Richard L. Daft - Management. 9th ed., 2010

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PART 6 CONTROLLING540

of the contemporary organization.

British Airways, for example, measures its perfor-

mance in key areas of customer service because its strategy is to compete on superior

service in an industry dominated by companies that compete on price. Underpinning

this strategy is a belief that delivery of excellent service will result in higher levels

of customer retention and pro tability. Thus, British Airways measures and controls

areas of customer service that have the greatest impact on a customer’s service expe-

rience, including in- ight service, meal rating, baggage claim, and executive club

membership.

Instead of relying only on  nancial measures to judge the company’s

performance, British Airways uses a number of different operational measures to

track performance and control the organization.

The Balanced Scorecard

Like British Airways, many  rms are now taking a more balanced perspective of

company performance, integrating various dimensions of control that focus on mar-

kets and customers as well as employees and  nancials.

Organizations recognize

that relying exclusively on  nancial measures can result in short-term, dysfunctional

behavior. Non nancial measures provide a healthy supplement to the traditional

 nancial measures, and companies are investing signi cant sums in developing more

balanced measurement systems as a result.

The balanced scorecard is a comprehen-

sive management control system that balances traditional  nancial measures with

operational measures relating to a company’s critical success factors.

A balanced scorecard contains four major perspectives, as illustrated in

Exhibit 18.1:  nancial performance, customer service, internal business processes,

and the organization’s capacity for learning and growth.

Within these four areas,

managers identify key performance metrics the organization will track. The  nancial

performance perspective re ects a concern that the organization’s activities contrib-

ute to improving short- and long-term  nancial performance. It includes traditional

measures such as net income and return on investment. Customer service indicators

measure such things as how customers view the organization, as well as customer

retention and satisfaction. Business process indicators focus on production and oper-

ating statistics, such as order ful llment or cost per order. A good example of busi-

ness process indicators comes from Facebook, one of the fastest-rising dot-coms in

history. One of the internal activities it measures is the number of minutes visi-

tors spend at its site. In March 2008, Facebook visitors spent a whopping 20 billion

minutes at the site, compared to 6.4 billion minutes a year earlier. By measuring

“minutes per visitor,” Facebook is able to track its performance and adjust its strat-

egy in response.

The  nal component of the balanced scorecard looks at the organization’s potential

for learning and growth, focusing on how well resources and human capital are being

managed for the company’s future. Metrics may include such things as employee

retention and the introduction of new products. The components of the scorecard are

designed in an integrative manner, as illustrated in Exhibit 18.1.

Managers record, analyze, and discuss these various metrics to determine how

well the organization is achieving its strategic goals. The balanced scorecard is an

effective tool for managing and improving performance only if it is clearly linked

to a well-de ned organizational strategy and goals.

At its best, use of the score-

card cascades down from the top levels of the organization so that everyone becomes

involved in thinking about and discussing strategy.

The scorecard has become the

core management control system for many organizations, including well-known

organizations such as Bell Emergis (a division of Bell Canada), ExxonMobil, Cigna

Insurance, Hilton Hotels Corporation, and even some units of the U.S. federal gov-

ernment.

As with all management systems, the balanced scorecard is not right for

every organization in every situation. The simplicity of the system causes some man-

agers to underestimate the time and commitment that is needed for the approach to

become a truly useful management control system. If managers implement the bal-

anced scorecard using a performance measurement orientation rather than a performance

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CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 541

Controlling

management approach that links targets and measurements to corporate strategy, use

of the scorecard can actually hinder or even decrease organizational performance.

FEEDBACK CONTROL MODEL

All well-designed control systems involve the use of feedback to determine whether

performance meets established standards. Managers need feedback, for example, in

each of the four categories of the balanced scorecard. British Airways ties its use of the

balanced scorecard to a feedback control model. Scorecards are used as the agenda for

monthly management meetings. Managers focus on the various elements of the score-

card to set targets, evaluate performance, and guide discussion about what further

actions need to be taken.

In this section, we examine the key steps in the feedback

control model and then look at how the model applies to organizational budgeting.

Steps of Feedback Control

Managers set up control systems that consist of the four key steps illustrated in

Exhibit 18.2: Establish standards, measure performance, compare performance to

standards, and make corrections as necessary.

EXHIBIT 18.1 The Balanced Scorecard

SOURCES: Based on Robert S. Kaplan and David P. Norton,“Using the Balanced Scorecard as a Strategic Management System,”Harvard Business Review (January–

February 1996): 75–85; and Chee W. Chow, Kamal M. Haddad, and James E.Williamson,“Applying the Balanced Scorecard to Small Companies,”Management

Accounting 79, no. 2 (August 1997): 21–27.

PART 6 CONTROLLING542

Establish Standards of Performance Within the organization’s overall strategic

plan, managers de ne goals for organizational departments in speci c, operational

terms that include a standard of performance against which to compare organizational

activities. A standard of performance could include “reducing the reject rate from 15

to 3 percent,” “increasing the corporation’s return on investment to 7 percent,” or

“reducing the number of accidents to one per each 100,000 hours of labor.” Manag-

ers should carefully assess what they will measure and how they will de ne it. In

the auto industry, crash test ratings provide a standard of performance established

by the National Highway Traf c Safety Administration. When crash test ratings are

below standard, managers rethink design and manufacturing processes to improve

crash test results. Although Daimler’s ultra-tiny Smart ForTwo car won a Five Star

rating for driver protection, it won just a Three Star rating for passenger protection,

indicating the need for improved passenger safety features.

Tracking such measures as customer service, employee involvement, or, for auto

manufacturers, crash test results, is an important supplement to traditional  nancial

and operational performance measurement, but many companies have a hard time

identifying and de ning non nancial measurements.

To effectively evaluate and

reward employees for the achievement of standards, managers need clear standards

that re ect activities that contribute to the organization’s overall strategy in a sig-

ni cant way. Standards should be de ned clearly and precisely so employees know

what they need to do and can determine whether their activities are on target.

Measure Actual Performance Most organizations prepare formal reports of

quantitative performance measurements that managers review daily, weekly, or

monthly. These measurements should be related to the standards set in the  rst step

of the control process. For example, if sales growth is a target, the organization should

have a means of gathering and reporting sales data. If the organization has identi ed

appropriate measurements, regular review of these reports helps managers stay aware

of whether the organization is doing what it should. Technology is aiding many orga-

nizations in measuring performance. For example, GPS tracking devices installed on

government-issued vehicles are helping many communities reduce waste and abuse,

in part by catching employees shopping, working out at the gym, or otherwise loaf-

ing while on the clock. Although some claim this technology is intrusive, city of cials

claim that tracking the whereabouts of government employees has deterred abuses

and saved taxpayers money. In Denver, 76 vehicles equipped with GPS units were

driven 5,000 fewer miles than the unequipped  eet during the same period the year

before, indicating the value of this type of quantitative measure.

In most companies, managers do not rely exclusively on quantitative measures.

They get out into the organization to see how things are going, especially for such

EXHIBIT 18.2 Feedback Control Model

CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 543

Controlling

goals as increasing employee participation or improving customer satisfaction. Man-

agers have to observe for themselves whether employees are participating in deci-

sion making and have opportunities to add to and share their knowledge. Interaction

with customers is necessary for managers to really understand whether activities are

meeting customer needs.

Compare Performance to Standards The third step in

the control process is comparing actual activities to perfor-

mance standards. When managers read computer reports

or walk through the plant, they identify whether actual per-

formance meets, exceeds, or falls short of standards. Typi-

cally, performance reports simplify such comparisons by

placing the performance standards for the reporting period

alongside the actual performance for the same period and

by computing the variance—that is, the difference between

each actual amount and the associated standard. To correct

the problems that most require attention, managers focus

on variances.

When performance deviates from a standard, manag-

ers must interpret the deviation. They are expected to dig

beneath the surface and  nd the cause of the problem.

If the sales goal is to increase the number of sales calls

by 10 percent and a salesperson achieved an increase of

8 percent, where did she fail to achieve her goal? Perhaps

several businesses on her route closed, additional sales-

people were assigned to her area by competitors, or she

needs training in making cold sales calls more effectively.

Managers should take an inquiring approach to devia-

tions to gain a broad understanding of factors that in u-

ence performance. Effective management control involves

subjective judgment and employee discussions, as well as

objective analysis of performance data.

As a new manager, apply the feedback control model to determine whether

your team is functioning well or if changes are needed. Deﬁ ne clear standards of

performance, measure outcomes regularly, and work with team members to take

corrective actions when necessary.

Take Corrective Action Managers also determine what changes, if any, are

needed. In a traditional top-down approach to control, managers exercise their for-

mal authority to make necessary changes. They may encourage employees to work

harder, redesign the production process, or  re employees. In contrast, managers

using a participative control approach collaborate with employees to determine

the corrective action necessary. As an example, Toyota’s commitment to continuous

improvement is re ected in its philosophy of “Problems First.” In staff meetings, fac-

tory managers are asked to present their “problems  rst,” triggering problem-solving

sessions with managers that generate solutions. This approach re ects the company’s

commitment to seeking out better ways to manufacture cars. “Even with projects that

had been a general success, we would ask, ‘What didn’t go well so we can make it

better?’” says James Wiseman, vice president of corporate affairs for Toyota manufac-

turing in North America.

Managers may wish to provide positive reinforcement when performance meets

or exceeds standards. For example, they may reward a department that has exceeded

its planned goals or congratulate employees for a job well done. Managers should

TakeaMoment

EVAN KAFKA

Is it possible to make scientiﬁ c

discovery efﬁ cient? Managers at pharmaceuticals company Wyeth

think so. They devised a streamlined research and development sys-

tem driven by ambitious, quantiﬁ able standards of performance.

Managers routinely compare performance to standards and issue

automated scorecards for each individual. Wyeth ties compensa-

tion to accomplishment of these all-or-nothing targets. “If the

goal was to discover 12 drugs, 11 drugs are worth no points,” says

Wyeth Research President Robert Ruffolo Jr., who oversaw the reen-

gineering effort. So far, the approach has yielded impressive results.

With no additional investment, Wyeth has seen the number of new

drugs that emerge from the early discovery phase increase fourfold.

PART 6 CONTROLLING544

not ignore high-performing departments at the expense of taking corrective actions

elsewhere. The online auction company eBay provides a good illustration of the feed-

back control model.

As CEO of eBay, one of Meg Whitman's guiding rules was “If you can’t measure it, you can’t

control it.” Whitman has moved on to other pursuits, but eBay is still a company obsessed

with performance measurement. Top managers personally monitor a slew of performance

metrics, including standard measurements such as site visitors, new users, and time spent on

the site, as well as the ratio of eBay’s revenues to the value of goods traded.

Managers and employees throughout the company also monitor performance almost

obsessively. Category managers, for example, have clear standards of performance for their

auction categories (such as sports memorabilia, jewelry and watches, health and beauty, and

fashion). They are constantly measuring, tweaking, and promoting their categories to meet

or outperform the targets.

Top managers believe getting a ﬁ rm grip on performance measurement is essential for

a company to know where to spend money, where to assign more personnel, and which

projects to promote or abandon. But performance measurement isn’t just about numbers.

At eBay, “it’s all about the customer,” and gauging customer (user) satisfaction requires a

mix of methods, such as surveys, monitoring eBay’s discussion boards, and personal contact.

Managers get their chance to really connect with users at the annual eBay Live conference.

There, they wander the convention hall ﬂ oor talking with anyone and everyone about their

eBay experiences.

By de ning standards, using a combination of measurement approaches, and

comparing performance to standards, eBay managers are able to identify trouble

spots and move quickly to take corrective action when and where it’s needed.

Application to Budgeting

Budgetary control, one of the most commonly used methods of managerial control, is

the process of setting targets for an organization’s expenditures, monitoring results

and comparing them to the budget, and making changes as needed. 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.

Go to the experiential exercise on page 561 that pertains to budgetary control.

A budget is created for every division or department within an organization, no

matter how small, as long as it performs a distinct project, program, or function. The

fundamental unit of analysis for a budget control system is called a responsibility

center. A responsibility center is de ned as any organizational department or unit

under the supervision of a single person who is responsible for its activity.

A three-

person appliance sales of ce in Watertown, New York, is a responsibility center, as

is a quality control department, a marketing department, and an entire refrigera-

tor manufacturing plant. The manager of each unit has budget responsibility. Top

managers use budgets for the company as a whole, and middle managers tradition-

ally focus on the budget performance of their department or division. Budgets that

managers typically use include expense budgets, revenue budgets, cash budgets, and

capital budgets.

Expense Budget An expense budget includes anticipated and actual expenses for

each responsibility center and for the total organization. An expense budget may

show all types of expenses or may focus on a particular category, such as materi-

als or research and development expenses. When actual expenses exceed budgeted

amounts, the difference signals the need for managers to identify whether a problem

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CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 545

Controlling

exists and take corrective action if needed. The difference may arise from inef ciency,

or expenses may be higher because the organization’s sales are growing faster than

anticipated. Conversely, expenses below budget may signal exceptional ef ciency

or possibly the failure to meet some other standards, such as a desired level of sales

or quality of service. Either way, expense budgets help identify the need for further

investigation but do not substitute for it.

Revenue Budget A revenue budget lists forecasted and actual revenues of the

organization. In general, revenues below the budgeted amount signal a need to

investigate the problem to see whether the organization can improve revenues. In

contrast, revenues above budget would require determining whether the organiza-

tion can obtain the necessary resources to meet the higher-than-expected demand for

its products or services. Managers then formulate action plans to correct the budget

variance.

Cash Budget The cash budget estimates receipts and expenditures of money on

a daily or weekly basis to ensure that an organization has suf cient cash to meet its

obligations. The cash budget shows the level of funds  owing through the organiza-

tion and the nature of cash disbursements. If the cash budget shows that the  rm

has more cash than necessary to meet short-term needs, the company can arrange

to invest the excess to earn interest income. In contrast, if the cash budget shows a

payroll expenditure of $20,000 coming at the end of the week but only $10,000 in the

bank, the organization must borrow cash to meet the payroll.

Capital Budget The capital budget lists planned investments in major assets such

as buildings, heavy machinery, or complex information technology systems, often

involving expenditures over more than a year. Capital expenditures not only have

a large impact on future expenses, they also are investments designed to enhance

pro ts. Therefore, a capital budget is necessary to plan the impact of these expen-

ditures on cash  ow and pro tability. Controlling involves not only monitoring the

amount of capital expenditures but also evaluating whether the assumptions made

about the return on the investments are holding true. Managers can evaluate whether

continuing investment in particular projects is advisable, as well as whether their

procedures for making capital expenditure decisions are adequate. Some companies,

including Boeing, Merck, Shell, United Technologies, and Whirlpool, evaluate capital

projects at several stages to determine whether they are still in line with the com-

pany’s strategy.

Budgeting is an important part of organizational planning and control. Many tradi-

tional companies use top-down budgeting, which means that the budgeted amounts

for the coming year are literally imposed on middle- and lower-level managers.

These managers set departmental budget targets in accordance with overall com-

pany revenues and expenditures speci ed by top executives. Although the top-down

process provides some advantages, the movement toward employee empowerment,

participation, and learning means that many organizations are adopting bottom-up

budgeting, a process in which lower-level managers anticipate their departments’

resource needs and pass them up to top management for approval.

Companies of

all kinds are increasingly involving line managers in the budgeting process. At the

San Diego Zoo, scientists, animal keepers, and other line managers use software and

templates to plan their department’s budget needs because, as CFO Paula Brock says,

“Nobody knows that side of the business better than they do.”

Each of the 145 zoo

departments also does a monthly budget close and reforecast so that resources can

be redirected as needed to achieve goals within budget constraints. Thanks to the

bottom-up process, for example, the zoo was able to quickly redirect resources to

protect its valuable exotic bird collection from an outbreak of a highly infectious bird

disease without signi cantly damaging the rest of the organization’s budget.

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PART 6 CONTROLLING546

FINANCIAL CONTROL

In every organization, managers need to watch how well the organization is per-

forming  nancially. Not only do  nancial controls tell whether the organization is

on sound  nancial footing, but they can be useful indicators of other kinds of perfor-

mance problems. For example, a sales decline may signal problems with products,

customer service, or sales force effectiveness.

Financial Statements

Financial statements provide the basic information used for  nancial control of an

organization. Two major  nancial statements—the balance sheet and the income

statement—are the starting points for  nancial control.

The balance sheet shows the  rm’s  nancial position with respect to assets and liabil-

ities at a speci c point in time. An example of a balance sheet is presented in Exhibit 18.3.

The balance sheet provides three types of information: assets, liabilities, and owners’

equity. Assets are what the company owns, and they include current assets (those that

can be converted into cash in a short time period) and  xed assets (such as buildings and

equipment that are long term in nature). Liabilities are the  rm’s debts, including both cur-

rent debt (obligations that will be paid by the company in the near future) and long-term

debt (obligations payable over a long period). Owners’ equity is the difference between

assets and liabilities and is the company’s net worth in stock and retained earnings.

The income statement, sometimes called a pro t-and-loss statement or P&L for

short, summarizes the  rm’s  nancial performance for a given time interval, usu-

ally one year. A sample income statement is shown in Exhibit 18.4. Some organi-

zations calculate the income statement at three-month intervals during the year to

see whether they are on target for sales and pro ts. The income statement shows

revenues coming into the organization from all sources and subtracts all expenses,

including cost of goods sold, interest, taxes, and depreciation. The bottom line indi-

cates the net income—pro t or loss—for the given time period.

The owner of Aahs!, a specialty retailing chain in California, used the income state-

ment to detect that sales and pro ts were dropping signi cantly during the summer

months.

He immediately evaluated company activities and closed two money-losing

New Creations Landscaping

Consolidated Balance Sheet

December 31, 2009

Assets Liabilities and Owners’ Equity

Current assets: Current liabilities:

Cash $ 25,000 Accounts payable $200,000

Accounts receivable 75,000 Accrued expenses 20,000

Inventory 500,000 Income taxes payable 30,000

Total current assets $ 600,000 Total current liabilities $ 250,000

Fixed assets: Long-term liabilities:

Land 250,000 Mortgages payable 350,000

Buildings and ﬁ xtures 1,000,000 Bonds outstanding 250,000

Less depreciation 200,000 Total long-term liabilities $ 600,000

Total ﬁ xed assets 1,050,000 Owners’ equity:

Common stock 540,000

Retained earnings 260,000

Total owners’ equity 800,000

Total assets $1,650,000 Total liabilities and net worth $1,650,000

EXHIBIT 18.3 Balance Sheet

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CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 547

Controlling

stores. He also began a training program to teach employees how to increase sales and

cut costs to improve net income. This use of the income statement follows the control

model described in the previous section, beginning with setting targets, measuring actual

performance, and then taking corrective action to improve performance to meet targets.

Financial Analysis: Interpreting the Numbers

A manager needs to be able to evaluate  nancial reports that compare the organiza-

tion’s performance with earlier data or industry norms. These comparisons enable

the manager to see whether the organization is improving and whether it is com-

petitive with others in the industry. The most common  nancial analysis focuses on

ratios, statistics that express the relationships between performance indicators such

as pro ts and assets, sales, and inventory. Ratios are stated as a fraction or propor-

tion; Exhibit 18.5 summarizes some  nancial ratios, which are measures of an organi-

zation’s liquidity, activity, pro tability, and leverage. These ratios are among the most

common, but many measures are used. Managers decide which ratios reveal the most

important relationships for their business.

Liquidity Ratios A liquidity ratio indicates an organization’s ability to meet its

current debt obligations. For example, the current ratio (current assets divided by cur-

rent liabilities) tells whether the company has suf cient assets to convert into cash

to pay off its debts, if needed. If a hypothetical company, Oceanographics, Inc., has

current assets of $600,000 and current liabilities of $250,000, the current ratio is 2.4,

meaning it has suf cient funds to pay off immediate debts 2.4 times. This level for the

current ratio is normally considered a satisfactory margin of safety.

New Creations Landscaping

Income Statement

For the Year Ended December 31, 2009

Gross sales $3,100,000

Less sales returns 200,000

Net sales $2,900,000

Less expenses and cost of goods sold:

Cost of goods sold 2,110,000

Depreciation 60,000

Sales expenses 200,000

Administrative expenses 90,000 2,460,000

Operating proﬁ t 440,000

Other income 20,000

Gross income 460,000

Less interest expense 80,000

Income before taxes 380,000

Less taxes 165,000

Net income $ 215,000

EXHIBIT 18.4

Income Statement

EXHIBIT 18.5

Common Financial Ratios

Liquidity Ratios

Current ratio Current assets/Current liabilities

Activity Ratios

Inventory turnover

Conversion ratio

Total sales/Average inventory

Purchase orders/Customer inquiries

Proﬁ tability Ratios

Proﬁ t margin on sales

Gross margin

Return on assets (ROA)

Net income/Sales

Gross income/Sales

Net income/Total assets

Leverage Ratios

Debt ratio Total debt/Total assets

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PART 6 CONTROLLING548

Activity Ratios An activity ratio measures internal performance with respect to key

activities de ned by management. For example, inventory turnover is calculated by

dividing total sales by average inventory. This ratio tells how many times the inven-

tory is used up to meet the total sales  gure. If inventory sits too long, money is wasted.

Dell Inc. achieved a strategic advantage by minimizing its inventory costs. Dividing

Dell’s annual sales by its small inventory generates an inventory turnover rate of 35.7.

Another type of activity ratio, the conversion ratio, is purchase orders divided by cus-

tomer inquiries. This ratio is an indicator of a company’s effectiveness in converting

inquiries into sales. For example, if Cisco Systems moves from 26.5 to 28.2 percent con-

version ratio, more of its inquiries are turned into sales, indicating better sales activity.

Proﬁ tability Ratios Managers analyze a company’s pro ts by studying pro t-

ability ratios, which state pro ts relative to a source of pro ts, such as sales or assets.

One important pro tability ratio is the pro t margin on sales, which is calculated as

net income divided by sales. Similarly, gross margin is the gross (before-tax) pro t

divided by total sales. Managers at Tesco.com, the online grocery service of Britain’s

top supermarket chain, pay close attention to the pro t margin. Tesco.com managers

implemented strict  nancial controls from the beginning. The online division was

immediately pro table, earning about $6 on the average online sale, whereas U.S.-

based Webvan, which eventually failed, lost about $100 per sale because of its huge

start-up costs and high operating expenses.

Another pro tability measure is return on total assets (ROA), which is a percentage

representing what a company earned from its assets, computed as net income divided

by total assets. ROA is a valuable yardstick for comparing a company’s ability to gener-

ate earnings with other investment opportunities. In basic terms, the company should

be able to earn more by using its assets to operate the business than it could by putting

the same investment in the bank. Caterpillar Inc., which produces construction and min-

ing equipment, uses return on assets as its main measure of performance. It sets ROA

standards for each area of the business and uses variances from the standards to iden-

tify whether the company is fully using its assets and improving operational ef ciency.

Since it began using ROA standards, Caterpillar has enjoyed double-digit returns.

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. However,

too much borrowing can put the organization at risk such that it will be unable to keep up

with repayment of its debt. Managers therefore 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.

THE CHANGING PHILOSOPHY OF CONTROL

Managers’ approach to control is changing in many of today’s organizations. In con-

nection with the shift to employee participation and empowerment, many companies

are adopting a decentralized rather than a hierarchical control process. Hierarchical con-

trol and decentralized control represent different philosophies of corporate culture,

which was discussed in Chapter 3. Most organizations display some aspects of both

hierarchical and decentralized control, but managers generally emphasize one or the

other, depending on the organizational culture and their own beliefs about control.

Hierarchical versus Decentralized Approaches

Hierarchical control involves monitoring and in uencing employee behavior

through extensive use of rules, policies, hierarchy of authority, written documen-

tation, reward systems, and other formal mechanisms.

In contrast, decentralized

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CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 549

Controlling

control relies on cultural values, traditions, shared beliefs, and trust to foster compli-

ance with organizational goals. Managers operate on the assumption that employees

are trustworthy and willing to perform effectively without extensive rules and close

supervision.

Exhibit 18.6 contrasts the use of hierarchical and decentralized methods of con-

trol. Hierarchical methods de ne explicit rules, policies, and procedures for employee

behavior. Control relies on centralized authority, the formal hierarchy, and close

personal supervision. Responsibility for quality control rests with quality control

inspectors and supervisors rather than with employees. Job descriptions generally

are speci c and task related, and managers de ne minimal standards for acceptable

employee performance. In exchange for meeting the standards, individual employ-

ees are given extrinsic rewards such as wages, bene ts, and possibly promotions up

the hierarchy. Employees rarely participate in the control process, with any partici-

pation being formalized through mechanisms such as grievance procedures. With

hierarchical control, the organizational culture is somewhat rigid, and managers do

not consider culture a useful means of controlling employees and the organization.

Technology often is used to control the  ow and pace of work or to monitor employ-

ees, such as by measuring the number of minutes employees spend on phone calls or

how many keystrokes they make at the computer.

Hierarchical control techniques can enhance organizational ef ciency and

effectiveness. Many employees appreciate a system that clari es what is expected

of them, and they may be motivated by challenging, but achievable goals.

How-

ever, although many managers effectively use hierarchical control, too much con-

trol can back re. Employees resent being watched too closely, and they may try

to sabotage the control system. One veteran truck driver expressed his unhappi-

ness with electronic monitoring to a Wall Street Journal reporter investigating the

use of devices that monitor truck locations. According to the driver, “It’s getting

worse and worse all the time. Pretty soon they’ll want to put a chip in the drivers’

ears and make them robots.” He added that he occasionally escapes the relentless

monitoring by parking under an overpass to take a needed nap out of the range of

the surveillance satellites.

Hierarchical Control Decentralized Control

Basic Assumptions People are incapable of self-discipline and can-

not be trusted. They need to be monitored and

controlled closely.

People work best when they are fully committed to the

organization.

Actions Uses detailed rules and procedures; formal

control systems.

Uses top-down authority, formal hierarchy,

position power, quality control inspectors.

Relies on task-related job descriptions.

Emphasizes extrinsic rewards (pay, beneﬁ ts,

status).

Features rigid organizational culture; distrust of

cultural norms as means of control.

Features limited use of rules; relies on values, group

and self-control, selection, and socialization.

Relies on ﬂ exible authority, ﬂ at structure, expert power;

everyone monitors quality.

Relies on results-based job descriptions; emphasizes

goals to be achieved.

Emphasizes extrinsic and intrinsic rewards (meaningful

work, opportunities for growth).

Features adaptive culture; culture recognized as means

for uniting individual, team, and organizational goals

for overall control.

Consequences Employees follow instructions and do just what

they are told.

Employees feel a sense of indifference toward

work.

Employee absenteeism and turnover is high.

Employees take initiative and seek responsibility.

Employees are actively engaged and committed to their

work.

Employee turnover is low.

SOURCES: Based on Naresh Khatri, Alok Bavega, Suzanne A. Boren, and Abate Mammo, “Medical Errors and Quality of Care: From Control to Commitment,” California

Management Review 48, no. 3 (Spring, 2006): 118; Richard E. Walton, “From Control to Commitment in the Workplace,” Harvard Business Review (March–April 1985): 76–84;

and Don Hellriegel, Susan E. Jackson, and John W. Slocum, Jr., Management, 8th ed. (Cincinnati, Ohio: South-Western, 1999), p. 663.

EXHIBIT 18.6 Hierarchical and Decentralized Methods of Control