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.