What Is Control

• Control
 The process of monitoring activities to ensure that they are being
accomplished as planned and of correcting any significant deviations.

 In other words, it is the process of monitoring, comparing and correcting

work performance as and when required.

• All managers must control, even if they think their units are performing as
planned because they cannot really know how well or bad they are performing
unless they control.

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The Control Process
• The Process of Control – a 3 step process
1. Measuring actual performance.
2. Comparing actual performance against a standard.
3. Taking action to correct deviations or inadequate
standards.
Step 1. Measuring Actual Performance

• Sources of Information:
 Personal observation
 Statistical reports
 Oral reports
 Written reports

Step 2. Comparing Actual Performance Against the Standard

Determining the degree of variation between actual performance and the standard.

Although some variation in performance can be expected in all activities, it is critical

to determine an acceptable range of variations.

Significance of variation is determined by:

The acceptable range of variation from the standard (forecast or budget).
The size (large or small) and direction (over or under) of the variation
from the standard (forecast or budget).
Acceptable Range of Variation

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 Step 3. Taking Managerial Action
• 3 possible courses of action:

1. “Doing nothing”
 Only if deviation is judged to be insignificant.

2. Correcting actual (current) performance

 Immediate corrective action to correct the problem at once to get performance
back on track.
 Basic corrective action looks at how and why performance deviated before
correcting the source of the deviation.

3. Revise the Standard

 In some cases, variance may be a result of an unrealistic standard – a goal that is
too low or too high. In this case, the standard, not the performance – needs
corrective action.
 Controlling for Organizational
Performance
• What Is Performance?
 The end result of an activity

• What Is Organizational
Performance?
 The accumulated end results of all of the
organization’s work processes and activities.

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 Organizational Performance Measures
• Organizational Productivity (or Efficiency)
 Productivity: the overall output of goods and/or services
divided by the inputs needed to generate that output.
 Output: sales revenues
 Inputs: costs of acquiring and transforming resources into outputs

 Ultimately, a measure of how efficiently employees do their

work.

• Organizational Effectiveness
 Measuring how appropriate organizational goals are and how
well the organization is achieving its goals.
 Organizational Effectiveness Measures
Industry and company rankings
Rankings are a popular way for managers to measure their organization’s
performance. These rankings give managers (and others) an indicator
of how well their company performs in comparison to others.
• Industry rankings on:
 Profits
 Return on revenue
 Return on shareholders’
equity
 Growth in profits
 Revenues per employee
 Revenues per dollar of
assets
 Revenues per dollar of
equity
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 Types of controls for controlling organizational performance

• Feedforward Control
 A control that prevents anticipated problems before actual occurrences
of the problem.

• Concurrent Control
 A control that takes place while the monitored activity is in progress.

• Feedback Control
 A control that takes place after an activity is done.
 Corrective action is after-the-fact, when the problem has already
occurred.

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 Feedforward/Concurrent/Feedback Controls

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Tools for Controlling Organizational Performance:

1. Financial Controls

• Every business wants to earn profits. For achieving this goal, managers need financial controls.

• They might analyze financial statements by calculating financial ratios.

• Traditional Controls

 Ratio analysis
 Liquidity - measure an organization’s ability to meet its current debt obligations.

 Leverage - examine the organization’s use of debt to finance its assets and whether it’s
able to meet the interest payments on the debt.

 Activity - assess how efficiently a company is using its assets.

 Profitability - how efficiently and effectively the company is using its assets to generate
profits.

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 2. Information Controls

Managers need the right information at the right time and in the right amount to
monitor and measure organizational activities and performance.

They use information to determine whether deviations are acceptable and also to
develop appropriate courses of action.

Information comes from the organization’s management information system.

• Management Information Systems (MIS)

 A system used to provide management with needed information on a regular
basis.
 Data: an unorganized collection of raw, unanalyzed facts (e.g., unsorted
list of customer names)
 Information: data that has been analyzed and organized such that it has
value and relevance to managers
Controlling Organizational Performance:
Balanced Scorecard

 Balanced Scorecard
 A measurement tool that uses goals set by managers
in four areas to measure a company’s performance:
 Financial
 Customer
 Internalprocesses
 People/innovation/growth assets

 Is intended to emphasize that all of these areas are

important to an organization’s success and that there
should be a balance among them

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 Benchmarking of Best Practices
• Benchmarking
 The search for the best practices among competitors
or non competitors that lead to their superior
performance.
 Benchmark: the standard of excellence against which
to measure and compare.
 A control tool for identifying and measuring specific
performance gaps and areas for improvement.

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 Contemporary Issues in Control
• Corporate Governance

 The system used to govern a corporation so that the interests of the corporate
owners are protected. Two areas where reforms has taken place after some well
known corporate financial scandals are:

(i) Changes in the role of boards of directors – the original purpose of a board of
directors was to have a group, independent from management, looking out for
the interests of the shareholders, who were not involved in the day-to-day
management of the organization. However, it didn’t work that way as board
members had a good relationship with managers in which each took care of the
other. This has now changed.

(ii) Increased scrutiny of financial reporting – New laws have now made it
mandatory for more corporate financial disclosures and transparency. These have
led to information which are more accurate and reflective of a company’s financial
condition.

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 THE ENRON CASE – failure of corporate governance
• The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the 
Enron Corporation, an American energy company based in Houston, Texas, and the
dissolution of Arthur Andersen, which was one of the five largest audit
 and accountancy firms in the world. In addition to being the largest bankruptcy
reorganization in American history at that time, Enron was attributed as the biggest audit
failure.

• Enron was formed in 1985 by Kenneth Lay after merging Houston Natural

Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a
staff of executives that, through the use of accounting loopholes, special purpose
entities, and poor financial reporting, were able to hide billions in debt from failed deals
and projects. Chief Financial Officer Andrew Fastow and other executives not only
misled Enron's board of directors and audit committee on high-risk accounting practices,
but also pressured Andersen to ignore the issues.

• As the depth of the deception unfolded, investors and creditors retreated, forcing the firm
into bankruptcy in December 2001.Shareholders lost nearly $11 billion when Enron's
stock price, which hit a high of US$90 per share in mid-2000, plummeted to less than $1
by the end of November 2001.