Chapter 15: Control Management PDF

Chapter 15: Control Learning Outcomes After studying this chapter, you should be able to: Define control within an organisational context as a managerial task Explain aspects pertaining to control, analysing its relation to planning, decision- making, and organisational strategy Identify...

Chapter 15: Control Learning Outcomes After studying this chapter, you should be able to: Define control within an organisational context as a managerial task Explain aspects pertaining to control, analysing its relation to planning, decision- making, and organisational strategy Identify and explain the different types and sources of control and give examples Indicate the relationship of the different types of control within the systems approach Discuss the criteria for creating effective controls Identify, discuss, and apply the steps of the control process Identify, classify, and give examples of the different control standards Describe performance management, the areas of focus, and the different methodologies for consideration Define corporate governance and explain its relation to control. Understanding and defining control can be described as the process of establishing performance standards, monitoring performance, and taking corrective action, when necessary, to ensure the achievement of organisational goals can be described as a management Control process whereby the actual performance of employees is monitored against set performance standards to optimise organisational goal achievement and overall performance, and which requires corrective action if the actual performance does not meet the required standards Types of control Figure 15.1 Types of control (p. 475) Preventive controls Preventive controls are mechanisms intended to reduce errors proactively, thereby minimising the need for corrective action. These controls are developed and applied to the input factors of the transformation process to proactively ensure that any deviations from set standards are identified. Concurrent control Concurrent control or steering control indicates control measures that monitor activities while they are taking place. Concurrent control measures are most effective in situations where time is of the essence and especially where corrective action is essential for the completion of a process. Post control Post control is a mechanism intended to reduce or eliminate unwanted behaviours or results to meet the organisation’s regulations and standards. Sources of control Table 15.1 Examples of different sources and types of control (p. 477) Stakeholder control is expressed as pressures from outside sources on organisations to change their behaviours. Organisational control includes the formal rules and procedures for preventing or correcting deviations from plans, and for achieving desired goals. Group control comprises the norms and values that group members share and maintain through rewards and punishments. Individual self-control comprises the guiding mechanisms that operate both consciously and unconsciously within each person. The control process Figure 15.2 The control process (p. 481) Step 1: A formal control subsystem can be created and maintained Define the for an employee, a department, or even an entire organisation. subsyste m There is a need to define the employee, group, department, business unit, project, or organisation as a whole to establish the focus group of the control process. Identify key characteristics of the subsystem/s. Establishing a formal controlprocess requires early determination of the characteristics that can be measured, the costs and benefits of obtaining information about each characteristic, and whether variations in each characteristic are likely to affect performance. Step 2: Standards are criteria for evaluating Set quantitative (measurable) and qualitative performan (subjective and non-measurable) ce characteristics and should be set for each standards characteristic measured. Quantitative standards are usually expressed in terms of quantity, quality time or monetary value and/or cost. Qualitative standards are usually expressed in a descriptive manner and are not measurable. Step 3: Information on actual performance Collect relating to each of the set standards can informatio be collected manually or automatically. n and measure the actual Measurement must be reliable and have performan the same results for the same ce circumstances over the long term. Top managers may create special departments, or rely on regular departments, to collect information by monitoring or auditing certain activities. Step 4: Comparisons are needed to determine whether what is Compare happening, is what should be happening. performan ce against set Information about actual results must be compared with performance standards. Such comparisons allow performan managers and team members to identify and ce concentrate on deviations or exceptions. standards Step 5: Diagnosis involves assessing the types, number, and Evaluate causes of deviations from the set standards. and correct problems Action can then be taken to eliminate those deviations and correct problems. if required Creating effective controls One way to develop and measure the effectiveness of formal organisational controls is to compare their costs and benefits. Such a cost–benefit analysis addresses three basic questions: 1. For what desired behaviours and results should organisational controls be developed? 2. What are the costs and benefits of the organisational controls required to achieve the desired behaviours and results? 3. What are the costs and benefits of utilising alternative organisational controls to obtain the desired behaviours and results? Cost-benefit model With too little control, costs exceed benefits, and the controls are ineffective. As the amount of control increases, effectiveness also increases, but only up to a point. Beyond a certain point, effectiveness declines with further increases in the amount of control exercised. Organisational controls that fail to satisfy the identified criteria to a reasonable degree may do more harm than good. Various criteria for effective control: Linkage to desired Understandable goals Economical Objective Corrective action Complete Participation Timely Flexibility Acceptable Performance management The performance of the organisation is a measure of how efficiently and effectively managers use the available resources to satisfy the multiple needs of existing and potential customers and thereby achieve organisational goals and objectives. Effectiveness can be best described as how well an organisation pursues its goals and to what extent it achieves these set goals. Efficiency indicates how well resources are applied or used during the process of achieving these goals. Organisation → be efficient by minimising inputs and maximising outputs or maintaining inputs and increasing outputs.  The following outcomes are possible when applying controls to measure whether the outcomes are efficient and effective: High efficiency and high effectiveness the manager selected the appropriate goals to pursue and optimally apply the resources to achieve these chosen goals Low efficiency and low effectiveness the manager selected inappropriate goals to pursue and did not optimally apply the resources to achieve these chosen goals High efficiency and low effectiveness the managerselected inappropriate goals to pursue but optimally applied the resources to achieve these chosen goals Low efficiency and high effectiveness the manager selected the appropriate goals to pursue but did not optimally apply the resources to achieve these chosen goals  Performance management allows managers and employees to: Develop performance standards Communicate performance standards as well as any relevant expectations about them Conduct observations Establish understanding on contextual (situational) issues Provide feedback Conduct appraisals These factors enable the individual, team, and management to achieve the optimum results through managing employee performance. Managing the performance of each member of staff, each team, and each division will eventually contribute to the accumulative result that indicates the overall effectiveness and efficiency of the organisation. Market controls Market controls involve the use of data to monitor performance in terms of sales, prices, costs, and profits relating to products sold, market share, and services rendered. To be effective, market controls generally require that: The costs of the resources used in producing outputs be measured monetarily The value of the goods and services produced be defined clearly and priced monetarily The prices of the goods and services produced be set competitively Market controls are most effective as a performance management control in a context where genuine competition is taking place within the specific industry. Financial controls Financial controls include a wide range of methods, techniques, and procedures intended to prevent or correct the misallocation of resources Comparative financial analysis Evaluation of an organisation’s financial condition for two or more time periods Table 15.4 Examples of financial ratios (p. 493) Budgeting Budgeting has three primary purposes when managing performance: To help in planning work effectively To assist in allocating resources To assist in controlling and monitoring resource utilisation during the budget period. Types of budgets used for performance management: Sales budget → This is a forecast of expected revenue (sales), generally stated by product line on a monthly basis and revised at least annually Materials budget → Expected purchases are generally stated by specific categories Labour budget Capital budget → This refers to targeted spending for major tangible assets Research and development budget Cash budget → This refers to the expected flow of monetary receipts and expenditure. Activity-based costing (accounting) Activity-based costing (ABC) is a performance management system that focuses on activities as the fundamental cost centres of organisations. Activities become the focal point for the organisation. An activity is any event that drives costs, including energy consumed, kilometres driven, computer hours logged, quality inspections done, shipments made, and scrap or rework orders filled. Integrated strategic controls: The balanced scorecard A balanced scorecard is a format for describing the activities of an organisation through a number of measures for each of four perspectives: 1. Financial perspective (for example, profitability, increased revenue, and lower costs) 2. Customer perspective (how customers see the organisation – customer satisfaction) 3. Internal operations perspective (what the organisation must excel at – quality management in operations) 4. A learning and innovation perspective (can the organisation continue to improve and create value, in other words, can it be sustainable).  In terms of controlling, the balanced scorecard allows the management team to focus on the following elements when managing organisational performance: Financial performance: The organisation considers how it is viewed by its shareholders. Its financial performance can usually be evaluated by investigating the economic value added (EVA). Performance in terms of customers: The organisation considers how it is viewed by its customers. This allows management to ask how well the organisation is meeting customer needs and demands. Internal operational performance: The organisation considers what it must excel at. The focus is not external, as for the two previous performance areas, but internal, allowing management to focus on quality. Customers perceive a product or service as being of quality when they perceive it to offer value. Learning and innovation performance: The organisation considers whether it is able to improve continuously and create value. This directs management to focus on continuous improvement of what the organisation offers, and then to relearn and redesign those organisational processes.  Contemporary viewpoints support the balanced scorecard but reframe it to expand on the perspectives to include changes relevant to our current business context and system. In redefining the four scorecard perspectives, the following has been proposed: Financial Outcome perspecti s ve Stakehol Customer der perspecti perspecti ve ve Learning and Enablers innovation perspective Quality control approaches Production environments that utilise modern quality control methods are dependent upon statistical literacy. The approaches used therein are called quality control tools. The approaches that will be discussed : Six Sigma JIT Total quality management (TQM) Six Sigma Figure 15.3 Six Sigma process and tool examples (p. 501) Source: Adapted from DMAICTools.com (n.d.) Just-in-time Just-in-time, also known as lean or stockless production, can be described as an approach with the objective of producing the right part, in the right place, at the right time, therefore, the term ‘just in time’. The objective of JIT is to minimise waste. Waste can be described as the outcome from an activity that adds cost, but no value. Just-in-time aims to improve profits and ROI. Just-in-time is mostly related to repetitive manufacturing processes in which the same products and components are produced continuously. Total quality management Total quality management is much broader in scope than regular quality control. The final outcome of TQM is continuous improvement and not just acceptance or rejection of a product based on quality standards. The four major principles of TQM are: 1. Focusing on delivering customer value 2. Continually improving processes and systems 3. Focusing on managing process rather than people 4. Using teams to improve continually. Corporate governance Corporate governance is the pattern of relations and controls between the shareholders, the board of directors, and the top management of an organisation. These relations and controls are defined by the corporate charter, bylaws, formal policy, governmental laws and regulations, and the courts. Successful business leaders of the future will be those who: Develop a control system through effective performance management for each important product, service, process, or activity within the organisation. Incorporate sufficient variety, sensitivity, anticipation capability, and control feedback in the system. Determine the appropriate areas in the organisation where control should be focused. Measure the control system’s effectiveness by considering its relation to the organisational strategy and objectives. Understand the financial data and value of financial control techniques. Adopt a philosophy of control that is consistent with the organisational culture, management style, and employee practices. Align internal organisational controls with risk management. Table 15.7 Differentiating between internal and external control mechanisms for corporate governance (p. 505) Sources: Based on Davoren (2021); Indeed (2021) Chapter Summary Controls can be developed to focus on inputs, transformation, and outputs within the systems approach. Different types of control are used to ensure that the performance standards developed by the organisation are met. A variety of factors should be considered to optimise effective controlling. Controlling is not a restrictive measure or process, but it is necessary to achieve critical performance standards, such as quality and economic value added. Control systems are often developed to manage continuous processes. Sudden or unexpected events demand controls generally associated with projects. Incorporating the notions of project controls with traditional controls could assist managers to establish suitable control infrastructure that combines order and chaos in these complex situations.