Managerial and quality control

Chapter summary
This chapter introduces a number of concepts about organisational control. Organisational control
is the systematic process through which managers regulate organisational activities to meet
planned goals and standards of performance. The control system may include feedforward,
concurrent and feedback control. The implementation of control includes 4 key steps:
1 Establish standards.
2 Measure performance.
3 Compare performance to standards.
4 Make corrections.
Traditional bureaucratic controls emphasised establishing rules and procedures and then
monitoring employee behaviour to make sure the rules and procedures have been followed. With
decentralised control, employees assume responsibility for monitoring their own performance.
Budget and financial controls ensure that expenditures and sales are in line with the
organisation’s objectives. Organisations also control the quality of their goods and services. They
may do this by adopting total quality management (TQM) techniques such as:
• quality circles
• empowerment
• benchmarking
• outsourcing
• reduced cycle time
• continuous improvement.

Other trends in controlling include:

• international quality standards
• open-book management
• economic value added (EVA) systems
• market value-added (MVA)
• balanced scorecard
• activity-based costing (ABC).
Control systems are generally successful when they match an organisation’s strategy, have
understandable, reasonable and varied standards, provide accurate information, are flexible, and
focus on areas in which action is required.
Learning objectives

After studying this chapter, students should be able to:

• define organisational control and explain why it is a key management function Organisational

control is defined as the systematic process through which managers regulate organisational

activities to make them consistent with the expectations established in plans, targets, and

standards of performance. Control, especially quality control, is an issue facing every manager in

every organisation today. Control is a key management function because it is the mechanism

managers use to steer the organisation toward its objectives. Organisational control is a process of

ensuring that objectives are met and that resources are allocated in the best way to achieve those

objectives.

• describe differences in control focus, including feedforward, concurrent and feedback control

Control can focus on events before, during, or after a process. These three types of control are

formally called feedforward, concurrent and feedback:

– Feedforward control attempts to identify and prevent deviations before they occur. Sometimes

called preliminary or preventive control, it focuses on human, material and financial resources

that flow into the organisation.

– Concurrent control monitors ongoing employee activities to ensure they are consistent with

quality standards. Concurrent control assesses current work activities, relies on performance

standards, and includes rule and regulations for guiding employee tasks and behaviours.

– Feedback control, sometimes called postaction or output control, focuses on the organisation’s

outputs, particularly the quality of an end product or service. Many feedback controls focus on

financial measurements. • explain the four steps in the control process Reflecting the definition of

organisational control, a well-designed control system consists of the following four key steps:
1 Establish standards of performance. Managers define goals for organisational departments in

specific, operational terms that comprise a standard of performance against which to compare

organisational activities.

2 Measure actual performance. Managers develop quantitative measurements of performance

that can be reviewed on a daily, weekly, or monthly basis.

3 Compare performance to standards. This is an explicit comparison of actual activities to

performance standards.

4 Feedback. Corrective action is a change in work activities to bring them back to acceptable

performance standards.

discuss the use of financial statements, financial analysis and budgeting as

management controls
Budget and financial controls tell whether the organisation is on sound financial footing
and they can be useful indicators of others kinds of performance problems. Managers
need to be able to evaluate financial reports that compare their organisation’s
performance with earlier data or industry norms. The most common financial analysis
focuses on ratios. Liquidity ratios, activity ratios, profitability ratios and leverage ratios
are among the most common ratios. Budgets are a useful tool for planning an
organisation’s expenditures. Examples of types of budgets managers use are expense
budgets, revenue budgets, cash budgets, and capital budgets.
• contrast the bureaucratic and decentralised control approaches An organisation’s
approaches to quality are based on its basic philosophy of control. With many
organisations moving toward participation and employee empowerment, a choice must be
made between the traditional bureaucratic and contemporary decentralised approaches.
Bureaucratic control is the use of rules, policies, hierarchy of authority, written
documentation, reward systems, and other formal mechanisms to influence employee
behaviour and assess performance. Bureaucratic control relies on the cultural value of
traditional top-down control and is implemented through the organisation’s administrative
system. Decentralised control represents cultural values almost the opposite of
bureaucratic control. Decentralised control relies on social values, traditions, shared
beliefs, and trust to foster compliance with organisational goals. Employees are trusted,
and managers believe employees are willing to perform correctly without extensive rules
or supervision. Decentralised control is implemented through the corporate culture, peer
groups, self-control, and employee selection and socialisation.
• describe the concept of total quality management and the main quality
management techniques Total quality management (TQM) is a philosophy of
organisation-wide commitment to continuous improvement, with the focus on teamwork,
increasing customer satisfaction, and lowering costs. TQM works through horizontal
collaboration across functions and departments and extends to include customers and
suppliers. Teams of workers are trained and empowered to make decisions that help the
organisation achieve high standards of quality. This is a revolution in management
thinking because quality control departments and formal control systems no longer have
primary control responsibility. Quality control thus becomes part of the day-to-day
business of every employee.
• identify current trends in control and discuss their impact on organisations Some of
the major trends in controls include international quality standards, open-book
management, economic value-added (EVA) systems, market-value added (MVA), the
balanced scorecard and activity-based costing (ABC).
– International quality standards. Many countries have endorsed a universal
framework for quality assurance called ISO 9000, which set uniform guidelines defining
what manufacturing and service organisations should do to ensure their products conform
to high-quality requirements.
– Open-book management is the sharing of financial information and results with all
employees in the organisation. It allows employees to see for themselves, through charts,
computer printouts, meetings, etc, the financial condition of the company. It also shows
the individual employee how his/her job fits into the big picture and affects the financial
future of the organisation.
– Economic value added (EVA) systems is a control system that measures performance
in terms of net (after-tax) operating profit minus the cost of capital invested in the
company’s tangible assets. Measuring performance in terms of EVA is intended to
capture all the things a company can do to add value from its activities.
– Market value-added (MVA) adds another dimension by measuring the stock market’s
estimate of the value of a company’s past and projected capital investment projects. A
positive MVA indicates that a company has increased the value of capital entrusted to it
and thus created shareholder wealth. A positive MVA usually, though not always, goes
hand-in-hand with a high overall EVA measurement.
– The balanced scorecard is a comprehensive management control system that balances
traditional financial measures with measures of customer service, internal business
processes and the organisation’s capacity for learning and growth.
– Activity-based costing (ABC) identifies various activities needed to provide a product
and determines the cost of each of those activities.
• explain the value of open-book management and the balanced scorecard
approaches to control in a turbulent environment.
Management cannot hoard financial data if they wish to have an organisation based on
information sharing and teamwork. They must admit employees into the loop of financial
control and responsibility to encourage active participation and commitment to
organisational goals. Open-book management allows employees to see for themselves –
through charts, computer printouts, meetings, and so forth – the financial condition of the
organisation. Second, open-book management shows employees how their jobs fit into the
big picture and affect the financial future of the organisation. Finally, open-book
management ties employee rewards to the organisation’s overall success. Many of today’s
companies compete primarily on the basis of ideas and relationships, which requires
managers to find ways to measure intangible as well as tangible assets. The balanced
scorecard integrates the various dimensions of control, combining internal financial
measurements and statistical reports with a concern for markets and customers as well as
employees. A balanced scorecard contains four major perspectives: financial performance,
customer service, internal business processes and the organisation’s capacity for learning
and growth. Managers record, analyse and discuss these various metrics to determine how
well the organisation is achieving its strategic goals. At its best, the use of the scorecard
cascades down from the top levels of the organisation so that everyone becomes involved in
thinking about and discussing strategy.

Summarise the characteristics of an effective control system

Properly used, controls help managers respond to unforeseen developments and achieve
strategic plans. Effective controls share the following traits: linkage to strategy,
understandable measures, acceptance by employees, balance of objective and subjective
data, accuracy, flexibility, timeliness, and support of action.

Lecture outline – Teaching points

Control is an issue facing every manager in every organisation. For example, managers
continually look for new ways to improve customer satisfaction, maintain relationships
with suppliers, cut inventory costs, and develop the right goods/services. Every
organisation needs basic systems for allocating financial resources, developing human
resources, analysing financial performance and evaluating overall profitability. A lack of
effective control can seriously damage an organisation’s health and threaten its future.

The importance of control

Organisational control is the systematic process through which managers regulate
organisational activities to make them consistent with the expectations established in
plans, targets and standards of performance. To effectively control an organisation,
managers (or workers) require information about performance standards, actual
performance, as well as actions taken to correct deviations from the standard. There are
two problems with control:
1 Complacency. The assumption that our management techniques are the best in the
world.
2 Top management expects to control everything. Middle and lower managers
implement decisions. Production workers do only as they are told.
Organisational control focus
The organisation exists around a production process, and control can focus on events
before, during or after the production process.
Feedforward control Feedforward control (also called preliminary or preventive control)
focuses on human, material and financial resources that flow into the organisation. The
purpose is to ensure that input quality is sufficiently high to prevent problems when the
organisation performs its tasks. Feedforward control is anticipatory and attempts to
identify and prevent deviations before they occur.
Concurrent control Concurrent control monitors ongoing employee activities to ensure
that they are consistent with quality and other standards. Concurrent control assesses
current work activities. It relies on performance standards and includes rules and
regulations for guiding employee tasks and behaviours. Concurrent control is designed to
ensure employee work activities produce the correct results.
 Feedback control Feedback control (also called post-action or output control) focuses
on the organisation’s outputs, particularly the quality of the end product or
service. Many feedback controls focus on financial measurements.

Feedback control model

All well-designed control systems involve the use of feedback to determine whether
performance meets established standards. Managers set up control systems that consist of
four key steps:
Establish standards of performance Within the organisation’s strategic plan managers
define goals for organisational departments in specific, operational terms that include a
standard of performance against which to compare organisational activities. Managers
should carefully assess what they will measure and how they will define it. Standards
should be defined precisely and clearly so that managers and workers can determine
whether activities are on target.
Measure actual performance Most organisations prepare formal reports of quantitative
performance measurements that managers review daily, weekly, or monthly. If the
organisation has identified appropriate measurements, regular review of these reports
helps managers stay aware of whether the organisation is doing what it should be. In most
organisations, managers do not rely exclusively on quantitative measures but also get out
into the organisation to see how things are going.
Compare performance to standards Managers identify whether actual performance
meets, exceeds or falls short of standards. To correct the problems that most require
attention, managers focus on variances, using such techniques as exception reporting.
When performance falls short of a standard managers must interpret the deviation and
find the cause of the problem.
Take corrective action When performance deviates from standards, managers must
determine what changes, if any, are necessary. In a traditional top-down approach to
control, managers exercise their formal authority to make necessary changes. By contrast,
managers using a participative control approach collaborate with employees to determine
the corrective action necessary. Knowing when and how to take corrective action requires
good judgement. In some cases, managers may take corrective action to change
performance standards.
Financial statements and analysis
Managers need to be able to evaluate financial reports that compare their organisation’s
performance with earlier data or industry norms. These comparisons enable them to see
whether the organisation is improving and whether it is competitive with others in the
industry. The most common financial analysis focuses on:
• The balance sheet shows the company’s financial position with respect to assets and liabilities
at a specific point in time.

The income statement (also called a profit-and-loss statement) summarises the company’s
financial performance for a given time interval, usually 1 year. The bottom line indicates
the net income – profit or loss – for the given time period.
• Financial ratios are stated as a fraction or proportion. The most common ratios include:
Liquidity ratio A liquidity ratio indicates an organisation’s ability to meet its current
debt obligations. For example, the current ratio (current assets divided by current
liabilities) tells whether there are sufficient assets to convert into cash to pay off debts, if
 needed. Activity ratio An activity ratio measures internal performance with respect to
key activities defined by management. For example, inventory turnover is calculated by
dividing total sales by average inventory. Another type of activity ratio, the conversion
ratio, reflects purchase orders divided by customer inquiries. This ratio is an indicator of a
company’s effectiveness in converting inquiries into sales.
Profitability ratios Managers analyse a company’s profits by studying profitability
ratios, which state profits relative to a source of profits, such as sales or assets. One
important profitability ratio is the profit margin on sales, which is calculated as net
income divided by sales. Similarly, gross margin is the gross (before-tax) profit divided
by total sales. Another profitability measure is return on total assets (ROA), which is a
percentage representing what a company earned from its assets, calculated as net income
divided by total assets.
Leverage ratios Leverage refers to funding activities with borrowed money. A
company can use leverage to make its assets produce more than they could on their own.
Managers can track their debt ratio, or total debt divided by total assets, to make sure it
does not exceed a level they consider acceptable. Lenders may consider a company with a
debt ratio above 1.0 to be a poor credit risk.
Budgeting Budgets are a useful tool for planning an organisation’s expenditures. When
managers use budgets to ensure they are meeting their plans, they are a control technique.
A budget is created for every division or department within an organisation, no matter
how small, so long as it performs a distinct project, program or function. The fundamental
unit of analysis for a budget control system is called a responsibility centre, which is
defined as any organisational department or unit under the supervision of a single person
who is responsible for its activity. Types of budgets managers use are:
• Expense budget – includes anticipated and actual expenses for each responsibility centre and
for the total organisation.
• Revenue budget – lists forecasted and actual revenues of the organisation.
• Cash budget – estimates receipts and expenditures of money on a daily or weekly basis
to ensure that an organisation has sufficient cash to meet its obligations.
• Capital budget – lists planned investments in major assets such as buildings, trucks,
and heavy machinery, often involving expenditures over more than a year
Budgeting is an important part of organisational planning and control. Organisation use:
• top-down budgeting, in which the budgeted amounts for the coming year are literally
imposed on middle and lower-level managers; or
• bottom-up budgeting, in which lower-level managers anticipate their departments’
resource needs and pass them up to top management for approval.

The changing philosophy of control

Bureaucratic control and decentralised control represent different philosophies of corporate
culture. Bureaucratic control involves monitoring and influencing employee behaviour through
extensive use of:
• rules
• policies
• hierarchy of authority
• written documentation

• reward systems
• other formal mechanisms.

Bureaucratic methods define explicit rules, policies, and procedures for employee behaviour.
Control relies on:
• centralised authority
• the formal hierarchy
• close personal supervision

Responsibility for quality control rests with quality control inspectors and supervisors rather than
with employees. Bureaucratic control techniques can enhance organisational efficiency and
effectiveness. Decentralised control relies on the following to foster compliance with
organisational goals:
• cultural values
• traditions
• shared beliefs
• trust.
Decentralised control is based on values and assumptions with rules and procedures used only
when necessary. The organisation places great emphasis on the selection and socialisation of
employees to ensure that workers have the appropriate values needed to influence behaviour
toward meeting company goals. With decentralised control, power is more dispersed and based
on knowledge and experience as much as position. Everyone is involved in quality control on an
ongoing basis. Job descriptions are generally results-based. Managers use not only extrinsic
rewards such as pay, but also the intrinsic rewards of meaningful work and the opportunity to
learn and grow. Employees participate in a wide range of areas, including:

• setting goals
• determining standards of performance
• governing quality
• designing control systems.

With decentralised control, the culture is adaptive, and managers recognise the importance of
organisational culture for uniting individual, team, and organisational goals for greater overall
control.
Total quality management (TQM)
Total quality management (TQM) is an organisation-wide commitment to infusing quality
throughout every activity through continuous improvement. TQM philosophy focuses on
teamwork, increasing customer satisfaction and lowering costs. Organisations 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. Teams
of workers are trained and empowered to make decisions that help the organisation achieve high
standards of quality. TQM techniques Most organisations that have adopted TQM have
incorporated:
• Quality circles. A quality circle is a group of 6–12 volunteer employees who meet regularly to
discuss and solve problems affecting the quality of their work. They meet during work hours to
identify problems and find solutions. The idea being that employees who do the job know better
than anyone else how to improve performance.
• Empowerment. TQM relies on the empowerment of employees, suppliers and customers in the
decision making process. As companies reduce staff and layers of management, or shift tasks to
suppliers or outside organisations, managers need to share information and collaborate with
customers and suppliers.
• Benchmarking is the continuous process of measuring products, services, and practices against
the toughest competitors or those companies recognised as industry leaders. The key to successful
benchmarking lies in analysis. A company must honestly analyse its current procedures and
determine areas for improvement; as well as carefully select competitors worthy of copying.
• Six Sigma is a highly ambitious quality standard introduced by Motorola in the 1980s, that
specifies a goal of no more than 3.4 defects per million parts, which essentially means being
defect-free 99.99997 per cent of the time. Six Sigma today has deviated from its precise definition
to become a generic term for a quality-control approach that emphasises a disciplined and
relentless pursuit of higher quality and lower costs.
• Outsourcing is the contracting out of a company’s in-house function to a preferred vendor with
a high quality level in the particular task area. Outsourcing is a route to almost immediate savings
and quality improvement. This is widespread and one of the fastest growing trends in business.
• Reduced cycle time. Cycle time refers to the steps taken to complete a company process, such
as teaching a class, publishing a textbook, or designing a new car. The focus is on improved
responsiveness and acceleration of activities into a shorter time. Reduction in cycle time
improves overall company performance as well as quality.
• Continuous improvement is the implementation of a large number of small, incremental
improvements in all areas of the organisation on an on-going basis. All employees are expected to
contribute by initiating changes in their own job activities.

TQM success factors TQM does not always work. Many organisational contingency factors
influence the success of a TQM program, such as:
• Quality circles are most beneficial when employees have challenging jobs.
• TQM tends to be most successful when it enriches jobs and improves employee motivation.
• When workers’ problem-solving skills are improved productivity is likely to increase.
• TQM has the greatest chance of success in an organisational culture that values quality and
stresses continuous improvement as a way of life.

It is important to note, however, that many companies that have persisted with quality
improvement initiatives have benefited greatly – US and Australian companies at the pinnacle of
quality control outperform industry averages by a factor of between 3 and 5.
Trends in quality and financial control
Organisations are responding to changing economic realities and global competition by
reassessing organisational management and processes including control mechanisms.
International quality standards
One impetus for total quality management is the increasing significance of the global
economy. ISO 9000 is a set of international standards for quality management adopted in
the late 1980s by more than 50 nations, including Australia. These standards, established
by the International Standards Organization, set uniform guidelines defining what
manufacturing and service organisations should do to ensure that their products conform
to high quality requirements.
Open-book management Open-book management is the sharing of full financial
information and results with all employees in the organisation. In an organisational
 environment that advocates information sharing, teamwork, and the role of managers as
facilitators, executives cannot hoard financial data. Open-book management allows
employees to see for themselves, through charts, computer printouts, meetings, and so
forth the financial condition of the company. It shows the individual employee how his or
her job fits into the big picture and affects the financial future of the organisation. It ties
employee rewards to the company’s overall success. The goal of open-book management
is to get every employee thinking and acting like a business owner rather than like a hired
hand.
Economic value added (EVA) systems
Economic value added (EVA) systems can be defined as a company’s net (after-tax)
operating profit minus the cost of capital invested in the company’s tangible assets.
Measuring performance in terms of EVA is intended to capture all the things a company
can do to add value from its activities, such as run the business more efficiently, satisfy
customers and reward shareholders. In practice, the use of EVA is complicated. However,
when correctly used EVA systems can effectively measure and help control a company’s
financial performance. EVA should be central to the financial management system and
integrated throughout company policies and procedures.
Market value-added (MVA) Market value-added (MVA) adds another dimension because
it measures the stock market’s estimate of the value of a company’s past and projected
capital investment projects. A positive MVA indicates that a company has increased the
value of capital entrusted to it and thus created shareholder wealth. A positive MVA
usually, though not always, goes hand-in-hand with a high overall EVA measurement.
The balanced scorecard
Another recent innovation is to integrate the various dimensions of control, combining
internal financial measurements and statistical reports with a concern for markets and
customers as well as employees. The balanced scorecard is a comprehensive
management control system that balances traditional financial measures with measures of
customer service, internal business processes and the organisation’s capacity for learning
and growth. In addition, the scorecard has evolved from a system that places equal
emphasis on the four categories of performance management into a cause–effect
relationship that calls attention to how organisations achieve higher performance.
Activity-based costing (ABC)
A basic objective of controlling is to ensure that the organisation’s activities are
profitable. Managers measure the cost of producing goods/services so they can be sure the
company is selling those products for more than the cost to produce them. In many
situations, however, the traditional approach to costing no longer reflects today’s realities
of doing business. Activity-based costing identifies the various activities needed to
provide a product and determines the cost of each of those activities. If the ABC system
measures important activities, it can provide a more useful reflection of costs than
traditional accounting systems.
Qualities of effective control systems
Properly used, controls help managers respond to unforeseen developments and achieve strategic
plans. When problems signal that control systems are not working properly, management must
examine them for possible clarification, revision, or overhaul. Effective controls share the
following traits:
• Linkage to strategy
• Understandable measures
• Acceptance by employees
• Balance of objective and subjective data
• Accuracy
• Flexibility
• Timeliness
• Support of action.

New workplace concerns

Today’s managers face some difficult control issues, not least of which has been the
failure of top executives and corporate directors at some companies to provide adequate
oversight and control. There is a move towards increasing control in many organisations,
particularly in terms of corporate governance, the system of governing an organisation
sothat the interests of corporate owners are protected. In a fast-moving environment,
under-control can be a problem because managers can’t keep personal tabs on
everything in a large, global organisation. Over-control can also be a problem,
particularly when excessive control of employees can lead to de-motivation, low morale,
lack of trust and even hostility among workers. Managers have to find an appropriate
balance – although oversight and control are important, good organisations also depend
on mutual trust and respect among managers and employees.

Discussion questions
1 Why is it important for managers to understand the process of organisational
control?

Organisational control is the systematic process of regulating organisational activities to make

them consistent with the expectations established in plans, targets, and standards of performance.
In a classic article on the control function, Sherwin (1956) summarises this concept as follows:
‘The essence of control is action which adjusts operations to predetermined standards, and its
basis is information in the heads of managers.’ Control is an issue facing every manager in every
organisation. A lack of effective control can seriously damage an organisation’s health and
threaten its future. Effectively controlling an organisation requires information about performance
standards and actual performance, as well as actions taken to correct any deviations from the
standards. Managers need to decide what information is essential, how they will obtain that
information (and share it with employees), and how they can and should respond to it.

2 How might a private school use feedforward control to identify the best candidates
for its teaching positions?

Feedforward control attempts to identify and prevent deviations before they occur. It focuses on
human, material and financial resources that flow into the organisation. Its purpose is to ensure
that input quality is high enough to prevent problems when the organisation performs its tasks.
Feedforward controls are evident in the selection and hiring of new employees. A private school
may use feedforward control to identifyappropriate teaching candidates through their application,
interviews, background and reference checks. The school would attempt to improve the
likelihood that its teachers will perform up to standards by identifying the necessary skills and
using tests and other screening devices to hire people who have those skills.
3. How might the manager of a family-style restaurant use concurrent controls to
ensure that the restaurant is providing customers with the highest quality food
and service? What feedback controls could be useful?

Concurrent control monitors ongoing employee activities to ensure they are consistent with
quality standards. It assesses current work activities, relies on performance standards, and
includes rules and regulations for guiding employee tasks and behaviours. Its intent is to ensure
that work activities produce the correct results. Concurrent controls could include ensuring that
all employees receive appropriate ongoing training in food preparation and customer service. The
manager can engage in MBWA, so that he/she can see how things are going both in the kitchen
and on the restaurant floor, and be on hand to sort out any problems which arise. The manager
should also ensure that the work culture emphasises the importance of both food quality and
customer service to the restaurant. Feedback focuses on the organisation’s outputs, particularly
quality of the end product or service. Feedback controls at the restaurant could include customer
feedback forms and analysing data on meals returned to the kitchen because of a problem.

4. What standards of performance has your lecturer established for this class? How
will your actual performance be measured? How will your performance be
compared with the standards? Do you think the standards and methods of
measurement are fair? Why or why not?

When determining the assessment procedures for a course, the coordinator normally establishes
performance standards, usually in line with a university-wide grading system. An example could
be 85–100 High Distinctions, 75–84 Distinctions, 65–74 Credits. The actual performance is
determined through student marks on a variety of assessment items such as class tests, case
method analysis, research papers and final examinations. The instructor can compare
performance against the standards when the various assessment items are marked and evaluated.
When these results are given back to students, corrective action can be undertaken based on the
performance when compared against the standard. Student responses may vary based on their
assessment of the performance standard against their individual performance in the classroom.

5 What is the difference between budgeting and financial analysis? Why is each type
of control important to a company?
Budgets are a useful tool for planning an organisation’s expenditures. When managers use
budgets to ensure they are meeting their plans, budgets also are a control technique. As a control
device, budgets are reports that list planned and actual expenditures for cash, assets, raw
materials, salaries, and other resources. In addition, budget reports usually list the variance
between the budgeted and actual amounts for each item. Managers need to be able to evaluate
financial reports that compare their organisation’s performance with earlier data or industry
norms. These comparisons enable them to see whether the organisation is improving and
whether it is competitive with others in the industry. The most common financial analysis
focuses on ratios, statistics that express the relationships between performance indicators such
as profits and assets, sales and inventory. Some are financial ratios, which are measures of an
organisation’s liquidity, profitability, and leverage. These are among the most common ratios,
but many measures are used. Managers decide which ratios reveal the most important
relationships for their business. Each type of control is important to a company because of the
data being provided. This type of financial information is important to permit improved planning
and control of the firm’s financial resources. Budgets are an excellent financial control in regards
to planning and control of the firm’s resources. Ratio analysis is important because of the
financial data being generated to make better financial decisions.
6. Imagine that you are going to be the manager of a new Woolworths being built in your area.
What items might be listed in your capital budget? What items might be listed in your expense
budget?
A manager of a new Woolworths store is concerned with capital budgeting and expense budgets.
A capital budget lists planned investments in major assets such as buildings, trucks, heavy
machinery and major equipment, often involving expenditures over more than a year. The store
managers might include the following items in her/his capital budget: building construction costs;
building fit-out costs, such as shelving, refrigeration, air-conditioning; and computer systems. An
expense budget includes anticipated and actual expenses for each responsibility centre and for the
total organisation. An expense budget may show all types of expenses or may focus on a
particular category, such as materials, research and development, advertising, utilities, wages and
salary, selling, and administrative expenses. The store manager might include the following items
in his/her expense budgets: stationery; marketing artwork and design; newspaper advertising; and
electricity.

7. In what ways could a university benefit from bureaucratic control? In what ways might it benefit
from decentralised control? Overall, which approach do you think would be best at your TAFE
college or university? Why?
Bureaucratic control involves monitoring and influencing employee behaviour through extensive
use or rules, policies, hierarchy of authority, written documentation, reward systems, and other
formal mechanisms. A university would likely benefit from using bureaucratic control in terms of
its budget and financial controls, student enrolment numbers, number of journal articles published
by academic staff, rules for student admission and progression, program and course development
policies, student feedback on teaching, and so on. Bureaucratic controls would be used to reassure
plans were implemented and goals achieved.
Decentralised control relies on cultural values, traditions, shared beliefs and trust to foster
compliance with organisational goals. Rules and procedures are used only when necessary. The
organisation places great emphasis on the selection and socialisation of employees to ensure
that workers have the appropriate values needed to influence behaviour towards organisational
goals. One way a university would likely benefit from using decentralised control is in terms of
developing a strong andpervasive culture that values student-centred learning and socialising
staff in this culture through seminars and other activities. Both bureaucratic and decentralised
controls will be generally utilised at TAFE colleges and universities.
8 If you were managing a local video rental shop, which company would you choose
to benchmark one aspect of your shop’s performance against? Why?
Student answers may vary, however one could choose Blockbuster Video. As a manager of a
local video rental store, a benchmark such as market share or sales revenue per square foot
could be analysed. The rationale in selecting Blockbuster is because it is a national franchise
with a large market share and generates high sales volume per square foot in their retail outlets.
9 Would you like to work for a company that uses open-book management? Would
you like to be a manager in the company? Why or why not?
The goal of open-book management is to get every employee thinking and acting like a business
owner rather than like a hired hand. To get employees to think like owners, management
provides them with the same information owners have about what money is coming in to the
business and where it is going. Open-book management helps employees appreciate why
efficiency is important to the organisation’s success. Many students would likely appreciate
working for a firm using open-book management. Open-book management can be very
motivating to employees – it can help them make better decisions about their work because
they are better able to understand the consequences of what they do, particularly in terms of its
impact on the company’s financial bottom line. It can also help them develop a better
appreciation of the reasoning behind management decisions. As an employee, open-book
management can give you a heightened sense of involvement, even ownership, in the company
you work for and enhance your job satisfaction and organisational commitment.

10. Why is it important for an organisation’s control system to be linked to its overall strategy?
Successful organisations work to achieve fit between their strategy and their control system.
Different strategies demand different things of organisations and thus require different control
systems. For example, a company pursuing a low-cost competitive strategy requires its control
system to focus on productive operational efficiencies. The company’s control system would
need to emphasise controls in terms of productivity, costs and budgets. On the other hand, a
strategy of differentiating through customer service would require the company to establish
control systems that reward high levels of responsiveness to customer needs by its employees.
The company’s control system would need to emphasise controls in terms of service quality, and
would have a much greater reliance on decentralised control.
It is important that organisational control does not have an exclusively inward focus on
organisational activities. Control tends to encourage stability; that is, it encourages doing in the
future what the organisation has done well in the past. Yet the environment of the organisation
changes, and the control systems must also change to ensure that new targets are established
and new behaviours adopted. The internal control system should accommodate environmental
factors by adapting to them. If the control system is not carefully linked to strategic planning,
the target to which the organisation is steered will not be consistent with the strategic needs of
the external environment.
11. You’re a manager who employs a participative control approach. You’ve
concluded that corrective action is necessary to improve customer satisfaction, but
first you need to convince your employees that the problem exists. What kind of
evidence do you think employees will find more compelling: quantitative
measurements or anecdotes from your interactions with customers? Explain your
answer.
As the text indicates, one of the qualities of an effective control system is that it should balance
objective and subjective data. Control should be perceived as objective, but quantitative
information tells only part of the story. Managers should balance quantitative and qualitative
performance indicators to provide a well-rounded picture of performance. Ideally, then the
manager should present both sets of measures, so that employees can see ‘the numbers’, while
the feedback from customers can be used to personalise the consequences of the problem. This
question also provides a good opportunity to revisits some of the material from previous
chapters regarding, for example, decision-making (e.g. personal decision styles), change (e.g.
resistance to change) and communication (e.g the communication process) which can be drawn
upon as part of the explanation.