Meet the Manager

Mike Stutzman
Rockwell Collins
Cedar Rapids, IA

MY JOB:
I am currently leading several initiatives in organizational
and leadership development. I am responsible for aligning
the learning and development of our leaders to the
objectives of the business. I basically am responsible for
helping leaders become better leaders so they can
demonstrate desired leadership skills and execute their
business plans.
BEST PART OF MY JOB:
The single most competitive advantage a company has
in any industry today is the ability of its people to
continuously learn and grow. Every company has the
same access to information and technology. The true
differentiator is how learned and engaged an organization’s
people are in their jobs. I take a lot of pride in and
enjoy having a direct impact on a leader’s personal and
professional development.
Explain the Describe the Explain how Describe tools Discuss
nature and three steps in organizational used to measure contemporary
importance of the control performance is organizational issues in control.
control. process. measured. performance. page 499
page 486 page 488 page 491 page 493

WORST PART OF MY JOB:

Trying to sustain change. Attempting to influence new behavior and shifting cul-
ture are challenging and require a long-term commitment. It’s difficult at times to
inspire people to embrace new directions of “tomorrow” when they keep getting
pulled back into the demands and constraints of “today.”
BEST MANAGEMENT ADVICE EVER RECEIVED:
A leader once told me that at the end of your career, when all is said and done,
you will have, at most, four or five things that you can say truly mattered. Things
that were actually worth the stress and anxiety. Beyond that, stay focused on the
Big Picture. Life was never intended to be taken as seriously as we make it.
Love your family, like your job, all the rest is just “paperwork.” Remember to
have fun, life is short. This has helped me keep a more healthy and balanced
perspective.

485
A Manager’s Dilemma
The 2010 Winter Olympics, held in those other aspects, including the track’s design,
magnificent Vancouver, British that people questioned.
Columbia, was set to be one for The luge track was more than 13 percent faster
the record books but is likely to be than original estimates, a figure that alarmed the
remembered for something much FIL. Although the wall on that turn had already
more tragic—the death of a young been raised and lengthened to stop athletes
luger on a practice run. What went from flying off, it wasn’t enough to prevent the
wrong? fatal crash. Jacques Rogge, the International
The final report of the International Olympic Committee’s president, said, “The
Luge Federation, or FIL, placed the IOC had a moral responsibility for the luge
blame for the fatal crash on the track where the death happened, but not a legal
young man and on “a complex one . . . blame should be shared by the FIL and
series of interrelated events.”1 The re- the Vancouver Organizing Committee, which built
port said that Nodar Kumaritashvili it.” Could better controls have helped prevent
made a series of mistakes that this situation?
caused his sled to hit the wall on turn
16 at an exceptional angle, but it’s
What Would You Do?
The situation that occurred at the Vancouver Olympics illustrates how important controls
are to managers. We’ll never know whether a safer design or more thorough track testing
could have prevented the tragedy, but it’s likely that having a systematic approach to con-
trolling might have made everyone more aware that the situation needed to be addressed.
And that’s what all managers are looking for. Appropriate controls that can help pinpoint
specific performance gaps and areas for improvement.

LEARNING OUTCOME
18.1 What Is Controlling and Why
Explain the nature and Is It Important?
importance of control.
A press operator at the Denver Mint noticed a flaw—an extra up leaf or an extra down
leaf—on Wisconsin state quarters being pressed at one of his five press machines. He
stopped the machine and left for a meal break. When he returned, he saw the machine run-
ning and assumed that someone had changed the die in the machine. However, after a rou-
tine inspection, the machine operator realized the die had not been changed. The faulty
press had likely been running for over an hour and thousands of the flawed coins were now
commingled with unblemished quarters. As many as 50,000 of the faulty coins entered cir-
culation, setting off a coin collector buying frenzy.2 Can you see why controlling is such an
important managerial function?
What is controlling? It’s the process of monitoring, comparing, and correcting work
performance. All managers should control even if their units are performing as planned
because they can’t really know that unless they’ve evaluated what activities have been
done and compared actual performance against the desired standard.3 Effective controls
ensure that activities are completed in ways that lead to the attainment of goals. Whether
controls are effective, then, is determined by how well they help employees and managers
achieve their goals.4
In David Lee Roth’s autobiography (yes, that David Lee Roth, the former front man
for Van Halen), he tells the story of how he had a clause (article 126) in his touring contract
asking for a bowl of M&Ms backstage, but no brown ones.5 Now, you might think that it is
just typical demanding rock star behavior, but instead it was a well-planned effort by Roth
to see whether the venue management had paid attention. With the technical complexity of
his show, he figured if they couldn’t get the M&Ms right, he needed to demand a line

486
 CH AP TE R 18 | I NTR O DU CTI ON TO CO NTR O L LIN G 487

check of the entire production to ensure that no technical errors would occur during a per-
formance. Now that’s what control should do!
Why is control so important? Planning can be done, an organizational structure
created to facilitate efficient achievement of goals, and employees motivated through
effective leadership. But there’s no assurance that activities are going as planned and
that the goals employees and managers are working toward are, in fact, being attained.
Control is important, therefore, because it’s the only way that managers know whether
organizational goals are being met and if not, the reasons why. The value of the control
function can be seen in three specific areas: planning, empowering employees, and pro-
tecting the workplace.
In Chapter 8, we described goals, which provide specific direction to employees and
managers, as the foundation of planning. However, just stating goals or having employees
accept goals doesn’t guarantee that the necessary actions to accomplish those goals have
been taken. As the old saying goes, “The best-laid plans often go awry.” The effective man-
ager follows up to ensure that what employees are supposed to do is, in fact, being done
and goals are being achieved. As the final step in the management process, controlling pro-
vides the critical link back to planning. (See Exhibit 18-1.) If managers didn’t control,
they’d have no way of knowing whether their goals and plans were being achieved and
what future actions to take.
The second reason controlling is important is because of employee empowerment.
Many managers are reluctant to empower their employees because they fear something
will go wrong for which they would be held responsible. But an effective control system
can provide information and feedback on employee performance and minimize the chance
of potential problems.
The final reason that managers control is to protect the organization and its assets.6
Today’s environment brings heightened threats from natural disasters, financial scandals,
workplace violence, supply chain disruptions, security breaches, and even possible terror-
ist attacks. Managers must protect organizational assets in the event that any of these Controls are important because they
ensure that activities are completed in
things should happen. Comprehensive controls and backup plans will help assure minimal ways that lead to the attainment of goals.
work disruptions.

EXHIBIT 18-1
Planning Planning-Controlling Link
Goals
Objectives
Strategies
Plans
Controlling
Organizing
Standards
Structure
Measurements
Human Resource
Comparison Management
Actions
Leading
Motivation
Leadership
Communication
Individual and
Group Behavior

controlling
The process of monitoring, comparing,
and correcting work performance
488 PA RT SIX | C ON TR OL L IN G

LEARNING OUTCOME
18.2 The Control Process
Describe the three steps When Maggine Fuentes joined Core Systems in Painesville, Ohio, as HR manager, she knew
in the control process. that her top priority was reducing employee injuries. The number of injuries was “through the
roof; above the industry average.” The high frequency and severity of the company’s injury
rates not only affected employee morale but also resulted in lost workdays and affected the
bottom line.7 Maggine relied on the control process to turn this situation around.
The control process is a three-step process of measuring actual performance, com-
paring actual performance against a standard, and taking managerial action to correct devi-
ations or to address inadequate standards. (See Exhibit 18-2.) The control process assumes
that performance standards already exist, and they do. They’re the specific goals created
during the planning process.

Step 1. Measuring Actual Performance

To determine what actual performance is, a manager must first get information about it.
Thus, the first step in control is measuring.

HOW WE MEASURE. Four approaches used by managers to measure and report actual
performance are personal observations, statistical reports, oral reports, and written reports.
Exhibit 18-3 summarizes the advantages and drawbacks of each approach. Most managers
use a combination of these approaches.

WHAT WE MEASURE. What is measured is probably more critical to the control process
than how it’s measured. Why? Because selecting the wrong criteria can create serious
problems. Besides, what is measured often determines what employees will do.8 What
control criteria might managers use?
Some control criteria can be used for any management situation. For instance,
all managers deal with people, so criteria such as employee satisfaction or turnover
and absenteeism rates can be measured. Keeping costs within budget is also a fairly com-
mon control measure. Other control criteria should recognize the different activities that
managers supervise. For instance, a manager at a pizza delivery location might use mea-
sures such as number of pizzas delivered per day, average delivery time, or number of
coupons redeemed. A manager in a governmental agency might use applications typed
per day, client requests completed per hour, or average time to process paperwork.
Most work activities can be expressed in quantifiable terms. However, managers
should use subjective measures when they can’t. Although such measures may have limita-
tions, they’re better than having no standards at all and doing no controlling.

EXHIBIT 18-2
The Control Process
Measuring
Step 1. Actual Performance

GOALS AND
OBJECTIVES
Comparing Actual
Organizational Performance Step 2.
Divisional Against Standard
Departmental
Individual

Taking
Step 3. Managerial Action
 CH AP TE R 18 | I NTR O DU CTI ON TO CO NTR O L LIN G 489

Benefits Drawbacks EXHIBIT 18-3

Sources of Information
Personal Observations • Get firsthand knowledge • Subject to personal biases
for Measuring Performance
• Information isn’t filtered • Time-consuming
• Intensive coverage of work • Obtrusive
activities
Statistical Reports • Easy to visualize • Provide limited information
• Effective for showing relationships • Ignore subjective factors
Oral Reports • Fast way to get information • Information is filtered
• Allow for verbal and nonverbal • Information can’t be
feedback documented
Written Reports • Comprehensive • Take more time to prepare
• Formal
• Easy to file and retrieve

Step 2. Comparing Actual Performance

Against the Standard
The comparing step determines the variation between actual performance and the standard.
Although some variation in performance can be expected in all activities, it’s critical to de-
termine an acceptable range of variation (see Exhibit 18-4). Deviations outside this
range need attention. Let’s work through an example.
Chris Tanner is a sales manager for Green Earth Gardening Supply, a distributor of
specialty plants and seeds in the Pacific Northwest. Chris prepares a report during the first
week of each month that describes sales for the previous month, classified by product line.

EXHIBIT 18-4
Acceptable Range
of Variation
Measurement of Performance

Acceptable
Upper Limit

Standard Acceptable
Range of
Variation

Acceptable
Lower Limit

t t+1 t+2 t+3 t+4 t+5

Time Period (t)

control process range of variation

A three-step process of measuring actual The acceptable parameters of variance
performance, comparing actual performance between actual performance and the standard
against a standard, and taking managerial
action to correct deviations or inadequate
standards
490 PA RT SIX | C ON TR OL L IN G

EXHIBIT 18-5 Product Standard Actual Over (Under)

Green Earth Gardening
Vegetable plants 1,075 913 (162)
Supply—June Sales
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

Exhibit 18-5 displays both the sales goals (standard) and actual sales figures for the month
of June. After looking at the numbers, should Chris be concerned? Sales were a bit higher
than originally targeted, but does that mean there were no significant deviations? That
depends on what Chris thinks is significant; that is, outside the acceptable range of varia-
tion. Even though overall performance was generally quite favorable, some product
lines need closer scrutiny. For instance, if sales of heirloom seeds, flowering bulbs, and
annual flowers continue to be over what was expected, Chris might need to order more
product from nurseries to meet customer demand. Because sales of vegetable plants were
15 percent below goal, Chris may need to run a special on them. As this example shows,
both overvariance and undervariance may require managerial attention, which is the third
step in the control process.

Step 3. Taking Managerial Action

Managers can choose among three possible courses of action: do nothing, correct the ac-
tual performance, or revise the standards. Because “do nothing” is self-explanatory, let’s
look at the other two.

CORRECT ACTUAL PERFORMANCE. Sports coaches understand the importance of

correcting actual performance. During a game, they’ll often correct a player’s actions. But
if the problem is recurring or encompasses more than one player, they’ll devote time
during practice before the next game to correcting the actions.9 That’s what managers
need to do as well.
Depending on what the problem is, a manager could take different corrective actions.
For instance, if unsatisfactory work is the reason for performance variations, the manager
could correct it by things such as training programs, disciplinary action, changes in com-
pensation practices, and so forth. One decision that a manager must make is whether to take
immediate corrective action, which corrects problems at once to get performance back
on track, or to use basic corrective action, which looks at how and why performance
deviated before correcting the source of deviation. It’s not unusual for managers to rational-
ize that they don’t have time to find the source of a problem (basic corrective action) and
continue to perpetually “put out fires” with immediate corrective action. Effective managers
analyze deviations and if the benefits justify it, take the time to pinpoint and correct the
causes of variance.

REVISE THE STANDARD. It’s possible that the variance was a result of an unrealistic
standard—too low or too high a goal. In that situation, the standard needs the corrective
action, not the performance. If performance consistently exceeds the goal, then a manager
should look at whether the goal is too easy and needs to be raised. On the other hand,
managers must be cautious about revising a standard downward. It’s natural to blame the
goal when an employee or a team falls short. For instance, students who get a low score on
a test often attack the grade cutoff standards as too high. Rather than accept the fact that
 CH AP TE R 18 | I NTR O DU CTI ON TO CO NTR O L LIN G 491

EXHIBIT 18-6
Managerial Decisions
Compare Is Yes
Y
standard in the Control Process
actual Do nothing
performance being
with standard attained?

N
No

Is Yes
Y
variance Do nothing
acceptable?
Measure
Objectives Standard actual
performance No

Is Yes
Y
Identify
standard
cause of
acceptable?
variation

No

Revise Correct
standard performance

their performance was inadequate, they will argue that the standards are unreasonable.
Likewise, salespeople who don’t meet their monthly quota often want to blame what they
think is an unrealistic quota. The point is that when performance isn’t up to par, don’t
immediately blame the goal or standard. If you believe the standard is realistic, fair, and
achievable, tell employees that you expect future work to improve, and then take the
necessary corrective action to help make that happen.

Managerial Decisions in Controlling

Exhibit 18-6 summarizes the decisions a manager makes in controlling. The standards are
goals that were developed during the planning process. These goals provide the basis for
the control process, which involves measuring actual performance and comparing it
against the standard. Depending on the results, a manager’s decision is to do nothing, cor-
rect the performance, or revise the standard.

Controlling for Organizational 18.3

LEARNING OUTCOME
Performance Explain how organizational
performance is measured.
Cost efficiency. The length of time customers are kept on hold. Customer satisfaction with
service provided. These are just a few of the important performance indicators that execu-
tives in the intensely competitive call-center service industry measure. To make good deci-
sions, managers in this industry want and need this type of information so they can manage

immediate corrective action basic corrective action

Corrective action that corrects problems at Corrective action that looks at how and why
once to get performance back on track performance deviated before correcting the
source of deviation
492 PA RT SIX | C ON TR OL L IN G

organizational performance. Managers in all types of businesses are responsible for man-
aging organizational performance.

What Is Organizational Performance?

When you hear the word performance, what do you think of? A summer evening con-
cert by a local community orchestra? An Olympic athlete striving for the finish line in
a close race? A Southwest Airlines ramp agent in Ft. Myers, Florida, loading passengers
as efficiently as possible in order to meet the company’s 20-minute gate turnaround
goal? Performance is all of these things. It’s the end result of an activity. And whether
that activity is hours of intense practice before a concert or race or whether it’s carrying
out job responsibilities as efficiently and effectively as possible, performance is what
results from that activity.
My biggest challenge in controlling Managers are concerned with organizational performance—the accumulated
employee performance is finding a results of all the organization’s work activities. It’s a multifaceted concept, but managers
balance that allows for effective need to understand the factors that contribute to organizational performance. After all, it’s
monitoring while not making people feel
unlikely that they want (or intend) to manage their way to mediocre performance. They
“micro-managed.”
want their organizations, work units, or work groups to achieve high levels of performance.

Measures of Organizational Performance

Theo Epstein, executive vice president and general manager of the Boston Red Sox, uses
some unusual statistics to evaluate his players’ performance instead of the old standards like
batting average, home runs, and runs batted in. These “new” performance measures include
on-base percentage, pitches per plate appearance, at-bats per home run, and on-base plus
slugging percentage.10 Also, by using these statistics to predict future performance, Epstein
has identified some potential star players and signed them for a fraction of the cost of a big-
name player. His management team is defining new statistics to measure the impact of a
player’s defensive skills. As a manager, Epstein has identified the performance measures
that are most important to his decisions.
Like Epstein, all managers must know which measures will give them the information
they need about organizational performance. Commonly used ones include organizational
productivity, organizational effectiveness, and industry rankings.

ORGANIZATIONAL PRODUCTIVITY. Productivity is the amount of goods or services

produced divided by the inputs needed to generate that output. Organizations and
individual work units want to be productive. They want to produce the most goods and
services using the least amount of inputs. Output is measured by the sales revenue an
organization receives when goods are sold (selling price number sold). Input is
measured by the costs of acquiring and transforming resources into outputs.
It’s management’s job to increase this ratio. Of course, the easiest way to do this is to
raise prices of the outputs. But in today’s competitive environment, that may not be an
option. The only other option, then, is to decrease the inputs side. How? By being more
efficient in performing work and thus decreasing the organization’s expenses.

ORGANIZATIONAL EFFECTIVENESS. Organizational effectiveness is a measure of

how appropriate organizational goals are and how well those goals are being met. That’s
the bottom line for managers and it’s what guides managerial decisions in designing
strategies and work activities and in coordinating the work of employees.

INDUSTRY AND COMPANY RANKINGS. Rankings are a popular way for managers to
measure their organization’s performance. And there’s not a shortage of these rankings as
Exhibit 18-7 shows. Rankings are determined by specific performance measures, which
are different for each list. For instance, Fortune’s Best Companies to Work For are chosen
by answers given by thousands of randomly selected employees on a questionnaire called
“The Great Place to Work® Trust Index®” and on materials filled out by thousands of
 CH AP TE R 18 | I NTR O DU CTI ON TO CO NTR O L LIN G 493

EXHIBIT 18-7
Fortune (www.fortune.com) IndustryWeek (www.industryweek.com) Popular Industry and Company
Fortune 500 IndustryWeek 1000 Rankings
25 Top MBA Employers IndustryWeek U.S. 500
Most Admired Companies 50 Best Manufacturing Companies
100 Best Companies to Work For IndustryWeek Best Plants
101 Dumbest Moments in Business
Global 500
Top Companies for Leaders
100 Fastest-Growing Companies
BusinessWeek (www.businessweek.com) Customer Satisfaction Indexes
World’s Most Innovative Companies American Customer Satisfaction Index—
BusinessWeek 50 University of Michigan Business School
Top MBA Programs Customer Satisfaction Measurement
Customer Service Champs Association

Forbes (www.forbes.com)
Forbes 500
200 Best Small Companies
400 Best Big Companies
Largest Private Companies
World’s 2,000 Largest Companies
Global High Performers

company managers including a corporate culture audit created by the Great Place to Work
Institute. These rankings give managers (and others) an indicator of how well their
company performs in comparison to others.

Tools for Measuring Organizational 18.4

LEARNING OUTCOME
Performance Describe tools used to
measure organizational
When someone typed the word “bailout” into a Domino’s promo code window and
performance.
found it was good for a free medium pizza, the news spread like wildfire across the
Web. Domino’s ended up having to give away thousands of free pizzas. A simple
mistyped Web address by a Google employee caused all search results worldwide dur-
ing a 55-minute period to warn, “This site may be harmful to your computer,” even
though it wasn’t. Operating under tremendous financial pressures as consumers cur-
tailed spending, retailers across the United States struggled to cut costs.11 What kinds
of tools could managers at these companies have used for monitoring and measuring
performance?
All managers need appropriate tools for monitoring and measuring organizational per-
formance. Before describing some specific types of control tools, let’s look at the concept
of feedforward, concurrent, and feedback control.

performance productivity
The end result of an activity The amount of goods or services produced
organizational performance divided by the inputs needed to generate that
The accumulated results of all the organization’s output
work activities organizational effectiveness
A measure of how appropriate organizational
goals are and how well those goals are being met
494 PA RT SIX | C ON TR OL L IN G

EXHIBIT 18-8
Types of Control Input Processes Output

Feedforward Concurrent Feedback

Control Control Control

Corrects Corrects
Anticipates problems as problems after
problems they happen they occur

Feedforward/Concurrent/Feedback Controls
Managers can implement controls before an activity begins, during the time the activity is
going on, and after the activity has been completed. The first type is called feedforward
control; the second, concurrent control; and the last, feedback control (see Exhibit 18-8).

FEEDFORWARD CONTROL. The most desirable type of control—feedforward

control—prevents problems because it takes place before the actual activity.12 For
instance, when McDonald’s opened its first restaurant in Moscow, it sent company quality
control experts to help Russian farmers learn techniques for growing high-quality potatoes
and to help bakers learn processes for baking high-quality breads. Why? McDonald’s
demands consistent product quality no matter the geographical location. They want a
cheeseburger in Moscow to taste like one in Omaha. Still another example of feedforward
control is the scheduled preventive maintenance programs on aircraft done by the major
airlines. These programs are designed to detect and hopefully to prevent structural damage
that might lead to an accident.
The key to feedforward controls is taking managerial action before a problem occurs.
That way, problems can be prevented rather than having to correct them after any damage
(poor-quality products, lost customers, lost revenue, etc.) has already been done. However,
these controls require timely and accurate information that isn’t always easy to get. Thus,
managers frequently end up using the other two types of control.

CONCURRENT CONTROL. Concurrent control, as its name implies, takes place while
a work activity is in progress. For instance, Nicholas Fox is director of business product
management at Google. He and his team keep a watchful eye on one of Google’s most
profitable businesses—online ads. They watch “the number of searches and clicks, the rate
at which users click on ads, the revenue this generates—everything is tracked hour by hour,
compared with the data from a week earlier and charted.”13 If they see something that’s not
working particularly well, they fine-tune it.
The best-known form of concurrent control is direct supervision. Another term for it is
management by walking around, which is when a manager is in the work area interact-
ing directly with employees. For example, Nvidia’s CEO Jen-Hsun Huang tore down his
cubicle and replaced it with a conference table so he’s available to employees at all times to
discuss what’s going on.14 Even GE’s CEO Jeff Immelt spends 60 percent of his workweek
on the road talking to employees and visiting the company’s numerous locations.15 All
managers can benefit from using concurrent control because they can correct problems
before they become too costly.

FEEDBACK CONTROL. The most popular type of control relies on feedback. In

feedback control, the control takes place after the activity is done. For instance, the
Denver Mint discovered the flawed Wisconsin quarters using feedback control. The
damage had already occurred even though the organization corrected the problem once it
 CH AP TE R 18 | I NTR O DU CTI ON TO CO NTR O L LIN G 495

Dr. Giovanni Colella interacts directly with employees

at Castlight Health, a Web-based company he
cofounded and heads as chief executive, to give
consumers the knowledge they need to make
informed health care buying decisions. By investing
time in communicating with employees face-to-face
in their work areas, Dr. Colella practices management
by walking around, a form of concurrent control. This
technique helps managers identify potential
problems as they listen to what employees say,
answer their questions, and ask them for their ideas
that will help improve the company.

was discovered. And that’s the major problem with this type of control. By the time a
manager has the information, the problems have already occurred, leading to waste or
damage. However, in many work areas, financial being one example, feedback is the only
viable type of control.
Feedback controls do have two advantages.16 First, feedback gives managers mean-
ingful information on how effective their planning efforts were. Feedback that shows lit-
tle variance between standard and actual performance indicates that the planning was
generally on target. If the deviation is significant, a manager can use that information to
formulate new plans. Second, feedback can enhance motivation. People want to know
how well they’re doing and feedback provides that information. Now, let’s look at some
specific control tools that managers can use.

Financial Controls
Every business wants to earn a profit. To achieve this goal, managers need financial con-
trols. For instance, they might analyze quarterly income statements for excessive expenses.
They might also calculate financial ratios to ensure that sufficient cash is available to pay
ongoing expenses, that debt levels haven’t become too high, or that assets are being used
productively.
Managers might use traditional financial measures such as ratio analysis and budget
analysis. Exhibit 18-9 summarizes some of the most popular financial ratios. Liquidity ra-
tios measure an organization’s ability to meet its current debt obligations. Leverage ratios
examine the organization’s use of debt to finance its assets and whether it’s able to meet the
interest payments on the debt. Activity ratios assess how efficiently a company is using its
assets. Finally, profitability ratios measure how efficiently and effectively the company is
using its assets to generate profits. These ratios are calculated using selected information
from the organization’s two primary financial statements (the balance sheet and the income
statement), which are then expressed as a percentage or ratio. Because you’ve probably
studied these ratios in other accounting or finance courses, or will in the near future, we

feedforward control management by walking around

Control that takes place before a work activity is A term used to describe when a manager is out
done in the work area interacting directly with
concurrent control employees
Control that takes place while a work activity is feedback control
in progress Control that takes place after a work activity is
done
496 PA RT SIX | C ON TR OL L IN G

EXHIBIT 18-9 Objective Ratio Calculation Meaning

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

Return on Net profit after taxes Measures the efficiency of

investment Total assets assets to generate profits

aren’t going to elaborate on how they’re calculated. We mention them here to remind you
that managers use such ratios as internal control tools.
Budgets are planning and controlling tools. (See the Planning Tools and Techniques
module for more information on budgeting.) When a budget is formulated, it’s a planning
tool because it indicates which work activities are important and what and how much
resources should be allocated to those activities. But budgets are also used for controlling
because they provide managers with quantitative standards against which to measure and
compare resource consumption. If deviations are significant enough to require action, the
manager examines what has happened and tries to uncover why. With this information,
necessary action can be taken. For example, if you use a personal budget for monitoring
and controlling your monthly expenses, you might find that one month your miscellaneous
expenses were higher than you had budgeted for. At that point, you might cut back spend-
ing in another area or work extra hours to get more income.

Balanced Scorecard
The balanced scorecard approach is a way to evaluate organizational performance from
more than just the financial perspective.17 A balanced scorecard typically looks at four
areas that contribute to a company’s performance: financial, customer, internal processes,
and people/innovation/growth assets. According to this approach, managers should
develop goals in each of the four areas and then measure whether the goals are being met.
Although a balanced scorecard makes sense, managers will tend to focus on areas that
drive their organization’s success and use scorecards that reflect those strategies.18 For
example, if strategies are customer-centered, then the customer area is likely to get more
attention than the other three areas. Yet, you can’t focus on measuring only one performance
area because others are affected as well. For instance, at IBM Global Services in Houston,
managers developed a scorecard around an overriding strategy of customer satisfaction.
However, the other areas (financial, internal processes, and people/innovation/growth) sup-
port that central strategy. The division manager described it as follows, “The internal
 CH AP TE R 18 | I NTR O DU CTI ON TO CO NTR O L LIN G 497

processes part of our business is directly related to responding to our customers in a timely
manner, and the learning and innovation aspect is critical for us since what we’re selling our
customers above all is our expertise. Of course, how successful we are with those things will
affect our financial component.”19

Information Controls
Cyber-attackers from China targeted Google and 34 other companies in an attempt to steal The types of control I use are building
strong relationships—if people feel
information. The largest-ever criminal stealing of credit-card data—account information comfortable approaching you, the art of
belonging to millions of people—happened to Heartland Payment Systems, a payments controlling almost takes care of itself.
processor. An ex-worker at Goldman Sachs stole “black box” computer programs that
Goldman uses to make lucrative, rapid-fire trades in the financial markets.20 Talk about the
need for 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.

HOW IS INFORMATION USED IN CONTROLLING? Managers need the right information

at the right time and in the right amount to monitor and measure organizational activities
and performance.
In measuring actual performance, managers need information about what is happening
within their area of responsibility and about the standards in order to be able to compare
actual performance with the standard. They also rely on information to help them determine
if deviations are acceptable. Finally, they rely on information to help them develop appropri-
ate courses of action. Information is important! Most of the information tools that managers
use come from the organization’s management information system.
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 com-
puter-based, although most organizations have moved to computer-supported applications.
The term system in MIS implies order, arrangement, and purpose. Further, an MIS focuses
specifically on providing managers with information (processed and analyzed data), not
merely data (raw, unanalyzed facts). A library provides a good analogy. Although it can
contain millions of volumes, a library doesn’t do you any good if you can’t find what you
want quickly. That’s why librarians spend a great deal of time cataloging a library’s collec-
tions and ensuring that materials are returned to their proper locations. Organizations today
are like well-stocked libraries. The issue is not a lack of data; instead, the issue is whether
an organization has the ability to process that data so that the right information is available
to the right person when he or she needs it. An MIS collects data and turns them into rele-
vant information for managers to use.

CONTROLLING INFORMATION. It seems that every week, there’s another news story
about information security breaches. A survey shows that 85 percent of privacy and security
professionals acknowledge a reportable data breach occurred within their organizations
within the last year alone.21 Because information is critically important to everything an
organization does, managers must have comprehensive and secure controls in place to
protect that information. Such controls can range from data encryption to system firewalls
to data backups, and other techniques as well.22 Problems can lurk in places that an
organization might not even have considered, like blogs, search engines, and Twitter
accounts. Sensitive, defamatory, confidential, or embarrassing organizational information
has found its way into search engine results. For instance, detailed monthly expenses
and employee salaries on the National Speleological Society’s Web site turned up in a

balanced scorecard management information system

A performance measurement tool that looks at (MIS)
more than just the financial perspective A system used to provide management with
needed information on a regular basis
498 PA RT SIX | C ON TR OL L IN G

Walt Disney Company is one of Google search.23 Equipment such as laptop computers,
the world’s largest entertainment smartphones, and even RFID (radio-frequency identification)
tags are vulnerable to viruses and hacking. Needless to say,
and media companies and has
information controls should be monitored regularly to ensure
had a long record of success.28 that all possible precautions are in place to protect important
When Bob Iger was named CEO information.
in 2005, analysts believed that
the Disney brand had become Benchmarking of Best Practices
outdated. The perception was too The Cleveland Clinic is world renowned for delivering high-
many Disney products in the quality health care, with a top-ranked heart program that
marketplace lacking the quality attracts patients from around the world. But what you may
not realize is that it’s also a model of cost-effective health
people expected. Iger decided to
care.24 It could serve as a model for other health care organ-
address that perception with what he called the Disney Difference. What is the izations looking to be more effective and efficient.
Disney Difference? It’s “high-quality creative content, backed up by a clear Managers in such diverse industries as health care,
strategy for maximizing that content’s value across platforms and markets.” education, and financial services are discovering what
manufacturers have long recognized—the benefits of
Now the company’s obsessive focus on product quality led it to a number one
benchmarking, which is the search for the best practices
ranking in Fortune’s Most Admired list for product quality. among competitors or noncompetitors that lead to their
superior performance. Benchmarking should identify vari-
ous benchmarks, which are the standards of excellence
against which to measure and compare. For instance, the American Medical Association
developed more than 100 standard measures of performance to improve medical care.
Carlos Ghosn, CEO of Nissan, benchmarked Walmart operations in purchasing, trans-
portation, and logistics.25 At its most basic, benchmarking means learning from others. As
a tool for monitoring and measuring organizational performance, benchmarking can be
used to identify specific performance gaps and potential areas of improvement. But best
practices aren’t just found externally.
Sometimes those best practices can be found inside the organization and just need
to be shared. One fertile area for f inding good performance improvement ideas is
employee suggestion boxes, which we discussed in Chapter 15. Research shows that
best practices frequently already exist within an organization but usually go unidenti-
fied and unnoticed.26 In today’s environment, organizations seeking high performance
levels can’t afford to ignore such potentially valuable information. For example,
Ameren Corporation’s power plant managers used internal benchmarking to help iden-
tify performance gaps and opportunities.27 Exhibit 18-10 provides some suggestions
for internal benchmarking.

EXHIBIT 18-10
1. Connect best practices to strategies and goals. The organization’s strategies and goals
Suggestions for Internal should dictate what types of best practices might be most valuable to others in the
Benchmarking 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.

Source: Based on T. Leahy, “Extracting Diamonds in the Rough,” Business Finance, August 2000, pp. 33–37.
 PREPARING FOR: Exams/Quizzes
CHAPTER SUMMARY
by Learning Outcomes
Explain the nature and importance of control. LEARNING 18.1
OU TC OM E
Controlling is the process of monitoring, comparing, and correcting work performance.
As the final step in the management process, controlling provides the link back to planning.
If managers didn’t control, they’d have no way of knowing whether goals were being met.
Control is important because (1) it’s the only way to know if goals are being met, and
if not, why; (2) it provides information and feedback so managers feel comfortable em-
powering employees; and (3) it helps protect an organization and its assets.

Describe the three steps in the control process. LEARNING 18.2

OU TC OM E
The three steps in the control process are measuring, comparing, and taking action.
Measuring involves deciding how to measure actual performance and what to measure.
Comparing involves looking at the variation between actual performance and the standard
(goal). Deviations outside an acceptable range of variation need attention.
Taking action can involve doing nothing, correcting the actual performance, or revis-
ing the standards. Doing nothing is self-explanatory. Correcting the actual performance
can involve different corrective actions, which can either be immediate or basic.
Standards can be revised by either raising or lowering them.

Explain how organizational performance is measured. LEARNING 18.3

OU TCOME
Organizational performance is the accumulated results of all the organization’s work
activities. Three frequently used organizational performance measures include (1) produc-
tivity, which is the output of goods or services produced divided by the inputs needed to
generate that output; (2) effectiveness, which is a measure of how appropriate organiza-
tional goals are and how well those goals are being met; and (3) industry and company
rankings compiled by various business publications.

Describe tools used to measure organizational performance. LEARNING 18.4

OU TCOME
Feedforward controls take place before a work activity is done. Concurrent controls take place
while a work activity is being done. Feedback controls take place after a work activity is done.
Financial controls that managers can use include financial ratios (liquidity, leverage,
activity, and profitability) and budgets. One information control managers can use is an
MIS, which provides managers with needed information on a regular basis. Others in-
clude comprehensive and secure controls such as data encryption, system firewalls, data
backups, and so forth that protect the organization’s information.
Balanced scorecards provide a way to evaluate an organization’s performance in four
different areas rather than just from the financial perspective. Benchmarking provides
control by finding the best practices among competitors or noncompetitors and from in-
side the organization itself.

Discuss contemporary issues in control. LEARNING 18.5

OU TC OM E
Adjusting controls for cross-cultural differences may be needed primarily in the areas of
measuring and taking corrective actions.
Workplace concerns include workplace privacy, employee theft, and workplace
violence. For each of these issues, managers need to have policies in place to control
inappropriate actions and ensure that work is getting done efficiently and effectively.
Control is important to customer interactions because employee service productivity
and service quality influences customer perceptions of service value. Organizations want
long-term and mutually beneficial relationships among their employees and customers.
Corporate governance is the system used to govern a corporation so that the interests
of corporate owners are protected.

507