Business Management Chapter 19 PDF

PAR T 6 CH 19 The Meaning of Control Feedback Control Model Four Steps of Feedback Control The Balanced Scorecard The Changing Philosophy of Control Hierarchical Versus Decentralized Approaches The Dilemma of Algorithmic Control Total Quality Management TQM Techniques TQM Success Factors Budge...

PAR T 6 CH 19 The Meaning of Control Feedback Control Model Four Steps of Feedback Control The Balanced Scorecard The Changing Philosophy of Control Hierarchical Versus Decentralized Approaches The Dilemma of Algorithmic Control Total Quality Management TQM Techniques TQM Success Factors Budgetary Control Expense Budget Revenue Budget Cash Budget Capital Budget Zero-Based Budget LEARNING OBJECTIVES CHAPTER OUTLINE Managing Quality and Performance After studying this chapter, you should be able to: 1. Explain why organizational control is a key management function. 2. Explain how the balanced scorecard addresses the four steps in the control process. 3. Contrast the hierarchical and decentralized methods of control. 4. Describe the concept of total quality management (TQM) and major TQM techniques, including quality circles, benchmarking, Six Sigma principles, quality partnering, and continuous improvement. 5. Explain how expense budgets and cash budgets are useful as management controls. 6. Discuss the use of financial statements and financial analysis as management controls. Financial Control Financial Statements Financial Analysis: Interpreting the Numbers Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. __________ __________ 2. So long as things are done correctly and efficiently, I prefer not to take on the hassle of changing them. __________ __________ 3. I believe the effort to improve something should be rewarded, even if the final outcome is disappointing. __________ __________ 4. A single change that improves things 30 percent is much better than 30 improvements of 1 percent each. __________ __________ 5. I frequently compliment other people on changes that they have made. __________ __________ 6. I let people know in a variety of ways that I need to be on my own to do my job efficiently. __________ __________ 7. I am typically involved in several improvement projects at one time. __________ __________ 8. I try to be a good listener and to be patient with what people say, except when it is a stupid idea. __________ __________ 9. I am frequently proposing unconventional techniques and ideas to improve things. __________ __________ __________ __________ 10. I usually do not take the risk of proposing an idea that might fail. SCORING AND INTERPRETATION: Score one point for each Mostly True answer to the odd-numbered items and one point for each Mostly False answer to the even-numbered items. Total score: __________ In organizations, continuous improvement in quality sometimes competes with managerial desires for production efficiency. Efficiency can be maximized by eliminating changes and quality improvements. Continuous improvement, however, is an attitude that productivity can always get better, and each employee can take responsibility to improve it. This attitude is appropriate for quality-conscious managers striving for continuous improvement. Introducing frequent small changes that may temporarily reduce efficiency is the best path to continuous improvement. A score of 7 or higher indicates that you may take personal responsibility for improving the activities on which you work. A score of 3 or lower indicates that you may prefer stable and efficient work. A score of 4–6 suggests that you are balanced between efficiency and continuous improvement. S PSH NA OT I magine taking a beloved family member to a hospital or clinic to receive an injection of pain medication, only to have the person contract fungal meningitis, a rare but potentially deadly disease. That’s exactly what happened for many families when tainted spinal steroid injections from the New England Compounding Center (NECC) caused one of the worst public health drug disasters in U.S. history. As many as 14,000 patients across 20 states were exposed to fungal meningitis, with nearly 800 becoming ill and more than 100 dying. The U.S. Food and Drug Administration (FDA) noted that surfaces in NECC’s clean rooms were contaminated with levels of bacteria or mold exceeding levels at which the company’s own procedures called for Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ENVIRONMENT 1. I spend time developing new ways of approaching old problems. 3 PLANNING Mostly False 4 ORGANIZING Organizing Mostly True 2 5 LEADING INSTRUCTIONS: Respond to each of the following statements based on how you think and act in a typical situation of work accomplishment at school or on the job. Mark whether each statement is Mostly True or Mostly False for you. There are no right or wrong answers, so answer honestly. 6 CONTROLLING Improvement Attitude INTRODUCTION 1 690 PART 6 CONTROLLING remedial measures, yet there was no evidence that the company ever took steps to implement those measures. By early 2019, at least 13 people associated with the nowdefunct NECC had been convicted of a combined 178 charges for their roles in this breakdown of quality and behavioral control.1 What a tragic illustration of the need for managerial control. Control is a serious responsibility for every manager. It might not always be a matter of life or death, but as a manager, you will use a variety of measures to monitor employees’ behavior and keep track of the organization’s performance and finances. Many of these measures will involve control issues, including controlling work processes, regulating employee behavior, maintaining quality standards, setting up basic systems for allocating financial resources, developing human resources, analyzing financial performance, and evaluating overall profitability. This chapter introduces basic mechanisms for controlling an organization. We begin by defining organizational control and summarizing the four steps in the control process. Then we discuss the use of the balanced scorecard to measure performance and examine the changing philosophy of control. We discuss the growing use of algorithmic control, today’s approach to total quality management (TQM), and methods for controlling financial performance, including the use of budgets and financial statements. 19-1 S OT PSH NA The Meaning of Control In Chapter 7, we described the food safety issues that sickened Chipotle customers and sent the company’s sales and stock price plummeting, along with the new control measures Chipotle has implemented to prevent such problems from happening again. Whole Foods Market experienced a similar, albeit less costly, situation related to one of its food processing plants. Prepared foods have almost double the profit margins of packaged foods, and Whole Foods, like other grocers, has made them a growing part of the product mix. Yet the addition of prepared foods also requires more stringent controls. When the FDA sent inspectors to one of the food processing plants, they identified issues such as condensation dripping from the ceiling near food, an ammonium-based sanitizer used on a work surface near food preparation, and a failure to separate dirty dishes from ready-to-eat salads. Companies in other industries face control issues, too. Facebook has come under fire for a lack of controls to effectively monitor device makers after granting them access to the personal data of hundreds of millions of its users. “It’s not good enough to just take the word of Facebook—or any major corporation—that they’re safeguarding our personal information,” said Senator Ron Wyden, a member of the Senate Intelligence Committee.2 Organizational control refers to the systematic process of regulating organizational activities to make them consistent with the expectations established in plans, targets, and standards of performance. Yet, as the examples we have just discussed suggest, organizations often have trouble ensuring that managers, employees, and partners stay aligned with the behaviors needed to support goals and meet expectations. In a classic article on the control function, Douglas S. Sherwin summarizes the concept of organizational control as follows: “ The essence of control is action which adjusts operations to predetermined standards, and its basis is information in the hands of managers.”3 Thus, effectively controlling an organization requires information about performance standards and actual performance, as well as actions taken to correct any deviations from the standards. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 19 Managing Quality and Performance 691 Concept Connection MANAGER’S S PSH NA OT Managers must decide what information is essential, how they will obtain that information, and how they can and should respond to it. Having the correct data is essential. Managers decide which standards, measurements, and metrics are needed to monitor and control the organization effectively, and they set up systems for obtaining that information. For example, if a hospital carefully monitors and controls the health care services it provides, patients should receive safe, high-quality health care. A pay-for-performance system built into the health care overhaul that adjusted Medicare payments to hospitals prompted some hospitals to initiate broader initiatives that tie doctors’ pay to patient outcomes and quality measures. New York City’s Health and Hospitals Corporation, which runs the city’s 11 public hospitals, for example, monitors 13 performance indicators that are believed to be correlated with better-quality care, including how quickly patients go from triage in the emergency room to hospital beds, whether doctors get to the operating room on time, how well patients say their doctors communicate with them, and so forth. The idea is that tying doctors’ raises to how well they perform on the benchmarks will improve patient care.4 This chapter’s “Manager’s Shoptalk” feature describes auto-analytics, an innovative reporting system for individuals that can provide information to help people control their own personal and professional growth. ndoeljindoel/Shutterstock.com The state of California offers training programs for contractors and others in the construction industry to help them improve organizational control. California has deep concerns about paint solvents, concrete slurry, and other pollutants entering the water supply through work done at construction sites. In addition to using filters that keep the water supply clean, effective control means ensuring that builders comply with new state regulations. Shoptalk CONTINUED Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6 CONTROLLING I magine becoming better at your job and more satisfied with your life by tracking information that reveals exactly how you spend your day. For 22 years, entrepreneur and scientist Stephen Wolfram did just that. He mapped data about his time spent in meetings, his use of e-mail, and the number of keystrokes he logged so that he could analyze how he spent his time. Wolfram was able to identify work habits that squelched his creativity and stymied his productivity. So he started planning changes that would help him become more productive and happier. karelnoppe/Shutterstock.com Quantify Yourself 692 PART 6 CONTROLLING New technology such as computer software and smartphone apps helps people gather and analyze data about what they do at work so they can use it to do their jobs better. This interest in self-awareness is part of a growing discipline called auto-analytics, which is the practice of voluntarily collecting and analyzing data about oneself in an effort to improve. It consists of the following elements: •• Tracking screen time. While it may be unsettling to have your manager watch what’s on your computer screen, that kind of monitoring is much more acceptable when you do the watching. New technology called knowledge workload tracking records how you use your computer, such as measuring how long you have an open window, how often you switch between windows, and how long you’re idle. The software turns all the measurements into charts so you can see where you’re spending your time and how you can improve your productivity. One computer programmer thought his online chats were eating into his programming time, so he analyzed how much time he spent chatting during certain periods and then looked at how much code he wrote during those times. Surprisingly, he found that talking online with colleagues actually improved his productivity. •• Measuring cognitive tasks. Another set of tracking tools can help you gather data as you perform cognitive tasks, such as client research on your smartphone or statistical analysis in Microsoft Excel. Bob Evans, a Google engineer, used an app to explore the relationship between his attention and his productivity. “As engineers, we load up our heads with all these variables, the intellectual pieces of the systems we are building. If we get distracted, we lose that thread in our heads,” he said. The app revealed to Evans that he needs about four straight hours to get anything challenging done, so he tackles those projects when he has that kind of time, rather than on days when he is interrupted with meetings and phone calls. •• Improving health. Exercise, amount of sleep, and the stress levels of knowledge workers have been shown to affect productivity, creativity, and job performance. People can choose from a variety of mobile apps and wearable sensors that collect valuable data about their physical health. For example, many people track their steps each day with smartwatches, smartphones, or other devices, most of which are preset to a default goal of 10,000 steps per day. Claudia Hammond reset her app’s goal to 9,000 steps to encourage herself with more consistent success, based partly on research showing that people who track their steps tend to walk more but enjoy it less. Tools used for auto-analytics will continue to become more sophisticated. The data they reveal can provide the hard evidence we sometimes need to adjust the way we use our time and nurture our minds and bodies to have more success in work and life. Sources: Based on H. James Wilson, “Employees, Measure Yourselves,” The Wall Street Journal (April 2, 2012), www.wsj.com/articles/SB10001 424052970204520204577249691204802060 (accessed September 18, 2020); H. James Wilson, “You, by the Numbers,” Harvard Business Review (September 2012): 2–5; and Claudia Hammond, “Do We Need to Walk 10,000 Steps a Day?”, BBC (July 28, 2019), www.bbc.com/future/ article/20190723-10000-steps-a-day-the-right-amount (accessed September 9, 2020). Re m e m b e r T h i s •• Organizational control is the systematic process through •• When Whole Foods Market added prepared foods to its which managers regulate organizational activities to meet planned goals and standards of performance. product mix, it encountered new control issues related to its food processing plants. •• Most organizations measure and control performance using quantitative financial measures. 19-2 Feedback Control Model When teams of researchers asked managers in thousands of organizations questions designed to determine how well they were implementing various management control practices, such as establishing standards and targets and measuring performance data, they found that better control is strongly correlated with better organizational productivity and Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 19 Managing Quality and Performance 693 performance.5 A feedback control model can help managers meet strategic goals by monitoring and regulating the organization’s activities and using feedback to determine whether performance meets established standards. 19-2A FOUR STEPS OF FEEDBACK CONTROL Managers set up control systems that consist of the four key steps illustrated in Exhibit 19.1: establish standards, measure performance, compare performance to standards, and make corrections as necessary. Establish Standards of Performance S PSH NA OT Within the organization’s overall strategic plan, managers define goals for organizational departments in specific, operational terms that include a standard of performance against which to compare organizational activities. At H&M retail stores, for example, sales floor employees are guided by the standard that clothes should always be “easy to find, easy to buy.” Pants, sweaters, and shirts are stacked neatly, with perfect folds; size stickers are placed with precision; and hangers are lined up uniformly. All that precision turns to chaos as soon as the doors open for business, of course, but employees are trained to restore order whenever they have free moments to do so. Basic standards for customer service are also followed precisely.6 Tracking such measures as customer service, product quality, or order accuracy is an important supplement to traditional financial and operational performance measurement, but many companies have a hard time identifying and defining nonfinancial measurements. To evaluate and reward employees effectively for their achievement of standards, managers need clear standards that reflect activities that contribute to the organization’s overall strategy in a significant way. Standards should be defined clearly and precisely so that employees know what they need to do and can determine whether their activities are on target.7 Measure Actual Performance Most organizations prepare formal reports of quantitative performance measurements that managers review daily, weekly, or monthly. Managers should take care, however, that they are not generating reports just because they have data to do so.8 These measurements should be related to the standards set in the first step of the control process, and the reports should be designed to help managers evaluate how well the organization is meeting its standards. For example, if sales growth is a target, the organization should have a means of gathering and reporting sales data. If the organization has identified EXHIBIT 19.1 Feedback Control Model Feedback Adjust Performance 1. Establish standards of performance. 2. Measure actual performance. 3. Compare performance to standards. If Inadequate 4. Take corrective action. If Adequate Feedback 4. Do nothing or provide reinforcement. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6 CONTROLLING Establish Strategic Goals Adjust Standards 694 PART 6 CONTROLLING Concept Connection example, many companies set a standard for how many compounds should move forward at each stage of the drug development process. When it comes to pharmaceutical drugs, accuracy is essential—human lives are at stake. Researchers like this one follow precise procedures to ensure that test results are both objective and accurate and that the testing processes meet research goals. S OT PSH NA Ryan McVay/Photodisc/Getty Images Pharmaceutical firms establish standards of performance to measure research activities and results. For appropriate measurements, regular review of these reports helps managers stay aware of whether the organization is doing what it should. Grady Memorial Hospital in Atlanta measures patient satisfaction based in part on the results of a government-mandated patient satisfaction survey that has been administered since 2006. Hospitals that receive Medicare payments must administer at least 100 patient surveys over a period of a year, and Grady’s administrators use the results combined with other metrics to evaluate overall patient care.9 Compare Performance to Standards S OT PSH NA The third step in the control process is comparing actual activities to performance standards. When managers read computer reports or walk through the plant, they can identify whether actual performance meets, exceeds, or falls short of standards. Typically, performance reports simplify such comparisons by placing the performance standards for the reporting period alongside the actual performance for the same period and by computing the variance—that is, the difference between each actual amount and the associated standard. To correct the problems that most urgently require attention, managers focus on variances. When performance deviates from a standard, managers must interpret the deviation. They are expected to dig beneath the surface and find the cause of the problem. For example, after discovering that the power steering in some vehicles could suddenly shut off while the car was being driven, Subaru temporarily closed down two factories in Japan so managers could carefully diagnose the causes of the problem and determine how to fix it.10 As another example, assume that a grocer established a goal of increasing seafood sales by 10 percent during the month of July, but sales increased by only 8 percent. Managers must investigate the reasons behind the shortfall. They might discover that recent price increases for shrimp and three late shipments of salmon from Canada caused weaker sales during July, for instance. Managers should take an inquiring approach to deviations to gain a broad understanding of factors that influence performance. Effective management control involves subjective judgment and employee discussions, as well as objective analysis of performance data. Take Corrective Action S OT PSH NA The final step in the feedback control model is to determine what changes, if any, are needed. Feedback control helps managers make needed adjustments in work activities, standards of performance, or goals to help the organization be successful An example comes from the Hershey Company, where one goal is to have Hershey’s Kisses “looking as great as they taste,” said spokesman Jeff Beckman. In one case, feedback from customers Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 19 Managing Quality and Performance 695 19-2B AP Images/Matt Rourke alerted Hershey to a deviation from standards. Bakers who were using the popular candy to adorn their holiday cookies were furious to find bags full of Kisses that were missing the tip on each piece of chocolate. “They baked ok but not with the nice pointy tip that I’m used to or expect from Hershey,” one customer wrote in a blog post. “I’m still steaming!” Hershey executives took the matter seriously, said Beckman, exploring what went wrong and what changes were needed to ensure that all Hershey’s Kisses come out looking the way they should.11 THE BALANCED SCORECARD A current approach to organizational control is to take a balanced perspective on company performance, integrating various dimensions of control that focus on markets and customers, as well as employees and financial data.12 Managers recognize that relying exclusively on financial measures can result in short-term, dysfunctional behavior. Nonfinancial measures provide a healthy supplement to the traditional financial measures, and companies are devoting increasing time and attention to developing more balanced measurement systems as a result.13 “Not everything that The balanced scorecard is a comprehensive management control system that counts can be counted, balances traditional financial measures with operational measures relating to a company’s critical success factors. and not everything that A balanced scorecard contains four major perspectives, as illustrated in Exhibit 19.2: financial performance, customer service, internal busican be counted counts.” ness processes, and the organization’s capacity for learning and growth. 14 — A lbert Einstein, THEORETICAL PHYSICIST Within these four areas, managers identify key performance metrics that the organization will track: •• Financial performance. The financial performance perspective reflects the Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6 CONTROLLING S PSH NA OT understanding that the organization’s activities should contribute to improving shortand long-term financial performance. It includes traditional measures such as net income and return on investment. •• Customer service. Customer service indicators measure information such as how customers view the organization and customer retention and satisfaction rates. These data may be collected in many forms, including testimonials from customers describing their service experience or from customer surveys.15 •• Internal business processes. Business process indicators focus on production and operating statistics. For an airline, business process indicators may include on-time arrivals and adherence to safety guidelines. An event at Reagan National Airport in Washington, D.C., reflected weak adherence to safety standards, for instance. When a lone air traffic controller at this airport fell asleep while on duty and failed to respond to repeated radio transmissions, two pilots waiting to land jets carrying a total of 160 people decided to land without clearance, violating Federal Aviation Administration (FAA) safety regulations and damaging the reputations of both airlines involved, as well as the airport.16 •• Potential for learning and growth. The final component of the balanced scorecard looks at the organization’s potential for learning and growth, focusing on how well resources and human capital are being managed for the company’s future. Metrics may include things such as employee retention and the introduction of new products. The components of the scorecard are designed in an integrative manner, as illustrated in Exhibit 19.2. 696 PART 6 CONTROLLING EXHIBIT 19.2 The Balanced Scorecard ns Correcti o Outco mes res Measu Do actions contribute to improving financial performance? Targe ts Financial Correcti ons es Outcom es ons Correcti mes Outco res Measu Targe t Are we learning, changing, and improving? s Mission and Goals Measur Do internal activities and processes add value for customers and shareholders? Targe ts Correcti ons Internal Business Processes Outcom es Measu res How well do we serve our customers? Targets Customers Learning and Growth SOURCES: Based on Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January–February 1996): 75–85; and Chee W. Chow, Kamal M. Haddad, and James E. Williamson, “Applying the Balanced Scorecard to Small Companies,” Management Accounting 79, no. 2 (1997): 21–27. Managers record, analyze, and discuss these various metrics to determine how well the organization is achieving its strategic goals. The balanced scorecard can certainly be an effective tool for managing and improving performance—but only if it is clearly linked to a well-defined organizational strategy and goals.17 At its best, use of the scorecard cascades down from the top levels of the organization so that everyone becomes involved in thinking about and discussing strategy. The scorecard has become the core management control system for many well-known organizations, such as ExxonMobil Corporation, Cigna (insurance), Hilton Hotels, and even some units of the U.S. federal government.18 Of course, as with all management systems, the balanced scorecard is not right for every organization in every situation. The simplicity of the system causes some managers to underestimate the time and commitment needed for this approach to become a truly useful management control system. If managers implement the balanced scorecard using a performance measurement orientation rather than a performance management approach that links targets and measurements to corporate strategy, use of the scorecard can actually hinder or even decrease organizational performance.19 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 19 Managing Quality and Performance 697 Re m e m b e r T h i s •• The feedback control model involves using feedback to determine whether performance meets established standards. •• Well-designed control systems include four key steps: establish standards, measure performance, compare performance to standards, and make corrections as necessary. •• Feedback from customers alerted managers at Hershey Kisses, which were missing the pointy tips that are prized by bakers who use the candy to adorn their holiday cookies. •• A balanced scorecard is a comprehensive management control system that balances traditional financial measures with measures of customer service, internal business processes, and the organization’s capacity for learning and growth. to a deviation from standards in the quality of Hershey The Changing Philosophy of Control 19-3 Managers’ approach to control is changing in many of today’s organizations. In connection with the shift to employee participation and empowerment, many companies are adopting a decentralized rather than a hierarchical control process. Hierarchical control and decentralized control represent different philosophies of corporate culture, as discussed in Chapter 3. Most organizations display some aspects of both hierarchical and decentralized control, but managers generally emphasize one or the other, depending on the organizational culture and their own beliefs about control. What Is Your Attitude Toward Organizational Regulation and Control?20 INSTRUCTIONS: Managers have to control people for organizations to survive, yet this control should be of the right amount and type. Companies are often less democratic than the society of which they are a part. Honestly consider your beliefs about the regulation of other people and indicate whether each statement that follows is Mostly True or Mostly False for you. Mostly False 1. I believe that people should be guided more by feelings and less by rules. __________ __________ 2. I think employees should be on time to work and to meetings. __________ __________ 3. I believe efficiency and speed are not as important as letting everyone have their say when making a decision. __________ __________ CONTINUED Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6 CONTROLLING Mostly True 698 PART 6 CONTROLLING Mostly True Mostly False 4. I think employees should conform to company policies. __________ __________ 5. I let my significant other make the decision and have his or her way most of the time. __________ __________ 6. I like to tell other people what to do. __________ __________ 7. I am more patient with the least capable people. __________ __________ 8. I like to have things running “just so.” __________ __________ SCORING AND INTERPRETATION: Give yourself one point for each “Mostly True” answer to the odd-numbered items and one point for each “Mostly False” answer to the even-numbered items. A score of 6 or higher suggests that you prefer decentralized control for other people in an organization. A score of 3 or less suggests a preference for more hierarchical control and bureaucracy in a company. Enthusiastic new managers may exercise too much of their new control and get a negative backlash. However, too little control may mean less accountability and productivity. The challenge for managers is to strike the right balance for the job and the people involved. HIERARCHICAL VERSUS DECENTRALIZED APPROACHES 19-3A S OT PSH NA Hierarchical control involves monitoring and influencing employee behavior through extensive use of rules, policies, hierarchy of authority, written documentation, reward systems, and other formal mechanisms.21 In contrast, decentralized control relies on cultural values, traditions, shared beliefs, and trust to foster compliance with organizational goals. Managers operate on the assumption that employees are trustworthy and willing to perform effectively without extensive rules and close supervision. Exhibit 19.3 contrasts the use of hierarchical and decentralized methods of control. Hierarchical methods define explicit rules, policies, and procedures for employee behavior. With this approach, control relies on centralized authority, the formal hierarchy, and close personal supervision. Responsibility for quality control rests with quality control inspectors and supervisors, rather than with employees. Job descriptions generally are specific and task-related, and managers define minimal standards for acceptable employee performance. In exchange for meeting the standards, individual employees are given extrinsic rewards such as wages, benefits, and possibly promotions up the hierarchy. Employees rarely participate in the control process, with any participation being formalized through mechanisms such as grievance procedures. With hierarchical control, the organizational culture is somewhat rigid, and managers do not consider culture a useful means of controlling employees and the organization. Technology often is used to control the flow and pace of work or to monitor employees, such as by measuring the number of minutes that employees spend on phone calls, how many keystrokes they make at the computer, or other performance data. For example, Kimberly-Clark, the maker of Kleenex, has begun using performance management software to track employee progress toward meeting personalized goals, with people expected to keep improving or risk losing their jobs. “People can’t duck and hide in the same way they could in the past,” said Scott Boston, vice president of human resources.22 The use of algorithmic control is discussed in detail later in this chapter. The hierarchical approach to control is strongly evident in many Japanese companies. In general, Japanese culture reflects a concern for rules and a penchant for bureaucracy that can excel at turning chaos into order. Consider the efficient organization of evacuation centers for families who lost their homes when a devastating earthquake and tsunami struck Japan. Self-governing committees managed these temporary shelters and laid out, Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 19 Managing Quality and Performance EXHIBIT 19.3 699 Hierarchical and Decentralized Methods of Control Hierarchical Control Decentralized Control Basic assumptions •• People are incapable of self-discipline and cannot be trusted. They need to be monitored and controlled closely. •• People work best when they are fully committed to the organization. Actions •• Uses detailed rules and procedures; formal control systems. •• Features limited use of rules; relies on values, group and self-control, selection, and socialization. •• Relies on flexible authority, flat structure, and expert power; everyone monitors quality. •• Relies on results-based job descriptions; emphasizes goals to be achieved. •• Emphasizes extrinsic and intrinsic rewards (meaningful work, opportunities for growth). •• Features an adaptive culture; culture recognized as a means for uniting individual, team, and organizational goals for overall control. •• Uses top-down authority, formal hierarchy, position power, and quality control inspectors. •• Relies on task-related job descriptions. •• Emphasizes extrinsic rewards (pay, benefits, status). •• Features a rigid organizational culture; distrust of cultural norms as a means of control. Consequences •• Employees follow instructions and do just what they are told. •• Employees feel a sense of indifference toward work. •• Employee absenteeism and turnover is high. •• Employees take initiative and seek responsibility. •• Employees are actively engaged and committed to their work. •• Employee turnover is low. SOURCES: Based on Naresh Khatri et al., “Medical Errors and Quality of Care: From Control to Commitment,” California Management Review 48, no. 3 (2006): 115–141; Richard E. Walton, “From Control to Commitment in the Workplace,” Harvard Business Review (March–April 1985): 76–84; and Don Hellriegel, Susan E. Jackson, and John W. Slocum, Jr., Management, 8th ed. (Cincinnati, OH: South-Western, 1999), p. 663. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6 CONTROLLING S PSH NA OT in painstaking detail, the daily responsibilities of the residents. People were assigned specific tasks, including sorting the garbage, washing the bathrooms, and cleaning freshwater tanks. This hierarchical method of managing the temporary evacuation centers helped survivors find routine and responsibility, which was expected to play a big role in reducing the long-term psychological and physical toll of this natural disaster.23 Decentralized control is based on values and assumptions that are almost opposite to those that characterize hierarchical control. Rules and procedures are used only when necessary. Managers rely instead on shared goals and values to control employee behavior. The organization places great emphasis on the selection and socialization of employees to ensure that workers have the appropriate values needed to influence behavior toward meeting company goals. No organization can control its employees 100 percent of the time, and self-discipline and self-control are what keep workers performing their jobs up to standard. Decentralized control reflects a shift in management from accountability to employee development and learning.24 Empowerment of employees, effective socialization, and training all can contribute to internal standards that provide self-control. Recall the example of game maker Valve Corporation, described in the Manager’s Shoptalk feature in Chapter 10. As a bossless company, Valve represents an extreme version of decentralized control. It has no formal management or hierarchy, and team members work together to make decisions about how often to meet, how to test products, and the best way to achieve goals.25 With decentralized control, power is more dispersed and is based on knowledge and experience as much as position. The organizational structure is flat and horizontal, as discussed in Chapter 10, with flexible authority and teams of workers solving problems and making improvements. Everyone is involved in quality control on an ongoing basis. Job descriptions generally are results based, with the outcomes to be achieved being emphasized more strongly than the specific tasks to be performed. To motivate employees, managers PART 6 CONTROLLING use not only extrinsic rewards such as pay, but also the intrinsic rewards of meaningful work and opportunities to learn and grow. Technology is used to empower employees by giving them the information they need to make effective decisions, work together, and solve problems. People are rewarded for team and organizational success as well as for their individual performance, and equity among employees is a key consideration. Employees participate in a wide range of management activities, including setting goals, determining standards of performance, governing quality, and designing control systems. With decentralized control, the culture is adaptive, and managers recognize the importance of organizational culture for uniting individual, team, and organizational goals for greater overall control. Ideally, with decentralized control, employees will pool their areas of expertise to arrive at procedures that are better than managers could come up with working alone. At the Campbell Soup plant in Maxton, North Carolina, factory workers huddle every morning with managers to find ways to increase efficiency. The daily worker– manager huddles are about “getting everybody involved,” said one longtime plant veteran. When challenged to find efficiency in the new Swanson broth line, employees devised a numbering system for each gasket to speed repairs of the processing equipment. They cut windows into the metal covers over conveyor belts so they could identify signs of wear. They color-coded valve handles to avoid confusion in the settings. With employee-driven changes like these, Campbell says that operating efficiency at the Maxton plant climbed to 85 percent of what its managers say is the maximum possible, up from 75 percent three years ago.26 calimedia/Shutterstock.com 700 S OT PSH NA 19-3B S OT PSH NA S OT PSH NA THE DILEMMA OF ALGORITHMIC CONTROL Algorithmic control is the use of software algorithms to set targets, measure performance, provide feedback, and decide rewards for employees. Using algorithmic control is a challenge for managers because the algorithms make it so easy to slip into excessive use of hierarchical control. These systems meet a need in organizations where employees work remotely or out of the view of management, including “gig worker” platforms such as Uber and delivery companies such as UPS.27 When employees do work that is measurable and somewhat routine, artificial intelligence algorithms can assert a level of control over workers that is fine-grained down to minor details. Seemingly, there may be no place for an employee to hide from algorithmic control. UPS can control the working life of a delivery truck driver with a handheld device and hundreds of sensors on each delivery truck that track everything from seat belt use, to backup speeds, to stop times. When a driver stops and scans a package for delivery, the system records the time and location as well as when a customer signs for the package. Much of this information goes to a supervisor in real time.28 Uber and other ride-hailing apps use algorithms to watch everything a driver does. Personal statistics are comprehensive, including rider acceptance rates, cancellation rates, hours spent logged in, acceleration smoothness, trips completed, and passengers’ ratings of their performance. Selected statistics are displayed to drivers as motivating tools, with messages such as “You are in the top 10 percent of partners!” In addition, if drivers fall below 4.6 stars on a 5-star rating system, they may be deactivated.29 Some companies have given employees ID badges to wear as part of their algorithmic control efforts. The badges track employees’ movements through the office and record with whom they talk and how long they spend in conversation. Managers are also increasingly using software to monitor and measure employee e-mail, Internet use, text messages, chats and calendar appointments, time spent away from the desk, and other activities.30 Demand for tracking software surged during the COVID-19 pandemic when large numbers of offices closed and many people began working from home. Chris Heuwetter, who Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 19 Managing Quality and Performance S PSH NA OT runs the marketing company 98 Buck Social in Jupiter, Florida, said employee productivity collapsed when employees began working from home during the pandemic. After Heuwetter began using algorithmic control, he says productivity levels rose “immediately.”31 Many organizations use these systems for such intense control because it pays off ­financially—specifically, by reducing employee variability and slack. UPS in some cases has added 10 stops to a driver’s workday. Drivers who are not up to standard at Uber can be identified and deactivated. The new algorithmic control systems produce impressive results for the bottom line. After United Grocers, a large wholesaler, implemented an electronic tasking system for its warehouse workers, the firm was able to cut payroll expenses by 25 percent while increasing sales by 36 percent. A study of chain restaurants found that electronic monitoring decreased employee theft and increased hourly sales.32 However, too much emphasis on close monitoring can damage employees’ trust and morale, create unhealthy levels of stress for employees, and hurt performance in the long run. Employees often react negatively to electronic monitoring, so managers should use care when implementing these systems. One UPS driver told of colleagues who found ways to get around the system, such as the driver who buckled his seat belt behind him to save time and help him meet delivery goals. “People get intimidated and they work faster,” he said. “It’s like when they whip animals. But this is a mental whip.”33 701 Concept Connection Rui Vieira/PA Images/Alamy Stock Photo Deliveroo’s 60,000 self-employed couriers are managed by algorithmic control. This food-delivery platform was founded in London in 2013 and now has couriers delivering high-quality restaurant food by scooter or bicycle in 200 cities across 12 countries. Deliveroo’s control algorithm monitors couriers closely and sends them personalized monthly assessments on such performance statistics as average “time to accept orders,” “travel time to restaurant,” and “travel time to customer,” comparing each courier’s performance to the company’s own estimate of how fast it should have been. Re m e m b e r T h i s in leadership methods. monitor employee progress, with people expected to keep improving or risk losing their jobs. •• Hierarchical control involves monitoring and influencing •• The bossless company Valve Corporation represents an employee behavior through extensive use of rules, policies, hierarchy of authority, written documentation, reward systems, and other formal mechanisms. •• Some organizations are moving toward increased control •• With decentralized control, the organization fosters compliance with organizational goals through the use of organizational culture, group norms, and a focus on goals rather than rules and procedures. •• Kimberly-Clark strengthened hierarchical control with the use of performance management software to extreme version of decentralized control. from the top with algorithmic control, which is the use of software algorithms to set targets, measure performance, provide feedback, and decide rewards for employees. •• The use of performance monitoring software grew during the COVID-19 pandemic when many offices were closed and managers wanted to keep track of employees who were working from home. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 6 CONTROLLING •• The philosophy of control has shifted to reflect changes 702 PART 6 CONTROLLING 19-4 S OT PSH NA Total Quality Management A popular approach based on a decentralized control philosophy is total quality management (TQM), an organization-wide effort to infuse quality into every activity in a company through continuous improvement. Managing quality is a concern for every organization, and failure to ensure quality can have devastating effects. Consider the experiences of food companies. Tyson Foods recalled more than 11 million pounds of frozen, ready-to-eat chicken strip products that may have been contaminated with extraneous pieces of metal. Amity Packing Company recalled thousands of pounds of raw ground beef products that may have contained pieces of clear, thin, pliable plastic. And the giant food company Nestlé recalled 3 million boxes of DiGiorno pizza and Lean Cuisine and Stouffer’s frozen dinners in the United States because of a suspicion that the spinach in them might contain bits of glass. Recalls related to foreign materials are less common than those related to food-borne illnesses, but they can sometimes prove even more challenging for managers, who have to determine what went wrong and how much product was affected. Companies such as Tyson, Amity, and Nestlé err on the side of caution, pulling a wide range of food off shelves rather than risk missing something.34 Food safety is of growing concern for consumers, so managers in food companies and restaurants are paying even greater attention to quality. TQM became attractive to U.S. managers in the 1980s because it had been implemented successfully by Japanese companies such as Toyota, Canon, and Honda, which were gaining both market share and an international reputation for high quality. The Japanese system was based on the work of such U.S. researchers and consultants as W. Edwards Deming, Joseph Juran, and Armand Feigenbaum, whose ideas attracted U.S. executives after the methods were tested overseas.35 The TQM philosophy focuses on teamwork, increasing customer satisfaction, and lowering costs. Organizations implement TQM by encouraging managers and employees to collaborate across functions and departments, as well as with customers and suppliers, to identify areas for improvement, no matter how small. Each quality improvement is a step toward perfection and meeting a goal of zero defects. Quality control becomes part of the day-to-day business of every employee rather than being assigned to specialized departments. 19-4A TQM TECHNIQUES The implementation of TQM involves the use of many techniques, including quality circles, benchmarking, Six Sigma principles, quality partnering, and continuous improvement. Quality Circles S OT PSH NA A quality circle is a group of 6 to 12 volunteer employees who meet regularly to discuss and solve problems that affect the quality of their work.36 At a set time during the workweek, the members of the quality circle meet, identify problems, and try to find solutions. Circle members are free to collect data and perform surveys. Many companies train people in team building, problem solving, and statistical quality control. In essence, the use of quality circles pushes decision making to an organization level at which recommendations can be made by the people who do the job and know it better than anyone else. At Carrier Collierville, a manufacturer of residential air conditioners and heat pumps, a quality circle attacked a leak issue at braze joints on a heat pump component. Changes made to the work area resulted in a 50 percent reduction in leaks and associated repair costs.37 Benchmarking Introduced by Xerox in 1979, benchmarking is now a major TQM component. Benchmarking is defined as “the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CHAPTER 19 Managing Quality and Performance S PSH NA OT leaders to identify areas for improvement.”38 For example, in the original Xerox study, managers compared Xerox to Japanese competitors and found that “it took twice as long as the Japanese competitors to bring a product to market, five times the number of engineers, four times the number of design changes, and three times the design costs.” This enabled Xerox managers to identify and allocate resources to specific areas to increase productivity and remain competitive.39 Organizations may also use benchmarking for generating new business ideas, assessing market demand, or identifying best practices within an industry. Exhibit 19.4 shows a five-step benchmarking process.40 The first step involves planning the benchmarking study, which includes identifying the objectives of the study and the characteristics of a product or service that significantly influence customer satisfaction. The second step involves identifying the source of the information to be collected. For example, the sources of data for a Sherwin-Williams benchmarking study might include national independent lab studies or studies published in Consumer Reports magazine. Once the source of information is identified, data are then collected. For example, when Xerox collected information on the order fulfillment techniques of L. L. Bean, the Freeport, Maine, outdoor gear and clothing retailer, it discovered ways to reduce warehouse costs by 10 percent. The fourth step includes analyzing the benchmarking data that have been collected and recommending areas of improvement. The fifth step includes implementing recommendations and then monitoring them through continuous benchmarking. 703 Six Sigma Six Sigma quality principles were introduced by Motorola in the 1980s and were later popularized by General Electric (GE), where former CEO Jack Welch praised Six Sigma for quality and efficiency gains that saved the company billions of dollars. Based on the Greek letter sigma, which statisticians use to measure how far something deviates from perfection, Six Sigma is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects per million parts. That essentially means being defect-free 99.9997 percent of the time.41 However, Six Sigma has deviated from its precise definition to become a generic term for a quality-control approach that takes nothing for granted and emphasizes EXHIBIT 19.4 A Five-Step Benchmarking Process Improve Analyze Collect Find SOURCE: Based on Deven Shah and Brian H. Kleiner, “Benchmarking for Quality,” Industrial Management (March–April 2011): 22–25. Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. CONTROLLING 6 Plan 704 PART 6 CONTROLLING S OT PSH NA S OT PSH NA a disciplined and relentless pursuit of higher quality and lower costs. Like other aspects of TQM, Six Sigma is not just for manufacturing organizations. Service firms have reaped significant benefits from Six Sigma and other TQM techniques. Cardinal Health, a distributor of health care products, embarked on a Lean Six Sigma initiative that led to a 30 percent drop in the order error rat