Control Systems in an organization - Principles of Management

Within organizations, control can be viewed as the process through which managers regulate the activities of individuals and units so they are consistent with the goals and standards of the organization. As we noted earlier in the book, a goal is a desired future state that an organization attempts to realize. A standard is a performance requirement the organization is meant to attain on an ongoing basis.

As we will see, there are several different ways in which managers can regulate the activities of individuals and units so they remain consistent with organization goals and standards. Before considering these, however, we need to review the workings of a typical control system. As illustrated in Figure, this system has five main elements: establishing goals and standards, measuring performance, comparing performance against goals and standards, taking corrective action, and providing reinforcement.

ESTABLISHING GOALS AND STANDARDS

Most organizations operate with a hierarchy of goals. In the case of a business enterprise, the major goals at the top of the hierarchy are normally expressed in terms of profitability and profit growth. These goals are typically translated into sub goals that can be applied to individuals and units within the organization. A sub goal is an objective that helps the organization attain or exceed its major goals.

As with major goals, sub goals should be precise and measurable, address important issues, be challenging but realistic, and specify a time period To illustrate what we mean by a goal hierarchy, suppose Nordstrom decides to achieve a15 percent return on invested capital (ROIC) in the coming year. This is the company’s major profitability goal.

ESTABLISHING GOALS AND STANDARDS

One way of doing this is to reduce the amount of capital needed to generate a dollar’s worth of sales—perhaps by reducing the amount of capital tied up in inventory. How does the company do that? By turning over inventory more rapidly! Thus Nordstrom might operate with a sub goal of turning over inventory five times in the next year. If it reaches that sub goal, which is precise, measurable, and challenging and must be achieved within a prespecified period, the company’s profitability, measured by ROIC, will increase.

Dell Computer is a good example of a company that adopts a hierarchical approach to goal setting and performance measurement. According to Michael Dell, in an effort to boost performance in the mid-1990s Dell introduced a companywide approach to educate everyone about the importance of boosting profitability as measured by return on invested capital.

“We explained specifically how everyone could contribute (to higher ROIC) by reducing cycle times, eliminating scrap and waste, selling more, forecasting accurately, scaling operations effectively, increasing inventory turns, collecting accounts receivable efficiently, and doing things right the first time. ”4 Dell went further: It made goals relating to these items the core of the company’s control and incentive compensation systems.

Standards are similar to goals in that they too are objectives; but standards tend to be things the organization is expected to achieve as a part of its routine operations rather than a challenging goal it is striving to attain. For example, an organization might operate with a standard that vendors should be paid within 30 days of submitting an invoice, customer inquiries should be answered within 24 hours, all employees should have a formal performance review and be given written feedback once a year, safety checks should be performed on production equipment every six months, or employees should fly coach on business trips.

A key element in the control process is generating the right goals, sub goals, and standards. Managers need to choose goals and standards carefully in case they generate the wrong kind of behavior. There is an old saying: “You get what you measure.” If you choose the wrong goals and standards, you will get the wrong behavior. A few years ago a placement agency decided to evaluate and reward its staff based on how many job seekers they sent to job interviews.

This productivity measure seemed to produce the desired results—over the next few months more job seekers got interviews. However, after a while the numbers started to drop-off alarmingly. When managers looked into the issue, they found that several prospective employers would no longer interview people referred to them by the placement agency. In an effort to hit their numbers, staff members had been sending people to interview for jobs for which they were not qualified.

This had damaged the reputation of the placement agency among prospective employers and reduced business for the agency—the opposite of what managers had been trying to achieve. Managers subsequently changed the measure to reflect the number of job seekers who were actually hired.

A similar example occurred in the customer service call center of a large organization. In an attempt to raise the productivity of call center staff, managers instituted a standard that customer complaints should be resolved within 5 minutes. What happened(predictably perhaps) was that call center staff would cut off customers 4 minutes and 58 seconds into a call, whether the customer problem had been resolved or not! This behavior damaged the company’s reputation for service quality.

Another important consideration when choosing goals into make sure the right goals are assigned to the right individuals and units. A classic mistake is to assign a goal to people who lack the responsibilities and resources required to attain it while not assigning the goal to those who do. In traditional automobile assembly operations, for example, quality goals were assigned to the quality assurance department, which checked finished automobiles for defects when they came off an assembly line.

This might seem logical, but it didn’t work well. The defects were normally built into cars upstream in the manufacturing process, and the quality assurance department could not improve the manufacturing process. Moreover, the people who made the mistakes (the assembly-line employees) were not given quality goals—rather they we reassessed on volume output goals, such as the number of employee hours it took to build afar.

Because they were not measured on quality, they had no incentive to pay attention to quality issues, and defect rates remained high. This problem was fixed only when automobile companies started to make assembly-line workers responsible for product quality.

MEASURING PERFORMANCE

Once goals, sub goals, and standards have been established, performance must be measured against the criteria specified. This is not as easy as it sounds. Information systems have to be put in place to collect the required data; and the data must be compiled into usable form and transmitted to the appropriate people in the organization. Reports summarizing actual performance might be tabulated daily, weekly, monthly, quarterly, or annually.

Wal-Mart, for example, produces weekly reports summarizing the performance of every store across a range of key measures such as profits and inventory turnover. Moreover, some performance metrics, such as store sales, are reported daily. Achieving such comprehensive and timely reporting requires significant investments in information technology. Thus for Nordstrom to measure inventory turnover, bar codes have to be placed on all merchandise, which is scanned when it enters a store and scanned again when it is sold.

The data are loaded onto a central computer that tracks inventory at all Nordstrom stores, and inventory data are communicated to managers and suppliers. To implement such a system, Nordstrom had to invest in computer technology and scanners.

With the massive advances in computing power that have occurred over the last three decades, managers have seemingly infinite quantitative information at their disposal. As advantageous as this is, there is danger in relying too much on quantitative data. Performance measurement has a soft element; the data might not tell the full story. It is in the interests of managers to leave their desks, visit the field, and try to see behind the numbers.

For example, for years Wal-Mart’s data showed that individual stores were hitting profit goals. In the early 2000s, however, a blizzard of lawsuits alleged that some store employees had been pressured to work overtime for no extra pay. Apparently some store managers were hitting their performance goals by resorting to behaviors that were not sanctioned by the company and in fact explicitly violated both the law and the values of the organization. Such behavior could not be detected simply by reviewing quantitative data.

COMPARING PERFORMANCE AGAINST GOALSAND STANDARDS

The next step in the control process is to compare actual performance against goals and standards. If performance is in line with goals or standards, that is good. However, managers need to make sure the reported performance is being achieved in a manner consistent with the values of the organization. If reported performance falls short of goals and standards, managers need to find the reason for the variance. This typically requires collecting more information, much of which might be qualitative data gleaned from face-to-face meetings and detailed probing. The same is true if reported performance exceeds goals or standards.

Managers must find the reasons for such favorable variance, and doing so requires collecting more information. For example, a hobby game company noted that sales of a new game were falling significantly behind sales goals in the United States while exceeding goals in Europe.

To examine these variances, managers met with distributors and retailers to see what was occurring. The U.S. distributor was in financial difficulty and had cut back on its sales force without informing the company: It was not promoting the game to retailers. In contrast, in Europe the major distributor had adopted an aggressive posture, setting up retail displays where potential customers could play the game before purchasing it.

This strategy proved successful. Apparently the game was so unusual that customers were initially put off; but once they played it, many former skeptics became enthusiastic customers. Thus by collecting additional qualitative data, managers found the reason for the variances from goals.

TAKING CORRECTIVE ACTION

Variances from goals and standards require that managers take corrective action. When actual performance easily exceeds a goal, corrective action might include raising the goal. When actual performance falls short of a goal, depending on what further investigation reveals, managers might change strategy, operations, or personnel. After Nordstrom failed to hit its profit goals for three years running, the board of directors fired the CEO and replaced him with member of the founding family, Blake Nordstrom, who at the time was only 39 years old.

Blake Nordstrom led the charge to improve the operating efficiency of the company. His first action was to visit the stores and talk to employees to discover what was going wrong. His actions included putting another family member, James Nordstrom, in charge of revamping Nordstrom’s inventory management system (which he successfully executed).

Radical change is not always the appropriate response when an organization fails to reach major goal. Investigation might reveal that the original goal was too aggressive, or that changes in market conditions outside the control of management accounted for the poor performance. In such cases the response to a shortfall might be to adjust the goal downward.

In the case of the hobby game company just discussed, after discovering the reason for the variance managers terminated the relationship with the U.S. distributor and hired a small sales force to visit retailers. In addition, the company adopted the strategy that had proved so successful in Europe—setting up displays in retail stores so potential customers could play the game. In Europe, managers raised the sales goals.

PROVIDING REINFORCEMENT

If the goals and standards are met or exceeded, managers need to provide timely positive reinforcement to those responsible—congratulations for job well done, awards, pay increases, bonuses, or enhanced career prospects. Providing positive reinforcements just as important an aspect of control system as taking corrective Action.

Behavioral scientists have long known that positive reinforcement increases the probability that those being acknowledged will continue to pursue such behavior in the future. 9 Without positive reinforcement, people become discouraged, feel underappreciated, may not be willing to work as hard, and might look for other employment opportunities where they are better appreciated.


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