Man. Analysis Midterm SG

What are the three parts of management?

Set objectives (what to achieve), make a strategy (how to achieve it), and use management control (make sure it happens).

What is management control?

Making sure employees carry out the company's strategy and work toward its goals.

What is a management control system (MCS)?

The combination of controls a company uses to guide employee behavior.

Why can a company fail even with a good strategy?

Employees may not understand it, be motivated to follow it, or be able to do the work.

What are the three management control problems?

Direction: don't know what to do. Motivation: know but won't do it. Personal limitations: want to but can't do it well yet.

Can the three control problems happen together?

Yes. An employee can lack both training and clear instructions, for example.

What is agency theory?

A principal delegates work to an agent whose interests may differ and whose actions cannot be perfectly observed.

Who is the principal?

The person who delegates work, such as a restaurant owner assigning a floor manager to run a shift.

Who is the agent?

The person who carries out delegated work, such as the floor manager acting for the owner.

Can a floor manager be both principal and agent?

Yes. Agent to the owner; principal to employees when delegating tasks to them.

What is information asymmetry?

The agent knows more about their own actions than the principal can easily see.

What are agency costs?

Costs of monitoring and safeguards, plus losses from an agent acting against the principal's interests.

Give a concrete agency cost example.

Employees are paid for unfinished side work, coworkers cover it, or the manager spends paid time checking it.

What is good control?

Reasonable confidence that major unwanted performance surprises will not occur.

What does “out of control” mean?

There is a high chance of poor performance even if the strategy is sound.

What is control loss?

The gap between the performance possible with the strategy and the performance expected with current controls.

When should a company add a control?

When the expected reduction in control loss is worth more than the control's cost and side effects.

Why isn't perfect control the goal?

No system guarantees perfect behavior, and trying to check everything costs too much.

What are the five stages of the control cycle?

Plan → Design → Detect → Assess → Affect; repeat.

What happens in Plan and Design?

Plan sets goals and standards. Design chooses the control, measure, and person responsible.

What happens in Detect, Assess, and Affect?

Detect collects actual results; Assess compares them with the target and finds the cause; Affect corrects the problem.

What is management by exception?

Focus on important deviations from targets instead of reviewing every detail equally.

What four questions guide control-system design?

What is desired? What is likely? Which controls could close the gap? How tight should they be?

What is a key operation?

An activity important to company success, such as sales, production, purchasing, or customer service.

What is the difference between a key action and a key result?

Action = what someone does, such as inspecting an item. Result = what it achieves, such as fewer defects.

What are the three textbook control types?

Result, action, and personnel/cultural controls.

What is result control?

Set a desired outcome, measure it, and reward or correct performance; for example, a sales target.

When should managers use result control?

When they can measure the desired outcome and employees can influence it.

What is a risk of result control?

Employees may chase the measured number while neglecting quality, teamwork, or long-term results.

What is action control?

Guide or restrict what employees do; for example, requiring approval before a large purchase.

When should managers use action control?

When the right actions are known and mistakes should be prevented or detected.

What are the four action-control methods?

Behavioral constraints, preaction reviews, action accountability, and redundancy.

What is a behavioral constraint?

A barrier preventing an unwanted action, such as restricting who can access cash.

What is a preaction review?

A knowledgeable person approves or checks a decision before it happens.

What is action accountability?

Explain required actions, check whether employees do them, and respond to their performance.

What is redundancy?

Use a backup person, extra capacity, or a second check so one error does not cause failure.

What is personnel control?

Hire, train, place, and equip employees so they can do the work and guide themselves.

What is cultural control?

Use shared values, leadership behavior, and peer expectations to guide employees.

Why aren't trust and a values statement enough?

People can still make mistakes or break trust; managers must model values and use appropriate checks.

What are the six control areas in the class handout?

Financial, physical, human resource, information, cultural, and organizational/structural.

Give one example of financial and physical control.

Financial: a budget. Physical: a locked inventory room or access badge.

Give one example of HR and information control.

HR: training or a performance review. Information: an error report used to fix a process.

What is organizational/structural control?

Define reporting lines, authority, duties, and procedures so employees know who decides what.

How do the six areas differ from the three textbook types?

The six name where or how controls are used; the three identify whether they target results, actions, or people/culture.

What does tight control mean?

A high likelihood that employees take desired actions or achieve desired results.

What three questions decide how tight a control should be?

What benefit will it bring? What will it cost? What harmful side effects could it cause?

Where should controls be tightest?

On the few key factors most important to company success, especially where failure is costly.

What is simultaneous tight–loose control?

Be strict about important goals and values while giving employees freedom over many methods.

What makes result controls tight?

Clear, complete targets; accurate, timely measures; and meaningful rewards clearly linked to results.

What makes action controls tight?

Clear rules, reliable restrictions or informed approvals, monitoring, and meaningful follow-through.

How can overly tight controls hurt performance?

They may slow work, cost too much, frustrate people, stifle creativity, or reward the wrong behavior.

What is behavioral displacement?

Employees focus on the rule or metric instead of the real goal; for example, raising sales with unprofitable discounts.

Why do control systems change as a company grows?

Founders cannot directly supervise everyone, so the company may need clearer procedures, authority, targets, and reports.

What is company valuation?

An estimate of what the whole company is worth, based on expected earnings, growth, assets, risks, and industry conditions.

How is a public company's market cap calculated?

Share price × number of shares outstanding; it is one market measure of company value.

What is a business goal in this class?

A future financial or strategic company result that could plausibly increase valuation.

What is the difference between financial and strategic business goals?

Financial = money or return, such as profit margin. Strategic = market position, such as market share.

Why isn't “spend more on advertising” a business goal?

It is an action and expense. State the valuable result it should produce, such as more profitable customers.

Why isn't “raise the stock price” a useful separate goal here?

It repeats the idea of increasing valuation instead of saying what business result will create that value.

What does SMART mean?

Specific, Measurable, Attainable, Relevant/Results-oriented, and Target date.

Give a SMART goal example.

Raise repeat-customer orders from 40% to 48% by December 31, measured in the order system.

What does cascading goals mean?

Break company goals into linked goals for divisions, departments, and sometimes individual employees.

What does “results funnel up” mean?

Department results should help the division achieve its goals, which should help the company achieve its goals.

What are breadth and depth in goal cascading?

Breadth: a lower goal need not serve every higher goal. Depth: goals need not be formally assigned to every employee.

What is the difference between business and operational control?

Business control checks company strategy and outcomes; operational control checks divisions and daily work.

What is the difference between an income statement and a balance sheet?

Income statement = revenue, expenses, and profit over a period. Balance sheet = assets, liabilities, and equity on one date.

What is gross profit margin?

(Revenue − cost of goods sold) ÷ revenue; the share of sales left after product costs.

What are the three parts of a financial result control system?

Responsibility centers assign accountability; budgets set targets; incentives link results to rewards.

Why do managers use financial result controls?

They summarize many activities, make units easier to compare, and let managers focus on major problems while giving units autonomy.

What is a weakness of financial measures?

Good short-term numbers can hide problems with quality, customers, innovation, or long-term performance.

What is a responsibility center?

A unit whose manager is responsible for specified financial results.

What are the four responsibility centers?

Revenue center, cost center, profit center, and investment center.

What is a revenue center?

A manager is accountable mainly for sales or revenue, such as a sales department.

What is the danger of judging a revenue center only on sales?

Discounts or low-margin sales may increase revenue while reducing company profit.

What is a cost center?

A manager is accountable mainly for costs while still delivering the required work.

What is an engineered cost center?

Output can be measured and its expected cost estimated; compare actual cost with standard cost for actual output.

What is a discretionary cost center?

Spending is hard to link precisely to output, as in HR or R&D; judge budget and quality of work together.

Why isn't being under budget automatically good?

The unit may have saved money by failing to complete its work or maintain quality.

What is a profit center?

A manager is accountable for both relevant revenue and costs, such as a division with its own sales and operations.

What is an investment center?

A manager is accountable for profit compared with the assets or capital the unit uses.

How should decision rights relate to accountability?

Managers should generally be measured on results they can meaningfully influence.

How do functional and divisional structures differ in responsibility?

Functional units are often revenue or cost centers; divisions with broad authority may be profit or investment centers.

What is a transfer price?

The internal price one company unit charges another for a transferred product or service.

How does a transfer price affect division profit?

It is revenue for the seller and cost for the buyer, shifting measured profit between divisions.

Does an internal transfer price itself change total company profit?

No. Internal revenue and expense cancel when the company's results are combined; decisions caused by the price may change real profit.

What are common transfer-pricing methods?

Market price, marginal/variable cost, full cost, and a price negotiated between divisions.

Why is no transfer-price method best everywhere?

A price that encourages the best company decision may not also measure each division's performance fairly.

What is the easiest way to answer a control case?

Goal → key operation → desired action/result → control problem → suitable control → measure and target → correction.

What is the difference between management control and accounting control?

Management control gets people to achieve business outcomes. Accounting control protects records/assets and helps prevent, detect, and correct errors or fraud.

What are the professor's five design principles?

Set clear direction; motivate people; allocate resources; get and develop capable employees; measure performance and correct problems.

What are the nine steps for designing control?

State goals; find key operations; name key actions; name key results; choose controls; set standards; measure; compare and diagnose; reward, discipline, or change.

Why does the professor ask “How do you know?”

Claims about a company need evidence or data; a company slogan or your opinion alone does not prove them.

What is goal divergence in agency theory?

The principal and agent want different things; for example, the owner wants productive work while an employee wants less effort for the same pay.

How can principals reduce an agency problem?

Give clear direction, monitor actions/resources, and use incentives that align the agent's goals with the principal's.

What is monitoring in agency theory?

Watching behavior or checking records/results to learn whether the agent did the delegated work; monitoring costs time and money.

What is a fiduciary duty?

A duty of care and loyalty to the party served, including fair dealing and avoiding conflicts of interest.

Why does the professor want company and industry named before choosing goals?

What raises a firm's value depends on its industry and business model.

Why are a past result and a vague claim poor SMART goals?

A goal must describe a future result with a measurable target and date; “we grew last year” and “be number one” do not.

What is the difference between sales bookings and shipments?

Bookings are orders received; shipments are products delivered. A revenue center may track either against a quota.

How does a profit center combine effectiveness and efficiency?

Effectiveness means generating revenue; efficiency means managing the costs of generating it.