Chapter 9 Control PDF

CHAPTER 9 Fundamentals of Control Ch.9 1 Ch.9 2  Key Takeaways 1. Identify the types of controls used by managers and the reasons for them. 2. List and describe the steps in the control process. 3....

CHAPTER 9 Fundamentals of Control Ch.9 1 Ch.9 2  Key Takeaways 1. Identify the types of controls used by managers and the reasons for them. 2. List and describe the steps in the control process. 3. Explain the use of common control tools and techniques. Ch.9 3  Chapter 9 Outline 1. Managerial Control ▪ Importance of controlling ▪ Types of controls ▪ Internal and external control 2. The Control Process ▪ Establish objectives and standards ▪ Measure actual performance ▪ Compare results with objectives ▪ Take corrective action Ch.9 4  Chapter 9 Outline 3. Control Tools and Techniques ▪ Project management and control ▪ Inventory control ▪ Breakeven analysis ▪ Financial controls ▪ Balanced scorecards Ch.9 5  Why and How Managers Control? Controlling ▪ Is the process of measuring performance and taking action to ensure desired results accomplished ➔ improve performance. ▪ Has a positive and necessary role in the mgt process. Continuous adjustment to get it right. ▪ Ensures that the right things happen, in the right way, at the right time. ▪ Benefit: Organizational Learning ~ Example: After-action review. Ch.9 6  The Role of Controlling in the Mgt Process Figure 9.1 Ch.9 7  Why and How Managers Control? https://www.youtube.com/watch?v=ypnXGvXfX9A Principles Of Management - Lesson Controlling Ch.9 8  Why and How Managers Control? Types of Controls – Based on time of occurrence. 1. Feedforward controls a.k.a. Preliminary controls. ▪ Employed before a work activity begins. ▪ Ensures that: ✓ Objectives are clear. ✓ Proper directions are established. ✓ Right resources are available. ▪ Goal is to solve problems before they occur → preventative in nature, e.g., Food ingredients, proper design. Ch.9 9  Why and How Managers Control? 2. Concurrent controls a.k.a. steering controls. ▪ Focus on what happens during work process; in- process control. ▪ Monitor ongoing operations to make sure they are being done according to plan, thru direct supervision. ▪ Goal is to solve problems as they occur. Ch.9 10  Why and How Managers Control? 3. Feedback controls a.k.a. post-action control. ▪ Take place after work is completed. ▪ Focus on quality of end results. ▪ Goal is to solve problems after they occur and prevent future ones. Ch.9 11  Feedforward, Concurrent and Feedback Controls Ch.9 12  Feedforward, Concurrent and Feedback Controls Figure 9.2 Ch.9 13  INTERNAL AND EXTERNAL CONTROL ▪ Internal control. Allows motivated individuals and groups to exercise self-discipline in fulfilling job expectations. Self-control o Internal control that occurs thru self-discipline in fulfilling work and personal goals and responsibilities. o Self management, freedom, emphasizes participation, empowerment. o Trust. Ch.9 14  INTERNAL AND EXTERNAL CONTROL External control: Occurs through personal supervision and the use of formal administrative systems. ▪ Types: 1. Bureaucratic control. Influences behavior through authority, policies, procedures, job descriptions, budgets, and day-to-day supervision. Laws & regulations in Organizations' external environment for compliance. 2. Clan control ~ Normative control. Influences behavior through norms and expectations set by the organizational culture. Shared values! Ch.9 15  INTERNAL AND EXTERNAL CONTROL 3. Market Control. Influence of market competition on the behavior of organizations and their members. Influence the way adjusting product, pricing promotion, etc., based on feedback from customers and the actions of competitors. e.g., green products & sustainability practices (PR advantage). Exercise: Identify and list some examples of controls that are used in organizations, e.g., @ GJU Ch.9 16  Examples - MCQ MCQ 1: Which of the following best describes controlling? A. The process of deciding where an individual should go and how to best go about it. B. The process of inspiring people to best utilize the resources. C. The process of bringing people and material resources together in working combinations. D. The process of setting directions and allocating resources. E. The process of measuring performance and taking action to ensure desired results. Ch.14 17  2. The Control Process Ch.9 18  2. The Control Process Figure 9.3 Four Steps in the Control Process Ch.9 19  2. The Control Process Four Steps in the Control Process Ch.9 20  2. The Control Process Step 1: Establishing Objectives and Standards ▪ Focus on key results (essentials / critical). ▪ Pareto principle (80/20); 80 Consequences /20 Causes. ▪ Standards: 1. Output standards. Measure performance results in terms of quantity, quality, cost or time (e.g., EPS, ROI, sales growth, Market share). 2. Input standards. Measure effort in terms of amount of work expended in task performance (e.g., conformance with rules, efficient use of resource, work attendance). Ch.9 21  2. The Control Process Step 2: Measuring actual performance ▪ Goal: accurate measurement of actual performance results (output standards) and/or performance efforts (input standards). ▪ Must identify significant differences between actual results and original plan. ▪ Effective control requires measurement (why?) “What gets measured happens”! Ch.9 22  2. The Control Process Step 3: Comparing results with objectives and standards ▪ The control equation: Need for Action = Desired Performance – Actual Performance ▪ Comparison methods: 1) Historical comparison: past results becomes the base line for evaluating current performance. (e.g., Y-o-Y). 2) Relative comparison: uses the performance of other persons, work units, or organizations as the evaluation standard; benchmarking performance against others. 3) Engineering comparison : uses engineered standards set scientifically through such methods as time and motion studies. Ch.9 23  2. The Control Process Step 4:Taking corrective action ▪ Taking action when a discrepancy exists between desired and actual performance. ▪ Management by Exception: Giving attention to situations showing the greatest need for action. Types of exceptions (discrepancy) : 1) Problem situation: Actual performance < desired 2) Opportunity situation: Actual performance > desired https://www.youtube.com/watch?v=Xaf4iNOKRyU Controlling as a Function of Management Free Principles of Management Video: Ch.9 24  3. Control Tools and Techniques ✓ Takeaway 3: What are the common control tools and techniques? ✓ Learning Objective: Explain the use of common control tools and techniques. Ch.9 25  3. Control Tools and Techniques Project Management Overall planning, supervision and control of projects: 1) Projects – unique one-time events that occur within a defined period. 2) Gantt chart – graphic display of scheduled tasks required to complete a project. 3) CPM/PERT – combination of the Critical Path Method and Program Evaluation and Review Technique. Ch.9 26  Gantt Chart ▪ Gantt chart is a type of bar chart that illustrates a project schedule, named after its inventor, Henry Gantt, who designed such a chart around the years 1910–1915. Modern Gantt charts also show the dependency relationships between activities and current schedule status. ▪ A Gantt chart is simply a timeline view of your project. It’s a tool that helps you manage all the different resources, people and tasks along the way to accomplishing the goal of your project. Ch.9 27  Gantt Chart 0 Example: New Building Project schedule Ch.9 28  Gantt Chart Ch.9 29  Gantt Chart Ch.9 30  Gantt Chart Ch.9 31  Gantt Chart – Modern Example Ch.9 32  CPM / PERT CHART- Example 1 Ch.9 33  CPM/PERT CHART ▪ CPM is a statistical technique of project management in which planning, scheduling, organizing, coordination and control of well-defined activities take place. ▪ PERT deals with unpredictable events, but CPM deals with predictable activities. PERT is used where the nature of the job is non-repetitive. In contrast to, CPM involves the job of repetitive nature. ▪ PERT probabilistic whereas CPM deterministic. ▪ Helps PM to track activities to make sure they happen in the right sequence and on time. Critical path: is the longest pathway in a CPM/PERT network. Ch.9 34  CPM/PERT CHART – Example 2 1. Identify the Critical path. 2. What is the min. time needed to complete the project? Ch.9 35  3. Control Tools and Techniques Inventory control ▪ Aim: to ensures that inventory is only high enough to meet immediate needs ➔ minimize carrying cost. ▪ Economic Order Quantity (EOQ) Places new orders when inventory levels fall to predetermined points. (mathematically calculated) ▪ Just-in-time scheduling (JIT) Routes materials to workstations just in time for use. Aim ➔ to reduce material cost. Ch.9 36  3. Control Tools and Techniques Inventory Model Example Time Max level Min Level Inv. Level Reorder Point Inentory Model Example 0 100 20 100 60 120 1 100 20 80 60 2 100 20 60 60 100 3 100 20 40 60 4 100 20 20 80 60 5 100 20 100 60 INV. LEVEL 6 100 20 80 60 60 7 100 20 60 60 40 8 100 20 40 60 9 100 20 20 20 60 10 100 20 100 60 Lead Time 11 100 20 80 0 60 12 100 20 60 0 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 13 100 20 40 60 TIME (weeks) 14 100 20 20 60 Max level Min Level Inv. Level Reorder Point 15 100 20 100 60 Ch.9 37  3. Control Tools and Techniques Ch.9 38  3. Control Tools and Techniques Ch.9 39  3. Control Tools and Techniques Breakeven analysis ▪ Breakeven point (BEP): Occurs where revenues = costs BEP = FC / (SP-VC) CM = SP-VC ▪ Breakeven analysis: Performs what-if calculations under different revenue & cost conditions: SP= $8/unit, FC= $10,000, VC= $4/unit. BEP= 10,000/(8-4) = 2500 units. What if SP=$10? Or VC=$5? Ch.9 40  Breakeven Analysis QTY UVC TVC FC TC UP Revenues P/L 0 15,000 - 33,000 33,000 19,000 - (33,000) Breakeven Point Analysis 1 15,000 15,000 33,000 48,000 19,000 19,000 (29,000) 300,000 280,000 2 15,000 30,000 33,000 63,000 19,000 38,000 (25,000) 260,000 3 15,000 45,000 33,000 78,000 19,000 57,000 (21,000) 240,000 220,000 Profit 4 15,000 60,000 33,000 93,000 19,000 76,000 (17,000) 200,000 5 15,000 75,000 33,000 108,000 19,000 95,000 (13,000) 180,000 X Money 160,000 6 15,000 90,000 33,000 123,000 19,000 114,000 (9,000) BEP 140,000 7 15,000 105,000 33,000 138,000 19,000 133,000 (5,000) 120,000 100,000 8 15,000 120,000 33,000 153,000 19,000 152,000 (1,000) 80,000 9 15,000 135,000 33,000 168,000 19,000 171,000 3,000 60,000 40,000 Loss 10 15,000 150,000 33,000 183,000 19,000 190,000 7,000 20,000 11 15,000 165,000 33,000 198,000 19,000 209,000 11,000 - 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 12 15,000 180,000 33,000 213,000 19,000 228,000 15,000 13 15,000 195,000 33,000 228,000 19,000 247,000 19,000 QTY 14 15,000 210,000 33,000 243,000 19,000 266,000 23,000 FC TC Revenues 15 15,000 225,000 33,000 258,000 19,000 285,000 27,000 UVC= Unit Variable Cost TVC= Total Variable Cost FC= Fixed Cost, TC= Total Cost = TVC+FC UP= Unit Price, QTY= Quantity, P/L= Profit/Loss Ch.9 41  Breakeven Analysis Example & Exercise Bonus Homework (handwritten by email tonight by 11 pm) Your firm pays $3,000 per year in fixed costs.You also pay $15 /unit to produce your product. Selling Price $20 /unit 1. What is your total cost if you produce 1,000 units? Calculate profit / loss? 2. What is the BEP? Ch.9 42  Use of breakeven analysis to make informed “what-if” decisions Ch.9 43  Use of breakeven analysis to make informed “what-if” decisions Figure 9.4 Ch.9 44  Examples - MCQ MCQ 3: Managers rely on _____ to perform what-if calculations under different projected cost and revenue conditions. A. CPM/PERT B. Gantt charts C. Critical path method D. Breakeven analysis E. Just-in-time scheduling Ch.14 45  Financial Controls Basic foundations of Balance Sheet and Income Statement: ▪ Balance sheet : shows Assets, Liability and owners’ Equity at one point in time. (snapshot) ▪ Income statement : shows profit /loss during a period (e.g., one month, one quarter, one year) ▪ Both together provide a good picture of the financial health of an organization. Ch.9 46  Financial Controls Balance Sheet Main Components + Equity Balance sheet : shows Assets, Liability and Owners’ Equity at one point in time. Ch.9 47  Financial Controls Income statement : shows profit /loss during a period. Ch.9 48  Basic Financial Ratios Basic Financial Ratios ▪ Liquidity: The ability to generate cash to pay short term obligations. Higher better. ▪ Leverage: The ability to earn more in returns than the cost of debt (interest expenses). Lower is better. ▪ Asset management: The ability to use resources efficiently and operate at minimum cost. Higher is better ▪ Profitability: The ability to earn revenues greater than costs. Higher is better. Ch.9 49  Examples - MCQ MCQ 4: In the context of financial controls, which of the following best describes leverage? A. It is the ability to operate at minimum cost. B. It is the ability to earn revenues greater than costs. C. It is the ability to earn more in returns than the cost of debt. D. It is the ability to meet short-term obligations. E. It is the ability to generate cash to pay bills. Ch.14 50  Control Tools and Techniques- Balanced Scorecard Balanced Scorecard Scores (records) organization performance in financial, customer service, internal processes and innovation & learning areas. Factors (perspectives) used to develop scorecard goals and measures: 1. Financial performance 2. Customer Satisfaction 3. Internal process improvement 4. Learning and Growth Ch.9 51  Control Tools and Techniques- Balanced Scorecard Ch.9 52  End of the Chapter Ch.9 Copyright ©2015 John Wiley & Sons, Inc. 53