Methods of Control - Principles of Management

Now that we have a clear idea of how a control system works, we can look at the different ways in which managers can regulate the activities of individuals and units so that they are consistent with organization goals and standards. Here we review six main ways of achieving control: personal controls, bureaucratic controls, output controls, cultural controls, control through incentives, and market controls.

Personal Control System

PERSONAL CONTROLS

As the name suggests, personal control is control by personal contact with and direct supervision of subordinates. Personal control consists of making sure through personal inspection and direct supervision that individuals and units behave in a way that is consistent with the goals of the organization. Personal control can be very subjective, with the manager assessing how well subordinates are performing by observing and interpreting their behavior.

As a philosophy for control within an organization, personal control tends to be found primarily in small firms where the activities of a few people might be regulated through direct oversight. Bits nature personal control tends to be associated with the centralization of power and authority in a key manager, who is often the owner of the small business. Personal control may work best when this key manager is a charismatic individual who can command the personal allegiance of subordinates.

Personal control has serious limitations. For one thing, excessive supervision can bed motivating. Employees may resent being closely supervised and may perform better withal greater degree of personal freedom. Moreover, the subjective nature of personal control can create a lack of objectivity and procedural justice in the performance review process.

Subordinates may feel that favoritism, personal likes and dislikes, and individual idiosyncrasies are as important in performance reviews as actual performance. Personal control is also costly in that managers must devote considerable time and attention to direct supervision of subordinates, which takes their attention away from other important issues. The real problem with personal control, however, is that it starts to break down as an organization grows in size and complexity.

As this occurs, the key manager has no choice but to decentralize decision making to others within the hierarchy if the enterprise is to continue growing. Doing so effectively requires the adoption of different control philosophies.

However, even in large organizations some limited personal control is still used, although typically as an adjunct toothier control methods. For example, while relying on objective metrics to monitor performance, the CEO may also use personal control to shape the behavior of his or her immediate subordinates. In turn, these managers may use personal controlling addition to other control methods to influence the behavior of their subordinates, and so on down through the organization.

Jack Welch, the longtime CEO of General Electric, had regular one-on-one meetings with the heads of all forge’s major businesses. He used these meetings to probe the managers about the strategy, structure, and financial performance of their operations and to communicate to his subordinates the importance of certain key values. In doing shoe exercised some personal control over these managers and undoubtedly over the strategies they favored.

At the sometime, managers like Welch also give their subordinates considerable autonomy, reviewing their performance by looking at objective measures such as the performance of the units under their control.

BUREAUCRATIC CONTROLS

The great German sociologist Max Weber was the first to describe the nature of bureaucratic controls. Writing in the early 20th century, Weber described how bureaucratic organizations emerged as a rational and efficient response to the problems of organizing large -scale economic and social activity. According to Weber, bureaucracies are goal-oriented organizations characterized by hierarchical management systems and extensive division of labor into specialized tasks.

Weber saw control within a bureaucracy as being achieved by impersonal written rules and standardized procedures. Advancement within such organizations, according to Weber, was based on the ability of an individual to perform well against predetermined standards. Following Weber, bureaucratic control is typically defined as control through a formal system of written rules and procedures.

Bureaucratic control methods rely primarily on prescribing what individuals and units can and cannot do—that is, on establishing bureaucratic standards. At the University of Washington, for example, a bureaucratic standard specifies that faculty members can perform no more than one day a week of outside work. Other standards articulate the steps to be taken when hiring and promoting faculty, purchasing computer equipment for faculty, and so on.

Almost all large organizations use some bureaucratic controls. Familiar examples are budgetary controls and controls over capital spending. Budgets are essentially a set of rules for allocating an organization’s financial resources. A subunit’s budget specifies with some precision how much the unit may spend and how that spending should be allocated across different areas. Senior managers in an organization use budgets to control the behavior of subunits.

For example, an R&D budget might specify how much an R&D unit can spend on product development in the coming year. R&D managers know that if they spend too much on one project, they will have less to spend on others; so they modify their behavior to stay within the budget. Most budgets are set by negotiation between headquarters and subunit managers.

Headquarters managers can encourage the growth of certain subunits and restrict the growth of others by manipulating their budgets. Similarly, capital spending rules might require senior managers to approve any capital expenditure by a subunit that exceeds a certain amount. (A budget lets headquarters specify the total amount a subunit can spend in a given year, whereas capital spending rules give headquarters additional control over how that money is spent.)

Headquarters can be expected to deny approval for capital spending requests that are at variance with the overall goals of the enterprise and to approve those that are congruent with enterprise objectives. As you should realize by now, although the term bureaucratic often has negative connotations, in fact bureaucratic control methods can be useful in organizations. They allow managers to decentralize decision making within the constraints specified by formal rules and procedures.

However, too great a reliance on bureaucratic rules can lead to problems. Excessively formal rules and procedures can be stifling, limiting the ability of individuals and units to respond in flexible way to specific circumstances. This can sour performance and sap the motivation of those who value individual freedom and initiative. As such, extensive bureaucratic control methods are not well suited to organizations facing dynamic, rapidly changing environments or to organizations that employ skilled individuals who value autonomy.

The costs of monitoring the performance of individuals and units to make sure they comply with bureaucratic rules can also be significant and may outweigh the benefits of establishing extensive rules and standards.

Bureaucratic standards can also lead to unintended consequences if people try to find ways around rules that they think are unreasonable. An interesting and controversial case is forced school busing in the United States. In the 1970s school districts around America started to bus children to schools outside their immediate neighborhoods to achieve a better racial mix. This well-intentioned bureaucratic rule was designed to speed racial integration in a society characterized by significant racial discrimination.

Unfortunately the rule had unintended consequences. Parents of all races objected to their children being bused to distant schools. Inman large cities where forced busing was practiced, white families with children responded by fleeing to suburbs where there were few minorities and busing was not practiced, or by sending their children to expensive private schools within the city. As a result, rather than advancing racial integration, busing had the opposite effect.

For example, in Seattle the percentage of white students in city schools dropped from 60 percent to 41 percent over the 20 years Of forced busing. 14 In the 1990s most school districts ended forced busing.

OUTPUT CONTROLS

Output controls can be used when managers can identify tasks that are complete in themselves in the sense of having a measurable output or criterion of overall achievement that is visible. For example, the overall achievement of an automobile factory might be measured by the number of employee hours required to build a car (a measure of productivity) and the number of defects found per 100 cars produced by the factory (a measure of quality).

Similarly, Nordstrom measures the overall achievement of the unit responsible for inventory management by the number of inventory turns per year, and FedEx measures the performance of each of its local stations in its express delivery network by the percentage of packages delivered before 10:30a.m. In a multibusiness company such as GE or 3M, senior management might measure the output of a product division in terms of that division’s profitability and profit growth.

When complete tasks can be identified, output controls are goals set for units or individuals to achieve; performance is monitored against those goals. Unit managers’ performances then judged by their ability to achieve the goals.

If goals are met or exceeded, unit managers will be rewarded (an act of reinforcement). If goals are not met, senior managers will normally intervene to find out why and take appropriate corrective action. Thus, as in a classic control system, control is achieved by comparing actual performance against targets, providing reinforcement, and intervening selectively to take corrective action.

The goals assigned to units depend on their role in the firm. Self-contained product divisions are typically given goals for profitability and profit growth. Functions are more likely tube given goals related to their particular activity. Thus R&D will be given product development goals, production will be given productivity and quality goals, marketing will be given market share goals, and so on.

As with budgets, output goals are normally established through negotiation between units and senior managers at headquarters. Generally headquarters tries to set goals that are challenging but realistic so unit managers are forced to look for ways to improve their operations—but not so pressured that they will resort to dysfunctional behavior. Output controls foster a system of “management by exception” in that so long as units meet their goals, unit managers are granted considerable autonomy.

If a unit fails to attain its goals, however, headquarters managers are likely to ask questions. If they don’t get satisfactory answers, they are likely to intervene in aunt, perhaps by replacing managers and looking for ways to improve efficiency. The great virtue of output controls is that they facilitate decentralization and give individual managers within units much greater autonomy than either personal controls or bureaucratic controls.

This autonomy lets managers within a unit configure their work environment to match the particular contingencies they face, rather than having a work environment imposed from above. Thus output controls are useful when units have to respond rapidly to changes in the markets they serve. Output controls also involve less extensive monitoring than either bureaucratic or personal controls.

Senior managers can achieve control by comparing actual performance against targets and intervening selectively. As such, output controls reduce the workload on senior executives and allow them to manage a larger and more diverse organization with relative ease. Thus many large multiproduct and multinational enterprises rely heavily on output controls in their various product divisions and foreign subsidiaries.

Like personal and bureaucratic controls, output controls have limitations. First, as noted earlier when we discussed control systems, senior managers need to look behind the numbers to make sure unit managers are achieving goals in a way that is consistent with the values of the organization. Second, as also noted earlier, managers need to choose the right output criteria to measure lest they encourage dysfunctional behavior.

Third, output controls do not always work well if there are extensive interdependencies between units. The performance of a unit may be ambiguous if it is based on cooperation with other units. To illustrate this problem, consider the case of a diversified enterprise—PDN Inc.—that has three product divisions making three different products: paper towels, disposable diapers, and napkins.

Initially the head office places each product into a self-contained product division, each with its own functions, and assigns each division a profitability target. Atthis point the output controls work well. However, all three divisions sell to the same customers, supermarkets. Imagine that these customers don’t want to deal with three different sales forces from the same company, so they pressure PDN Inc. to consolidate its sales force. PDN responds by creating a fourth division that is responsible for marketing and selling the three products to supermarkets .

The three product divisions are still assigned profitability goals,hereas the marketing and sales division is evaluated on the basis of sales growth. All this seems reasonable; but now consider what occurs if the disposable diaper business fails to reach its profitability target for the year, and the marketing division misses its sales target for diapers. Top management asks the head of the diaper division to explain why this has occurred. He replies, “It’s not my fault; my division executed well, but the guys in the marketing division screwed up.

OUTPUT CONTROLS

OUTPUT CONTROLS

I gave them a great product, and they didn’t sell it well.” Next the top managers ask the head of the marketing division what the problem was. She says, “My people did everything expected of them and more, but we were dealt a poor hand. The diaper division produced a poor-quality product that cost too much, and try as we might we could not sell enough to hit our sales goal.”

The interdependence between the diaper division and the marketing division has created performance ambiguity. Performance ambiguity occurs when it is difficult to identify the cause of poor (or strong) performance—that is, when the link between cause and effect is ambiguous. Performance ambiguity means senior managers cannot effectively control the division simply by relying on obvious output controls.

They have to discover the true causes of poor or strong performance. In this case, because the statements from the two divisional executives contradict each other, top managers have no choice but to audit the operations of both divisions, collecting more information, to determine the true cause of the poor performance.

This of course can be done, but doing so increases the costs of controlling the organization. Thus, in general, interdependence between units within an organization can create performance ambiguities that make output controls more difficult to interpret. Resolving these ambiguities requires managers to collect more information, which places more demand son top management and raises the monitoring costs associated with output controls.

It also increases the possibility that managers will become overloaded with information, run into the constraints implied by bounded rationality, and fall back on simple heuristics when making decisions, which can lead to cognitive biases

CULTURAL CONTROL

As noted already, organizational culture consists of the values and assumptions that are shared among employees of an organization. Cultural control involves regulating behavior by socializing employees so that they internalize the values and assumptions of the organization and act in a manner that is consistent with them. When this occurs, employees tend to engage in self-control —they regulate their own behavior so that it is congruent with organizational goals.

In enterprises with a strong culture where the values and assumptions of the organization are accepted by most employees and self-control is widely practiced, the need for other control systems, and particularly extensive personal and bureaucratic controls, is correspondingly reduced. By encouraging self-control, cultural controls reduce the monitoring costs associated with managing an organization.

We could say Nucor uses cultural controls to regulate behavior within the organization. Nucor is not alone. Microsoft, for example, has a very strong culture that was set by the company’s founder, Bill Gates. Gates always placed a high value on technical brilliance, competitiveness, and a willingness to work long hours, something that he himself did (as did Steve Ballmer, the current CEO). Gates and Ballmer hired people who shared these characteristics and then led by example.

As a result, today Microsoft remains a company where technical brilliance and competitiveness are highly valued and where people work long hours—not because any bureaucratic rules tell them to do so, and not because supervisors explicitly require them to do so, but because new employees are socialized into these norms by their coworkers, who themselves were thus socialized in the past.

At Microsoft cultural control has reduced the need for bureaucratic and personal controls. The company can trust people to work hard and to behave in a verycompetitive manner because this is such a pervasive aspect of the culture.

Although cultural control can mitigate the need for other controls, thereby reducing monitoring costs, it is not universally beneficial. Cultural control can have dysfunctional aspects too. The hard-driving, competitive aspect of Microsoft’s culture was arguably a contributing factor in the antitrust violations of which the company was accused in the 1990s (the U.S. Justice Department, which brought the antitrust case against Microsoft in the United States, used as evidence internal e-mail messages at Microsoft in which one senior manager stated that Microsoft would “cut off a competitor’s air supply”).

Moreover, Microsoft’s culture of working long hours clearly has a downside: Many good employees have burned out and left the company. The company is aware of this; and as its workforce has aged and started families, it has tried to become more accommodating, stressing that output is more important than hours worked. However, culture is difficult to change, and therein lies the problem: If cultural controls need to be changed, it may not be easy to do so.

CONTROL THROUGH INCENTIVES

Incentives are devices used to encourage and reward appropriate employee behavior. Many employees receive incentives in the form of annual bonus pay. Incentives are usually closely tied to the performance metrics used for output controls. For example, targets linked to profitability might be set to measure the performance of a subunit, such as a product division. To create positive incentives for employees to work hard to exceed those targets, they may be given a share of any profits above those targeted.

If a subunit has set a goal of 15 percent return on invested capital and it actually achieves a 20 percent return, unit employees may be given a share in the profits generated in excess of the 15 percent target in the form of bonus pay. The idea is that giving employees incentives to work productively cuts the need for other control mechanisms. Control through incentives is designed to facilitate self-control —employees regulate their own behavior in a manner consistent with organizational goals to maximize their chance of earning incentive-based pay.

Although paying out bonuses and the like costs the organization money, well- designed incentives typically pay for themselves. Thetis, the increase in performance due to incentives more than offsets the incentives’ costs. The type of incentive used may vary depending on the employees and their tasks. Incentives for employees working on the factory floor will probably differ from the ones for senior managers.

The incentives used must match the type of work performed. The employee son the factory floor of a manufacturing plant may be broken into teams of 20 to 30individuals, and they may have their bonus pay tied to the ability of their team to reach or exceed targets for output and product quality. In contrast, the senior managers of the plant may be rewarded according to metrics linked to the output of the entire operation.

The basic principle is to make sure the incentive scheme for an individual employees linked to an output target over which he or she has some control. Individual employees on the factory floor may note able to influence the performance of the entire operation, but they can influence the performance of their team, so incentive pay is tied to output at this level. When incentives are tied to team performance they have the added benefit of encouraging cooperation between team members and fostering a degree of peer control.

Peer control occurs when employees pressure others within their team or work group to perform up to or in excess of the expectations of the organization. 18 Thus if the incentive pay of a20-person team is linked to team output, team members cane expected to pressure those in the team who are perceived as slacking off, urging them to pick up the pace and make unequal contribution to team effort. Strong peer control reduces the need for direct supervision of a team and can facilitate attempts to move toward a flatter management hierarchy.

In sum, incentives can reinforce output controls, induce employees to practice self- control, increase peer control, and lower the need for other control mechanisms. Like all other control methods discussed here, control through incentives has limitations. Because incentives are typically linked to the metrics used in output controls, the points made about output controls also apply here. Specifically, managers need to make sure incentives are not tied to output metrics that result in unintended consequences or dysfunctional behavior.

Moreover, incentive systems have been abused in some firms, with senior managers being awarded incentive contracts that set the performance bar so low that they earn significant bonus pay, irrespective of whether there is a substantial improvement in the performance of the organization.

In 2004,for example, the CEO of Blockbuster Inc. earned $56.8 million in pay and bonuses (an increase of 541 percent over 2003) in a year when the operating income of Blockbuster fell 50 percent and its share price declined by 47 percent! In part this was achieved because the board of directors replaced 4.3 million of his stock options—which were worthless because the exercise price for them was significantly above the current stock price—with an outright grant of 1.6 million shares of stock as a “retention measure".

Incentives like these seem to reward senior managers for mediocre performance or worse, and as such they are not worthy of being called incentives. As an aside, it is worth noting that due to massive boosts in incentive pay, in 2004 the average CEO of an American public company earned 400 times what the average hourly worker took home, up from 42 times since 1980. Looking at these figures, many commentators have argued that senior managers have benefited from an abuse of incentive pay and are reaping huge gains at the expense of other employees and shareholders.

MARKET CONTROLS

Market controls involve regulating the behavior of individuals and units within an enterprise by setting up an internal market for some valuable resource such as capital. 20 Market controls are usually found within diversified enterprises organized into product divisions, where the head office might act as an internal investment bank, allocating capital funds between the competing claims of the different product divisions based on an assessment of their likely future performance.

Within this internal market, all cash generated by the divisions is viewed as belonging tithe head office. The divisions then have to compete for access to the capital resources controlled by the head office. Because they need that capital to grow their divisions, the assumption is that this internal competition will drive divisional managers to look forays to improve the efficiency of their units.

One of the first companies in the world to establish an internal capital market was the Japanese electronics manufacturerMatsushita (best known for its Panasonic brand name), which introduced such systems in the1930s. In addition, in some enterprises divisions compete for the right to develop and sell new products. Again, Matsushita has a long history of letting different divisions develop similar new products, then assigning overall responsibility for producing and selling the product to the division that seems to be furthest along in the commercialization process.

Although some people might view such duplication of product development effort as wasteful, Matsushita’slegendary founder, Konosuke Matsushita, believed that the creation of an internal market for the right to commercialize technology drove divisional managers to maximize the efficiency of product development efforts within their unit. Similarly, within Samsung, the Korean electronics company, senior managers often set up two teams within different units to develop new products such as memory chips.

The purpose of the internal competition between the teams is to accelerate the product development process, with the winning team earning significant accolades and bonuses. The main problem with market controls is that fostering internal competition between divisions for capital and the right to develop new products can make it difficult to establish cooperation between divisions for mutual gain.

If two different divisions are racing against each other to develop similar new products and are competing against each other for limited capital resources, they may be unwilling to share technological know-how with each other, perhaps to the detriment of the entire corporation. Companies like Samsung deal with this problem by using integrating mechanisms, such as the liaison role, and assigning the responsibility for leveraging technological know-how across divisions to key individuals.

SUMMARY

To recap, managers can use six different control methods to regulate the behavior of individuals and units within their organization: personal controls, bureaucratic controls, output controls, cultural controls, incentive controls, and market controls. In practice, few managers rely on just one control method.

Most organizations mix methods to achieve control. Some personal controls might be used to manage relationships with direct reports; bureaucratic controls are frequently used to set standards for budgets and capital spending; output controls aroused for relatively self-contained units that produce a measurable output; and incentives may also be tied to the metrics used for output controls.

Both cultural and incentive controls can induce employees to regulate their own behavior in a manner that is consistent with the goals of the organization, and market controls might help allocate capital resources between competing divisions within diversified enterprises. Each control method has advantages and disadvantages. As we will see in the next section, the choice between different methods has to be made in light of prevailing circumstances.


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