the organization is able to meet the interest
payments on the debt.
3. Activity ratios assess how efficiently the firm is using its assets.
4. Profitability ratios measure how efficiently and effectively the firm is
using its assets to generate profits.

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 Financial Controls 2 of 2
• Traditional Financial Control Measures (See Exhibit 18-9)

B. Budgets are discussed in the Planning and Control

Techniques module. Budgets also function as control tools;
budgets provide managers with quantitative standards against
which to measure and compare actual performance and
resource consumption.

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Exhibit 18.9: Popular Financial Ratios
Objective Ratio Calculation Meaning

Liquidity Current ratio Current assets Tests the organization’s ability to meet
Current liabilities short-term obligations
Liquidity Acid test Current assets less Tests liquidity more accurately when
inventories inventories turn over slowly or are
Current liabilities difficult to sell
Leverage Debt to Total debt The higher the ratio, the more leveraged
assets Total assets the organization
Leverage Times interest Profits before interest/taxes Measures how many times the
earned Total interest charges organization is able to meet its interest
expenses
Activity Inventory Sales The higher the ratio, the more efficiently
turnover Inventory inventory assets are used
Activity Total asset Sales The fewer assets used to achieve a
turnover Total Assets given level of sales, the more efficiently
management uses the organization’s
total assets
Profitability Profit margin Net profit after taxes Identifies the profits that are generated
on sales Total sales
Profitability Return on Net profit after taxes Measures the efficiency of assets to
investment Total assets generate profits

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 Information Controls
• Managers deal with information controls in two ways: (1) as
a tool to help them control other organizational activities and
(2) as an organizational area they need to control.
a. Managers need the right amount of information at the right
time. A management information system (MIS) is a system
used to provide managers with needed information on a
regular basis. In theory, this system can be manual, or
computer based, although most organizations have moved to
computer-supported applications.
b. Controlling Information. Information controls need to be
monitored regularly to ensure that all possible precautions
are being taken to protect important information.

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Balanced Scorecard
• Balanced scorecard: is a performance measurement tool
that looks at four areas—financial, customer, internal
processes, and people/innovation/growth assets—that
contribute to a company’s performance.

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 Benchmarking of Best Practices
1. Benchmarking is the search for the best practices among
competitors or noncompetitors that lead to their superior
performance.
2. The benchmark is the standard of excellence against which
to measure and compare.
a. Benchmarking can be used to monitor and measure
organizational performance.
b. This practice can be used to identify specific performance
gaps and potential areas of improvement.
c. Exhibit 18-10 provides a summary to guide managers in
implementing benchmarking programs.

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Exhibit 18.10: Suggestions for Internal Benchmarking
Suggestions
1. Connect best practices to strategies and goals. The organization’s strategies and goals
should dictate what types of best practices might be most valuable to others in the
organization.
2. Identify best practices throughout the organization. Organizations must have a way to
find out what practices have been successful in different work areas and units.
3. Develop best practices reward and recognition systems. Individuals must be given an
incentive to share their knowledge. The reward system should be built into the
organization’s culture.
4. Communicate best practices throughout the organization. Once best practices have
been identified, that information needs to be shared with others in the organization.
5. Create a best practices knowledge-sharing system. There needs to be a formal
mechanism for organizational members to continue sharing their ideas and best
practices.
6. Nurture best practices on an ongoing basis. Create an organizational culture that
reinforces a “we can learn from everyone” attitude and emphasizes sharing information.

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Review Learning Objective 18.1
• Explain the nature and importance of control.
– Controlling = monitoring, comparing, correcting
– Important:
§ Are goals being met?
§ Provides information/feedback
§ Protects organization and assets

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Review Learning Objective 18.2
• Describe the three steps in the control process.
– Measuring
– Comparing
– Taking action

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Review Learning Objective 18.3
• Explain how organizational and employee performance
are measured.
– Productivity
– Effectiveness
– Industry and company rankings

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Review Learning Objective 18.4
• Describe tools used to measure organizational
performance.
– Feedforward controls
– Concurrent controls
– Feedback controls
– Financial controls
– Information controls
– Balanced scorecards
– Benchmarking

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