Richard L. Daft - Management. 9th ed., 2010
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PART 6 CONTROLLING560
capital budgets. Other nancial controls include use of the balance sheet, income
statement, and nancial analysis of these documents.
▪ The philosophy of controlling has shifted to re ect changes in leadership
methods. Traditional hierarchical controls emphasize establishing rules and
procedures, then monitoring employee behavior to make sure the rules and pro-
cedures are followed. With decentralized control, employees assume responsibil-
ity for monitoring their own performance.
▪ Open-book management is used in decentralized organizations to share with
all employees the nancial condition of a company. Open-book management
encourages active participation in achieving organizational goals, helps the
employee understand how his or her job affects the nancial success of the orga-
nization, and allows employees to see the interdependence and importance of
each business function.
▪ Total quality management is an organization-wide effort to infuse quality into
every activity in a company through continuous improvement. Although based
on work of U.S. researchers and consultants, TQM was initially adopted and
made popular by Japanese rms. TQM techniques include quality circles, bench-
marking, Six Sigma, reduced cycle time, and continuous improvement.
▪ Recent trends in control include the use of international quality standards, eco-
nomic value-added (EVA) and market value-added (MVA) systems, activity-
based costing (ABC), and corporate governance.
1. You’re a manager who employs a participative
control approach. You’ve concluded that corrective
action is necessary to improve customer satisfac-
tion, but rst you need to convince your employ-
ees that the problem exists. What kind of evidence
do you think employees will nd more compelling:
quantitative measurements or anecdotes from your
interactions with customers? Explain your answer.
2. Describe the advantages of using a balanced score-
card to measure and control organizational perfor-
mance. Suppose you created a balanced scorecard
for McDonald’s. What speci c customer service
measures would you include?
3. In bottom-up budgeting, lower-level managers
anticipate their departments’ resource needs and
pass them up to top management for approval.
Identify the advantages of bottom-up budgeting.
4. In the chapter example of eBay, CEO Meg Whitman
is quoted as saying, “If you can’t measure it, you
can’t control it.” Do you agree with this statement?
Provide examples from your school or business
experience that support your argument.
5. Think of a class you’ve taken in the past. What stan-
dards of performance did your professor establish?
How was your actual performance measured?
How was your performance compared to the stan-
dards? Do you think the standards and methods of
measurement were fair? Were they appropriate to
your assigned work? Why or why not?
6. Some critics argue that Six Sigma is a collection
of super cial changes that often result in doing a
superb job of building the wrong product or offer-
ing the wrong service. Do you agree or disagree?
Explain.
7. What types of analysis can managers perform to
help them diagnose a company’s nancial condi-
tion? How might a review of nancial statements
help managers diagnose other kinds of perfor-
mance problems as well?
8. Why is benchmarking an important component of
total quality management (TQM) programs? Do
you believe a company could have a successful
TQM program without using benchmarking?
9. How might activity-based costing provide better
nancial control tools for managers of a company
such as Kellogg that produces numerous food
products?
10. What is ISO certi cation? Why would a global com-
pany like General Electric want ISO certi cation?
ch18
DISCUSSION QUESTIONS
CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 561
Controlling
6
ch18
MANAGEMENT IN PRACTICE: EXPERIENTIAL EXERCISE
Is Your Budget in Control?
By the time you are in college, you are in charge of
at least some of your own nances. How well you
manage your personal budget may indicate how well
you will manage your company’s budget on the job.
Respond to the following statements to evaluate your
own budgeting habits. If the statement doesn’t apply
directly to you, respond the way you think you would
behave in a similar situation.
1. I spend all my money as soon as I
get it.
Yes No
2. At the beginning of each week (or
month, or term), I write down all
my xed expenses.
Yes No
3. I never seem to have any money
left over at the end of the week (or
month).
Yes No
4. I pay all my expenses, but I never
seem to have any money left over
for fun.
Yes No
5. I am not putting any money away
in savings right now; I’ll wait until
after I graduate from college.
Yes No
6. I can’t pay all my bills. Yes No
7. I have a credit card, but I pay the
balance in full each month.
Yes No
8. I take cash advances on my credit
card.
Yes No
9. I know how much I can spend on
eating out, movies, and other enter-
tainment each week.
Yes No
10. I pay cash for everything. Yes No
11. When I buy something, I look for
value and determine the best buy.
Yes No
12. I lend money to friends whenever
they ask, even if it leaves me short
of cash.
Yes No
13. I never borrow money from friends. Yes No
14. I am putting aside money each
month to save for something that I
really need.
Yes No
Scoring and Interpretation:
Yes responses to statements 2, 9, 10, 13, and 14 point to
the most disciplined budgeting habits; yes responses
to 4, 5, 7, and 11 reveal adequate budgeting habits; yes
responses to 1, 3, 6, 8, and 12 indicate the poorest bud-
geting habits. If you have answered honestly, chances
are you’ll have a combination of all three. Look to see
where you can improve your budgeting.
The Wages of Sin?
Chris Dykstra, responsible for loss prevention at
Westwind Electronics, took a deep breath before he
launched into making his case for the changes he was
proposing in the company’s shoplifting policy. He
knew convincing Ross Chenoweth was going to be a
hard sell. Ross, the president and CEO, was the son of
the founder of the local, still family-owned consumer
electronics chain based in Phoenix, Arizona. He’d
inherited not only the company but also his father’s
strict moral code.
“I think it’s time to follow the lead of other stores,”
Chris began. He pointed out that most other retailers
didn’t bother calling the police and pressing charges
unless the thief had shoplifted merchandise worth
more than $50 to $100. In contrast, Westwind cur-
rently had the zero-tolerance policy toward theft that
Ross’s father had put in place when he started the
business. Chris wanted to replace that policy with one
that only prosecuted individuals between 18 and 65,
had stolen more than $20 worth of goods, and had no
previous history of theft at Westwind. In the case of
rst-time culprits under 18 or over 65, he argued for
letting them off with a strict warning regardless of
the value of their ill-gotten goods. Repeat offenders
would be arrested.
“Frankly, the local police are getting pretty tired
of having to come to our stores every time a teenager
sticks a CD in his jacket pocket,” Chris pointed out.
“And besides, we just can’t afford the costs associated
ch18
MANAGEMENT IN PRACTICE: ETHICAL DILEMMA
PART 6 CONTROLLING562
with prosecuting everyone.” Every time he pressed
charges against a shoplifter who’d made off with a
$10 item, Westwind lost money. The company had
to engage a lawyer and pay employees overtime for
their court appearances. In addition, Chris was look-
ing at hiring more security guards to keep up with
the workload. Westwind was already in a battle it
was losing at the moment with the mass retailers
who were competing all too successfully on price,
so passing on the costs of its zero-tolerance policy to
customers wasn’t really an option. “Let’s concentrate
on catching dishonest employees and those organized
theft rings. They’re the ones who are really hurting
us,” Chris concluded.
There was a long pause after Chris nished his
carefully prepared speech. Ross thought about his
recently deceased father, both an astute businessman
and a person for whom honesty was a key guiding
principle. If he were sitting here today, he’d no doubt
say that theft was theft, that setting a minimum was
tantamount to saying that stealing was acceptable
just as long as you don’t steal too much. He looked
at Chris. “You know, we’ve both got teenagers. Is this
really a message you want to send out, especially
to kids? You know as well as I do that there’s noth-
ing they like better than testing limits. It’s almost an
invitation to see if you can beat the system.” But then
Ross faltered as he found himself glancing at the latest
nancial gures on his desk—another in a string of
quarterly losses. If Westwind went under, a lot of
employees would be looking for another way to make
a living. In his heart, he believed in his father’s high
moral standards, but he had to ask himself: Just how
moral could Westwind afford to be?
What Would You Do?
1. Continue Westwind’s zero-tolerance policy toward
shoplifting. It’s the right thing to do—and it will
pay of
f in the end in higher pro tability because
the chain’s reputation for being tough on crime will
reduce overall losses from theft.
2. Adopt Chris Dykstra’s proposed changes and show
more leniency to rst-time offenders. It is a more
cost-effective approach to the problem than the
current policy, plus it stays close to your father’s
original intent.
3. Adopt Chris Dykstra’s proposed changes with an
even higher limit of $50 or $100, which is still less
than the cost of prosecution. In addition, make sure
the policy isn’t publicized. That way you’ll reduce
costs even more and still bene t from your reputa-
tion for prosecuting all shoplifters.
SOURCE: Based on Michael Barbaro, “Some Leeway for the Small
Shoplifter,” The New York Times, July 13, 2006.
ch18
CASE FOR CRITICAL ANALYSIS
Lincoln Electric
Imagine having a management system that is so suc-
cessful people refer to it with capital letters—the
Lincoln Management System—and other businesses
benchmark their own systems by it. That is the situ-
ation of Ohio-based Lincoln Electric. For a number
of years, other companies have tried to gure out
Lincoln Electric’s secret—how management coaxes
maximum productivity and quality from its workers,
even during dif cult nancial times. Lately, however,
Lincoln Electric has been trying to solve a mystery of
its own: Why is the company having such dif culty
exporting a management system abroad that has
worked so well at home?
Lincoln Electric is a leading manufacturer of weld-
ing products, welding equipment, and electric motors,
with more than $1 billion in sales and 6,000 workers
worldwide. The company’s products are used for
cutting, manufacturing, and repairing other metal
products. Although it is now a publicly traded com-
pany, members of the Lincoln family still own more
than 60 percent of the stock.
Lincoln uses a diverse control approach. Tasks are
precisely de ned, and individual employees must
exceed strict performance goals to achieve top pay.
The incentive and control system is powerful. Pro-
duction workers are paid on a piece-rate basis, plus
merit pay based on performance. Employees also are
eligible for annual bonuses, which uctuate accord-
ing to the company’s pro ts, and they participate
in stock purchase plans. A worker’s bonus is based
on four factors: work productivity, work quality,
dependability, and cooperation with others. Some
factory workers at Lincoln have earned more than
$100,000 a year.
However, the Lincoln system succeeds largely
because of an organizational culture based on open-
ness and trust, shared control, and an egalitarian
CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 563
Controlling
6
spirit. To begin with, the company has earned
employee trust with its no layoff policy. In fact, the
last time it laid off anyone was in 1951. Although
the line between managers and workers at Lincoln
is rmly drawn, managers respect the expertise of
production workers and value their contributions
to many aspects of the business. The company has
an open-door policy for all top executives, middle
managers, and production workers, and regular
face-to-face communication is encouraged. Work-
ers are expected to challenge management if they
believe practices or compensation rates are unfair.
Most workers are hired right out of high school, then
trained and cross-trained to perform different jobs.
Some eventually are promoted to executive posi-
tions, because Lincoln believes in promoting from
within. Many Lincoln workers stay with the com-
pany for life.
One of Lincoln’s founders felt that organizations
should be based on certain values, including hon-
esty, trustworthiness, openness, self-management,
loyalty, accountability, and cooperativeness. These
values continue to form the core of Lincoln’s cul-
ture, and management regularly rewards employees
who manifest them. Because Lincoln so effectively
socializes employees, they exercise a great degree
of self-control on the job. Each supervisor oversees
100 workers, and less tangible rewards complement
the piece-rate incentive system. Pride of workman-
ship and feelings of involvement, contribution, and
esprit de corps are intrinsic rewards that ourish at
Lincoln Electric. Cross-functional teams, empowered
to make decisions, take responsibility for product
planning, development, and marketing. Information
about the company’s operations and nancial perfor-
mance is openly shared with workers throughout the
company.
Lincoln emphasizes anticipating and solving cus-
tomer problems. Sales representatives are given the
technical training they need to understand customer
needs, help customers understand and use Lincoln’s
products, and solve problems. This customer focus
is backed by attention to the production process
through the use of strict accountability standards
and formal measurements for productivity, qual-
ity, and innovation for all employees. In addition, a
software program called Rhythm helps streamline
the ow of goods and materials in the production
process.
Lincoln’s system worked so well in the United
States that senior executives decided to extend it
overseas. Lincoln built or purchased eleven plants
in Japan, South America, and Europe, with plans to
run the plants from the United States using Lincoln’s
expertise with management control systems. Manag-
ers saw the opportunity to beat local competition by
applying manufacturing control incentive systems to
reduce costs and raise production in plants around
the world. The results were abysmal and nearly sunk
the company. Managers at international plants failed
to meet their production and nancial goals every
year—they exaggerated the goals sent to Lincoln’s
managers to receive more resources, especially dur-
ing the recession in Europe and South America.
Many overseas managers had no innate desire to
increase sales, and workers were found sleeping on
benches because not enough work was available.
The European labor culture was hostile to the piece-
work and bonus control system. The huge losses
in the international plants, which couldn’t seem to
adopt Lincoln’s vaunted control systems, meant the
company would have to borrow money to pay U.S.
workers’ bonuses, or forgo bonuses for the rst time
in Lincoln’s history. Top managers began to wonder:
Had they simply done a poor job of applying the
Lincoln Management System to other cultures, or
was it possible that it simply wasn’t going to work
abroad?
Questions
1. Does Lincoln follow a hierarchical or decentralized
approach to management? Explain your answer
and give examples.
2. Based on what you’ve just read, what do you think
makes the Lincoln System so successful in the
United States?
3. What is the problem with transporting Lincoln’s
control systems to other national cultures? What
suggestions would you make to Lincoln’s manag-
ers to make future international manufacturing
plants more successful?
4. Should Lincoln borrow money and pay bonuses to
avoid breaking trust with its U.S. workers? Why or
why not?
SOURCES: Based on Herb Greenberg, “Why Investors May Do Well
with Firms That Avoid Layoffs,” The Wall Street Journal, September
9, 2006; Mark Gottlieb, “Feeding the Dragon,” Industry Week 251,
no. 1 (February 2002): 54–55; Donald Hastings, “Lincoln Electric’s
Harsh Lessons from International Expansion,” Harvard Business Re-
view (May–June, 1999): 3–11; and Joseph Maciariello, “A Pattern of
Success: Can This Company Be Duplicated?” Drucker Management
1, no. 1 (Spring 1997): 7–11.
PART 6 CONTROLLING564
ch18
ON THE JOB VIDEO CASE
Preserve: Managing Quality
Control and Performance
When John Lively, director of operations at Pre-
serve, arrived for his rst day on the job ten years
ago, there wasn’t much to see. The company, which
makes housewares and personal care products from
recycled plastics, was just getting started. There
were about three or four people in one room doing
whatever it took to get the company off the ground.
It’s hard to believe, but in 1999, the whole idea of an
information technology (IT) department and all the
organizational tools to which we’ve grown accus-
tomed was still new. Larger companies certainly
had systems in place, but those tools were merely
something a four-person start-up company hoped to
acquire someday.
“My original mandate for Preserve was to come
in and look at their customer relationship manage-
ment database,” Lively recalled. His charge was
not to manage customers, but to look at the data
the company had accumulated and come up with
a way to use it to improve ef ciency. It was not
an easy task. At the end of six or seven months,
however, he had trained the staff to print shipping
labels.
Just when everyone started to get acclimated to
Lively’s newly ef cient system, Wal-Mart called.
“Growth happens,” Lively said. “But you’re always
hedging, saying, ‘I’m not really sure that’s gonna hap-
pen; maybe we won’t get that big account.’ ” That year
Preserve experienced a remarkable 75 percent growth
in revenue, yet Lively was running the entire admin-
istrative part of the company with only a few eager,
but inexperienced, of ce mates. Instead of anticipat-
ing staf ng and infrastructure needs as it should have
been doing, Preserve was hiring folks to recover from
the large in ux of business. “Looking at it and say-
ing, ‘How could we have done better?’ has de nitely
resulted in some hierarchy of management,” Lively
admitted. Up to this point, Preserve had been a very
at organization. It was time for some real reporting
structure.
IT systems and accounting continue to be the
most important factors in improving Preserve’s orga-
nizational performance. Lively is constantly working
with his crew to forecast and project sales, pro t, and
expenses. Making each department accountable for
its day-to-day spending ensures accurate balance
sheets and pro t and loss statements. “It’s a large
undertaking to understand where we need to be
and look around process-wise to get those actuals in
the books quicker,” Lively lamented. Preserve now
employs two controllers, freeing Lively to work on
the big picture.
Forecasts show sales aren’t going down anytime
soon, and Preserve has reacted by asking more from
its vendors and manufacturing partners. The fac-
tory responsible for manufacturing its most popular
product, the Preserve Toothbrush, now handles all
the inventory management and shipping on behalf
of Preserve. When it comes to quality control, the
factory implements its own systems and standards.
Preserve works with them initially to set the stan-
dards, then it steps back unless problems arise.
The choice to outsource adds value in the form of
reduced cycle time and improved service to the
customer.
Preserve’s total quality management approach
results in cost savings and improvement in accu-
racy and efficiency in all aspects of Preserve’s
business. As the company grows, even stricter
financial and manufacturing controls will no
doubt result in a more hierarchical structure.
Although this poses some threat to Preserve’s
casual and open culture, all recognize that it is a
necessary part of growth. A smoothly run orga-
nization means the folks at Preserve can get back
to doing what they do best—creating innovative,
earth-friendly products.
Discussion Questions
1. Do you think Preserve would bene t
from
employing an activity-based costing system?
Explain.
2. Do you think implementing a formal corporate
governance policy is appropriate for Preserve?
Why or why not?
CHAPTER 18 MANAGING QUALITY AND PERFORMANCE 565
Controlling
6
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307–325.
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Neely and Al Najjar, pp. 105 and 9.
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Haddad, and Williamson, “Applying
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Jessi Hempil, “Finding Cracks in 12.
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ch18
ENDNOTES
ch18
BIZ FLIX VIDEO CASE
In Bruges
Hit man Ray (Colin Farrell) botches the simple job
of murdering a priest in a confessional. The “botch”
occurs when a bullet passes through the priest’s body
into a young boy’s head. Deeply troubled, Ray and
fellow hit man Ken (Brendan Gleeson) go to the beau-
tiful medieval Flemish city of Bruges, Belgium. Ken
engages in tourist activities, which Ray nds highly
boring. Various characters, such as an American
dwarf actor and a beautiful woman selling drugs on a
lm set, add color and interest to this lm.
Customer Focus
This sequence has two parts that are separated by
a title slide that reads, “And another interaction for
the ticket seller.” Watch Part I up to the title slide and
pause the lm. Answer the rst two questions. Restart
the lm sequence and play to the end. Answer the
third question.
Part I. This sequence starts as Ken enters the tower
to buy a ticket. It ends after he asks the ticket seller
(Rudy Blomme) whether he is happy. This sequence
follows the discussion about the city of Bruges
between Ken and Ray.
Part II: This sequence begins as Ken and Harry
Waters (Ralph Fiennes) approach the bell tower. It fol-
lows their discussion over beers about where Harry
should shoot Ken. The ticket seller tells Ken that the
tower is closed because a visitor had a heart attack.
This sequence ends after Harry’s interaction with the
ticker seller. The lm continues with various scenes
based on the plaza.
What to Watch for and Ask Yourself
▪ Ken is the customer and the ticket seller responds
to him as a customer. Do you perceive the ticket
seller as having a customer focus as emphasized in
this chapter? Why or why not?
▪ The ticket seller will interact with Ken and Harry
Waters in Part II of this lm sequence. Do you
predict that the ticket seller’s customer approach
could result in negative results for him? Why or
why not?
▪ Part II offers a lesson in customer focus. What
did the ticket seller fail to understand about his
customers?
PART 6 CONTROLLING566
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Braam and Nijssen, “Performance 16.
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Olve et al., “Twelve Years Later: Un-17.
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Peter Valdes-Dapena, “Tiny Smart 18.
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Control,” Harvard Business Review
(July–August 1984): 150–164; Peter
Brownell, “Leadership Style, Bud-
getary Participation, and Managerial
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and Society 8 (1983): 307–321; and
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(November 1984): 50–54.
Tim Reason, “Budgeting in the Real 28.
World,” CFO (July 2005): 43–48.
Ibid.29.
Bruce G. Posner, “How to Stop Wor-30.
rying and Love the Next Recession,”
Inc. (April 1986): 89–95.
Lawrence M. Fisher, “Inside Dell
31.
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and Business 10,
(First Quarter
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Andy Reinhardt, “Tesco Bets Small—32.
And Wins Big,” BusinessWeek e.biz
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William G. Ouchi, “Markets, 34.
Bureaucracies, and Clans,” Ad-
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Nadine Heintz, “Everyone’s a CFO,” 38.
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Mel Mandell, “Accounting Challeng-40.
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chapter19pt6
© GE T TY IMAGES/DIGITAL VISION
Chapter Outline
Learning Outcomes
After studying this chapter, you should be able to:
1. Defi ne oper
ations management and describe its application within manu-
facturing and service organizations.
2. Explain today’s partnership approach to supply chain management.
3. Summarize considerations in designing facilities layout.
4. Discuss new technologies used for manufacturing and service opera-
tions, and e
xplain what is meant by lean manufacturing.
5. Explain why small inventories are preferred by most organizations and
describe just-in-time inventor
y management.
6. Identify ways in which information technology has transformed the
manager’s job
.
7. Describe different types of IT systems used in today’s organizations and
how they sup
port daily operations and decision making.
8. Summarize the key components of e-business and explain common
e-business str
ategies.
Which Side of Your Brain Do You Use?
The Organization As a V
alue Chain
Manufacturing and Service Operations
Sup
ply Chain Management
Facilities Layout
Process Layout
New Manager Self-Test: Political Skills
Product Layout
Cellular Layout
Fixed-P
osition Layout
Technology Automation
Radio-Frequency Identifi cation
(RFID)
Flexible Manufacturing Systems
Lean Manufacturing
Inventory Management
The Importance of Inventory
Just-in-
Time Inventory
Information Technology Has Transformed
Management
Boundaries Dissolve; Collaboration Reigns
Knowledge Management
Management Inf
ormation Systems
Enterprise Resource Planning Systems
A New Generation of Information
T
echnology
The Internet and E-Business
E-Business Strategy: Market Expansion
E-Business Str
ategy: Increasing Effi ciency
569
Managing the Value Chain, Information
Technology, and E-Business
Controlling
6
Planning
3
Environment
2
4
Organizing
5
Leading
Introduction
1
WHICH SIDE OF YOUR BRAIN DO YOU USE?
1
The following questions ask you to describe your
behavior. For each question, check the answer that
best describes you.
1. I am usually running late for class or other
appointments:
_____ a. Yes
_____ b. No
2. When taking a test I prefer:
_____ a. Subjective questions (discussion or essay)
_____ b. Objective questions (multiple choice)
3. When making decisions, I typically:
_____ a. Go with my gut—what feels right
_____ b. Carefully weigh each option
4. When solving a problem, I would more likely:
_____ a. Take a walk, mull things over, then discuss
_____ b. Write down alternatives, prioritize them, then pick
the best
5. I consider time spent daydreaming as:
_____ a. A viable tool for planning my future
_____ b. A waste of time
6. To remember directions, I typically:
_____ a. Visualize the information
_____ b. Make notes
7. My work style is mostly:
_____ a. To juggle several things at once
_____ b. To concentrate on one task at a time until complete
8. My desk, work area, or laundry area are typically:
_____ a. Cluttered
_____ b. Neat and organized
SCORING AND INTERPRETATION: People have two
thinking processes—one visual and intuitive, which is
often referred to as right-brained thinking, and the other ver-
bal and analytical, referred to as left-brained thinking. The
thinking process you prefer predisposes you to certain
types of knowledge and information—visual charts and
operations dashboards vs. written reports, intuitive sug-
gestions vs. quantitative data—as effective input to your
thinking and decision making.
Count the number of checked “a” items and “b”
items. Each “a” represents right-brain processing, and
each “b” represents left-brain processing. If you scored six
or higher on either, you have a distinct processing style.
If you checked less than six for either, you probably have
a balanced style. New managers typically need left-brain
processing to handle data and to justify decisions. At
middle and upper management levels, right-brain pro-
cessing enables visionary thinking and strategic insights.
Managers are inundated with data and information, particularly in today’s world
of computers and the Internet. As suggested by the opening questionnaire, some
people prefer written reports with lots of explicit data, while others like a visual pre-
sentation and a broad overview. Both styles are useful, and as managers grow in their
abilities, they typically learn to use and appreciate a balanced approach.
This chapter describes techniques for the planning and control of manufacturing
and service operations and the use of information technology in today’s organizations.
Whereas the previous chapter described overall control concepts, this chapter will
focus on the control of production operations and the use of information systems for