Managerial Control

Managerial Control

Control is any process that directs the activities of individuals toward the achievement of organisational goals. Three main types of control exist:

• Bureaucratic control — uses rules, regulations, and authority to guide performance
• Market control — uses pricing mechanisms and economic information to regulate activities
• Clan control — based on norms, values, shared goals, and trust among group members

The Control Cycle

1. Setting performance standards — expected performance targets based on quantity, quality, time, or cost
2. Measuring performance — data from written reports, oral reports, and personal observations
3. Comparing performance to standards — using the principle of exception (focus on significant deviations)
4. Taking corrective action — after-action review asking what was planned, what happened, why it happened, and what to do better

Approaches to Bureaucratic Control

• Feedforward control — before operations begin; policies and procedures ensuring planned activities are carried out
• Concurrent control — while plans are being carried out; directing, monitoring, and fine-tuning
• Feedback control — uses information about previous results to correct deviations

Six Sigma

A powerful application of feedback control. At six sigma, a process produces fewer than 3.4 defects per million opportunities (99.99966% accuracy). Companies achieve close to zero defects, lower production costs, and higher customer satisfaction.

Budgetary Controls

Common budget types: sales, production, cost, cash, capital, and master budgets. Activity-based costing (ABC) identifies streams of activity and allocates costs across business processes based on time employees devote to each activity.

Financial Controls

• Balance sheet — shows assets, liabilities, and stockholders' equity at a given point in time (Assets = Liabilities + Equity)
• Profit and loss statement — itemises income and expenses
• Financial ratios — current ratio (liquidity), debt-equity ratio (leverage), return on investment (ROI)

Management myopia is the danger of focusing on short-term earnings at the expense of long-term strategic obligations.

The Balanced Scorecard

A control system combining four sets of performance measures: Financial, Customer Satisfaction, Business Processes, and Learning and Growth. It prevents management myopia by balancing short- and long-term performance indicators.