Exploring Management: Controls and Control Systems

6.1 How and Why Managers Use The Control Process

Control as a Management Function

• Controlling is measuring performance and acting to achieve desired results. "What gets measured happens."

The Four-Step Control Process

1. Objectives and Standards: Define goals and benchmarks (output/input standards).

2. Measure actual performance: Track progress against standards.

3. Compare results: Identify variances.

4. Take corrective action: Adjust as needed; Management by Exception focuses on significant deviations.

6.2 Types of Controls Used by Managers

Organizations as Open Systems and Control Points

• Controls occur at various stages:

  • Feedforward Controls: Prevent problems before they start (e.g., quality inputs).

  • Concurrent Controls: Correct problems as they occur (e.g., during work process).

  • Feedback Controls: Address problems after they've occurred (e.g., learning from mistakes).

Internal Controls

• Rely on employee self-discipline and motivation, often through participation.

External Controls

• Influence through external mechanisms:

  • Bureaucratic Control: Formal policies, procedures, budgets.

  • Clan Control: Shared values, culture, norms.

  • Market Control: Market competition influencing decisions (pricing, products).

Management by Objectives (MBO)

• A shared goal-setting process between managers and subordinates.

  • Planning: Jointly identify performance objectives.

  • Support: Supervisor aids progress.

  • Controlling: Regular meetings review progress and set new objectives.

• Types of Objectives:

  • Improvement Objectives: Measurable enhancements (e.g., "reduce rejects by $10\%$").

  • Personal Development Objectives: Skill growth (e.g., "learn a second language").

• Good Objectives are specific, measurable, include a timetable, realistic, challenging, and concise.

6.3 Control Tools and Techniques

Quality Control

• Total Quality Management (TQM): Commitment to quality, aiming for zero defects.

• Continuous Improvement: Ongoing search for better work quality.

• Six Sigma: Rigorous standard (no more than $3.4$ defects per million units).

Project Management Tools

• Gantt Charts: Visual schedules for tasks and durations.

• CPM/PERT Charts: Identify the Critical Path for shortest project duration.

Inventory Control

• Aims to reduce costs:

  • Economic Order Quantity (EOQ): Reordering a predetermined amount at a specific stock level.

  • Just-in-Time (JIT) Scheduling: Materials arrive precisely when needed.

Breakeven Analysis

• Breakeven Point: Where total revenues equal total costs (neither profit nor loss).

• Formula: $Breakeven\ Point = Fixed\ Costs / (Price\ per\ Unit - Variable\ Costs\ per\ Unit)$. Used for "what-if" scenarios.

Financial Controls

• Use financial statements to monitor health:

Balance Sheet

• Snapshot of assets, liabilities, owner's equity.

• Equation: $Assets = Liabilities + Owner's\ Equity$

Income Statement

• Reports performance over time (sales to net income).

Financial Ratios

• Assess liquidity, leverage, asset management, and profitability.

  • Liquidity Ratios (Higher is generally better):

    • Current Ratio: $Current\ Ratio = Current\ Assets / Current\ Liabilities$

    • Quick Ratio (Acid-Test Ratio): $Quick\ Ratio = (Current\ Assets - Inventory) / Current\ Liabilities$

  • Leverage Ratios (Lower is generally better):

    • Debt Ratio: $Debt\ Ratio = Total\ Debts / Total\ Assets$

  • Asset Management Ratios (Higher is generally better):

    • Asset Turnover: $Asset\ Turnover = Sales / Total\ Assets$

    • Inventory Turnover: $Inventory\ Turnover = Sales / Average\ Inventory$

  • Profitability Ratios (Higher is generally better):

    • Net Margin: $Net\ Margin = Net\ Profit\ after\ Taxes / Sales$

    • Return on Assets (ROA): $Return\ on\ Assets = Net\ Profit\ after\ Taxes / Total\ Assets$

    • Return on Equity (ROE): $Return\ on\ Equity = Net\ Income / Owner's\ Equity$

Balanced Scorecard

• Strategic framework translating mission/vision into goals and measures across four perspectives: Financial Performance, Customer Satisfaction, Internal Process Improvement, and Innovation and Learning.