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Minimal 1,000-words and three different scholarly sources referenced in APA format and in text citations. . The book can be used as one source. Distribute the 1,000-word count as even as possible among the questions. (References cannot be counted in the word count). Book is uploaded and case study is provided.

Kinicki, A. & Williams, B. (2012). Management: A Practical Introduction (6th Ed.). New York, NY: McGraw-Hill Irwin.

1. Chapter 16 identifies techniques for enhancing organizational effectiveness and includes the view consumers have of the organization. It is easy for a company to lose its reputation. For example, Netflix after its decision to double user rates to provide DVD rentals and online movies. How does a company restore its reputation?


Use this scenario below to answer the following questions:

1. What are the pros and cons of ArcelorMittal’s twinning program? Explain.

2. To what extent do the changes at the Burn Harbor plant follow the control process shown in Figure 16.4? Discuss



Some steel mills are destroyed by globalization, others reborn.

Left for dead a decade ago, this 50-year-old facility on the shores of Lake Michigan has been rejuvenated thanks to an unusual experiment by its owner, Luxembourg-based ArcelorMittal.

In 2008, Burns Harbor was “twinned” with a hypermodern mill in Gent, Belgium. Over 100 U.S. engineers and managers, who were flown across the Atlantic, were told: Do as the Belgians do.

Burns Harbor now enjoys record output. Its furnaces, where steel is made out of iron ore, coal, and limestone, are run with software developed in Belgium. Robots are in. Pencils are out. Workers are learning to make the same amount of steel with nearly half the people it employed three decades ago. Productivity is nearing Belgium levels.

The transition hasn’t been seamless. As a collective bargaining session looms this summer, union leaders say a tough battle is expected over wages, safety risks, and the next wave of automation. But there is also an acknowledgement that increased productivity has saved the mill from oblivion. . . .

Globalization often is blamed for the travails of American manufacturing—from the relentless pressure of imports from lower-wage countries to outsourcing and overseas production by U.S.-based manufacturers. But globalization has its upsides as well. Not only does it often mean cheaper goods for American manufacturers, but it puts pressure on U.S. factories to become more efficient to keep up with global competition, making it possible for them to survive. . . .

A wave of globalization in the 1980s created a true international street market, straining less profitable mills, especially in the U.S., and leading many to bankruptcy. The U.S. steel industry produced 95.6 million tons in 2011, about three-quarters of what it made 30 years ago. It employed about 95,000 people in its core mills and plants, one fifth as many as in 1981, according to the American Iron and Steel Institute.

That laid the groundwork for Lakshmi Mittal, the billionaire Indian who began assembling what is now the world’s first successful international steel conglomerate of its size, and the largest by production, with 263,000 employees in 20 countries and 112 steelmaking facilities.

Mr. Mittal perfected a simple business model: Buy rundown, often state-owned, mills, cut costs, lay off workers, improve productivity, turn a profit. It worked from Slovakia to South Africa, from Ukraine to Trinidad.

Twinning—benchmarking two mills against each other—represents the next evolution. “The process doesn’t change: melt iron, cast, roll. But there are always incremental improvements you can make,” Mr. Mittal said in an interview.

Modern benchmarking was pioneered by Xerox in the 1980s and has become a common tool for multinationals. But industrial historians say that what Mr. Mittal is actually doing is taking a page out of the productivity obsessed playbook of 19th century steel pioneer Andrew Carnegie and applying it globally. . . .

In a similar fashion, ArcelorMittal twins pairs of mills—usually of similar size, age, product mix, and output—against each other. In addition to Indiana and Belgium, mills in Germany and Poland, and France and Romania, have been twinned. The weaker mill is ordered to copy the practices of the better mill, while the stronger is told to keep its edge. Managers are summoned to regular meetings and ordered to divulge and compare their performances. Although there is no explicit policy on the consequences of poor performance, ArcelorMittal has been quick to idle or shut down unprofitable mills, as it did in Liège, Belgium, last year.

Many in the industry thought high wages would permanently sink the U.S. steel industry. Workers at Burns Harbor averaged about $80,000 in wages and benefits in 2011, up about 14% from 2007. . . .

“Gent really is one of the best mills in the world,” says Peter Marcus, president of World Steel Dynamics, an Englewood Cliffs, N.J.-based consultancy. The measure his company favors, man-hours per ton, shows Gent at 1.25 and Burns Harbor behind at 1.32. “Those are both currently among the better numbers in the world,” he says. The average in the U.S. is 2.0.

Mr. Mittal said Gent was a star. “We wanted Burns Harbor to be more like Gent.” Thus the development of the twinning program, which began in late 2007, and accelerated after the U.S. recession put a premium on productivity.

That year, Larry Fabina, a hulking 56-year-old engineer from Johnstown, Pa., who had worked at the mill since 1973, traveled to Belgium, where he toured the medieval town and spent six weeks taking careful notes at the mill.

When Burns Harbor engineers returned, they made the quick and easy fixes first. They changed hose nozzles and moved the nozzle on 2,500 horsepower hoses used to scrub flakes off the steel closer, thus reducing the amount of power needed to propel the water. Those two changes saved the Indiana plant $1.4 million in energy costs, the company said.

Workers were directed to trim less rough steel off the sides of coil, saving the equivalent of 725 coils a year. “That’s 17,000 cars,” says Mr. Fabina, the mill’s manager for continuous improvement.

Adopting the Coordi computer model took longer. Workers used to gathering information on their own and relying on experience and intuition had to attend classes on computer modeling.

Last year, Burns Harbor implemented Coordi at a cost of under $1 million. Since then, the mill has increased the average number of 298-ton caldrons of molten steel it produces daily, known as “heats,” to 50 from 42. . . .

“Steel working used to be 80% back and 20% brain, now it’s the other way around,” says Mr. Trinidad, the union rep, who started when the plant employed 6,700 workers in 1974. Now it has 3,700. . . .

Burns Harbor achieved a record slab production of 4.8 million tons in 2011, says Bill Steers, the company spokesman, compared with 5 million at Gent. Productivity is almost at 900 tons per employee per year, while Gent has improved to around 950. “Much of this can be attributed to twinning,” says Mr. Steers.

ArcelorMittal executives say they are focused on pushing even harder. At a recent meeting, Gent managers boasted they would soon reach 1,100 tons per employee. Burns Harbor managers declined to comment

on whether that is feasible.

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kin29546_ch16_510-548.indd Page 510 7/23/12 9:13 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles PART 6—Controlling chapter 16 Control Systems & Quality Management Techniques for Enhancing Organizational Effectiveness F I Major Questions You Should BeN Able to Answer D L E 16.5 Some Financial Tools for 16.1 Managing for Productivity Y Control Major Question: How do managers , Major Question: Financial influence productivity? 16.2 Control: When Managers Monitor Performance Major Question: Why is control such an important managerial function? 16.3 Levels & Areas of Control Major Question: How do successful companies implement controls? 16.4 The Balanced Scorecard, Strategy Maps, & Measurement Management Major Question: How can three techniques—balanced scorecard, strategy maps, and measurement management—help me establish standards and measure performance? S A R A 5 3 1 9 B U performance is important to most organizations. What are the financial tools I need to know about? 16.6 Total Quality Management Major Question: How do top companies improve the quality of their products or services? 16.7 Managing Control Effectively Major Question: What are the keys to successful control, and what are the barriers to control success? kin29546_ch16_510-548.indd Page 511 8/1/12 3:53 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles the manager’s toolbox Encourage Employee Involvement & Innovation Improving Productivity: Going Beyond Control Techniques to Get the Best Results How, as a manager, can you increase productivity—get better results with what you have to work with? In this chapter we discuss control techniques for achieving better results. What are other ways for improving productivity? Following are some suggestions:1 Companies improve productivity by funding research and development (R&D) departments. As a manager, you can encourage your employees, who are closest to the work process, to come up with suggestions for improving their own operations. And, of course, you can give workers a bigger say, provide flextime, and reward people for learning new skills and taking on more responsibility. Encourage Employee Diversity F By hiring people who are diverse in gender, age, race, and Establish Base Points, Set Goals, & Measure Results ethnicity, you’re more likely to have a workforce with different To be able to tell whether your work unit is becoming more I experience, outlooks, values, and skills. By melding their differproductive, you need to establish systems of measurement.You N ences, a team can achieve results that exceed the previous can start by establishing the base point, such as the number of standards. customers served per day, quantity of products produced per D hour, and the like.You can then set goals to establish new levels that you wish to attain, and institute systems of measurement L Redesign the Work Process with which to ascertain progress. Finally, you can measure the E Some managers think productivity can be enhanced through results and modify the goals or work processes as necessary. cutting, but this is not always the case. Sometimes the Y cost work process can be redesigned to eliminate inessential Use New Technology , steps. Clearly, this is a favorite way to enhance productivity. With a computerized database, you can store and manipulate information better than you can using a box of file cards. Still, computerization is not a panacea; information technology also offers S plenty of opportunities for simply wasting time. A Improve Match Between Employees & Jobs R You can take steps to ensure the best fit between employees A and their jobs: improve employee selection, training, job redesign, and incentives. forecast 5 3 1 9 B What’s U For Discussion Some observers think the pressure on managers to perform will be even more intense than before, because the world is undergoing a transformation on the scale of the industrial revolution 200 years ago as we move further into an information-based economy.2 In what ways do you think you’ll have to become a champion of adaptation? Ahead in This Chapter This final chapter explores the final management function—control. Controlling is monitoring performance, comparing it with goals, and taking corrective action as needed. We discuss managing for productivity, explaining why it’s important. We then discuss controlling, identify six reasons it’s needed, explain the steps in the control process, and describe three types of control managers use. Next we discuss levels and areas of control. In the fifth section, we discuss financial tools for control—budgets, financial statements, ratio analysis, and audits. We then discuss total quality management (TQM), identifying its core philosophies and showing some TQM techniques. We conclude by describing the four keys to successful control and five barriers to successful control. kin29546_ch16_510-548.indd Page 512 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 16.1 MANAGING FOR PRODUCTIVITY ? major question How do managers influence productivity? THE BIG PICTURE The purpose of a manager is to make decisions about the four management functions— planning, organizing, leading, and controlling—to get people to achieve productivity and realize results. Productivity is defined by the formula of outputs divided by inputs for a specified period of time. Productivity is important because it determines whether the organization will make a profit or even survive. figure 16.1 MANAGING FOR PRODUCTIVITY & RESULTS In Chapter 1, we pointed out that as a manager in the 21st century you will operate in a F will need to deal with seven challenges—managing complex environment in which you for (1) competitive advantage, (2) I diversity, (3) globalization, (4) information technology, (5) ethical standards, (6) sustainability, and (7) your own happiness and life goals. Within this dynamic world, N you will draw on the practical and theoretical knowledge described in this book to make D decisions about the four management functions of planning, organizing, leading, and controlling. L reporting to you to achieve productivity and realThe purpose is to get the people ize results. E This process is diagrammed below, pulling together the main topics of this book. Y (See Figure 16.1.) , Competitive advantage Diversity …must operate in Globalization You as a manager... Information technology a complex environment and… Ethical standards S A R A …make 5 decisions about 3 1 the four 9 management B functions… U Planning Organizing Leading ... to achieve productivity and realize results. Controlling Sustainability Your happiness & goals What Is Productivity? Productivity can be applied at any level, whether for you as an individual, for the work unit you’re managing, or for the organization you work for. Productivity is defined by the formula of outputs divided by inputs for a specified period of time. Outputs are all 512 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 513 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles the goods and services produced. Inputs are not only labor but also capital, materials, and energy. That is, productivity  outputs inputs or goods  services labor  capital  materials  energy What does this mean to you as a manager? It means that you can increase overall productivity by making substitutions or increasing the efficiency of any one element: labor, capital, materials, energy. For instance, you can increase the efficiency of labor by substituting capital in the form of equipment or machinery, as in employing a backhoe instead of laborers with shovels to dig a hole.3 Or you can increase the efficiency of materials inputs by expanding their uses, as when lumber mills discovered they could sell not only boards but also sawdust and wood chips for use in gardens. Or you can increase the efficiency of energy by putting solar panels on a factory roof so the organization won’t have to buy so much electrical power from utility companies. F Why Increasing Productivity Is Important I ”Productivity growth is the elixir that makes an economy flourish,” says one business N because it can churn out article.4 “Our society is wealthy,” says another, “precisely products like automobiles, flush toilets, and Google search D algorithms at relatively low cost.”5 That is, the more goods and services that are produced and made easily availL Increasing the gross domesable to us and for export, the higher our standard of living. tic product—the total dollar value of all the goods andE services produced in the United States—depends on raising productivity, as well as on a growing workforce. Y The U.S. Productivity Track Record During the 1960s, productivity in the United , States averaged a hefty 2.9% a year, then sank to a disappointing 1.5% right up until 1995. Because the decline in productivity no longer allowed the improvement in wages and living standards that had benefited so many Americans in the 1960s, millions of people took S second jobs or worked longer hours to keep from falling behind. From 1995 to 2000, A history, the productivity rate however, during the longest economic boom in American jumped to 2.5% annually, as the total output of goods R and services rose faster than the total hours needed to produce them. From the business cycle peak in the first quarter of 2001 to the end of 2007, productivity grew at an annualA rate of 2.7%.6 Then came the recession year 2008, when it fell to 2%. Then, from the fourth quarter of 2008 to the fourth quarter of 2009, productivity rose 5.4%—“a turnaround unprecedented in modern his5 in 2010.7 From the first quartory,” says Newsweek—and it also rose an impressive 4.1% ter of 2011 to the first quarter of 2012, however, the rate 3 was only 0.5%, as companies began to approach the limit of how much they could squeeze from the workforce.8 1 The Role of Information Technology Most econo9 mists seem to think the recent productivity growth is the result B of organizations’ huge investment in information technology— computers, the Internet, other telecommunications advances, U and computer-guided production line improvements.9 From 1995 to 2001, for example, labor productivity in services grew at a 2.6% rate (outpacing the 2.3% for goods-producing sectors), the result, economists think, of information technology.10 (Since 2001, productivity has continued to advance in the service sectors in relation to the goods-producing sectors.)11 In particular, many companies have implemented enterprise resource planning (ERP) software systems, information systems for integrating virtually all aspects of a business, helping managers stay on top of the latest developments. Maintaining productivity depends on control. Let’s look at this. ● Control Systems & Quality Management ✽ CHAPTER 16 Competing internationally for productivity. This oil tanker represents the continual competition among companies and among nations to achieve productivity—“a matter of survival” for the United States, some leaders believe. Is our nation doing everything it could to be more productive? What about taking measures to reduce dependence on foreign oil? 513 kin29546_ch16_510-548.indd Page 514 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 16.2 CONTROL: WHEN MANAGERS MONITOR PERFORMANCE ? major question Why is control such an important managerial function? THE BIG PICTURE Controlling is monitoring performance, comparing it with goals, and taking corrective action. This section describes six reasons why control is needed and four steps in the control process. Control is making something happen the way it was planned to happen. Controlling is defined as monitoring performance, comparing it with goals, and taking correcF tive action as needed. Controlling is the fourth management function, along with I and its purpose is plain: to make sure that perforplanning, organizing, and leading, mance meets objectives. N figure 16.2 ■ CONTROLLING FOR PRODUCTIVITY ■ What you as a manager do to get things done, with controlling shown in relation to the three other management functions. (These are not lockstep; all four functions happen concurrently.) ■ Planning You set goals & decide how to achieve them. Dand deciding how to achieve them. Planning is setting goals L tasks, people, and other resources to accomplish Organizing is arranging the work. E Leading is motivating people to work hard to achieve the organization’s goals. Y Controlling is concerned with seeing that the right things happen at the right time in the right way. , ■ All these functions affect one another and in turn affect an organization’s producS tivity. (See Figure 16.2.) Organizing You arrange tasks, people, & other resources to accomplish the work. A R Leading You motivate A people to work hard to achieve 5 the organization’s goals. 3 Controlling You monitor performance, compare it with goals, & take corrective action as needed. For productivity 1 9 B Why Is Control Needed? U Lack of control mechanisms can lead to problems for both managers and companies. For example, the CEO of Yahoo, Scott Thompson, is discovered to have falsified his résumé by claiming to have a computer science degree—and 11 days later he is out, bringing turmoil to an already troubled company.12 The senior banker of J. P. Morgan Chase, Ina Drew, contracts Lyme disease and is frequently out of the office when traders begin taking more and more risky bets, culminating in a loss of at least $3 billion and public demands for greater bank regulation.13 California-based Pacific Gas & Electric Co. accidentally overpressurizes pipelines on its gas system more than 120 times since its 2010 San Bruno explosion that killed eight people, raising risks of another disaster.14 Could greater control have helped avoid or reduce the consequences of these situations? Of course. There are six reasons why control is needed. 514 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 515 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 1. To Adapt to Change & Uncertainty Markets shift. Consumer tastes change. New competitors appear. Technologies are reborn. New materials are invented. Government regulations are altered. All organizations must deal with these kinds of environmental changes and uncertainties. Control systems can help managers anticipate, monitor, and react to these changes.15 Example: As is certainly apparent by now, the issue of climate change or global warming has created a lot of change and uncertainty for many industries. The restaurant industry in particular is feeling the pressure to become “greener,” since restaurants are the retail world’s largest energy user, with a restaurant using five times more energy per square foot than any other type of commercial building, according to Pacific Gas & Electric’s Food Service Technology Center.16 Nearly 80% that commercial food service spends annually for energy use is lost in inefficient food cooking, holding, and storage. In addition, a typical restaurant generates 100,000 pounds of garbage per location per year. Thus, restaurants are being asked to reduce their “carbon footprints” by instituting tighter controls on energy use.17 F 2. To Discover Irregularities & Errors Small problems can mushroom into big I ones. Cost overruns, manufacturing defects, employee turnover, bookkeeping errors, N tolerable in the short run. But and customer dissatisfaction are all matters that may be in the long run, they can bring about even the downfallDof an organization. Example: You might not even miss a dollar a month looted from your credit card L account. But an Internet hacker who does this with thousands of customers can undermine the confidence of consumers using their credit cards E to charge online purchases at Amazon.com, Priceline.com, and other web retailers. Thus, a computer program Y that monitors Internet charge accounts for small, unexplained deductions can be a , valuable control strategy. 3. To Reduce Costs, Increase Productivity, or Add Value Control systems S and increase product delivery can reduce labor costs, eliminate waste, increase output, cycles. In addition, controls can help add value to a product A so that customers will be more inclined to choose it over rival products. R will again in this chapter), the Example: As we have discussed early in the book (and use of quality controls among Japanese car manufacturers Aresulted in cars being produced that were perceived as being better built than American cars. Another example: 3M Co.’s system for creating plastic picture-hanging hooks used to be split among four states and take 100 days; after reworking the system to get rid of5“hairballs,” as the former CEO called them, now all production takes place at one hub and takes a third as much time.18 3 4. To Detect Opportunities Hot-selling products. 1 Competitive prices on materials. Changing population trends. New overseas markets. Controls can help alert man9 agers to opportunities that might have otherwise gone unnoticed. B may result in a rush of cusExample: A markdown on certain grocery-store items tomer demand for those products, signaling store management that similar items might U also sell faster if they were reduced in price. 5. To Deal with Complexity Does the right hand know what the left hand is doing? When a company becomes larger or when it merges with another company, it may find it has several product lines, materials-purchasing policies, customer bases, even workers from different cultures. Controls help managers coordinate these various elements. Example: In recent years, Macy’s Inc. has twice had to deal with complexity. In 2006, it pulled together several chains with different names—Marshall Field’s, Robinsons-May, Kaufmann’s, and other local stores—into one chain with one name, Macy’s, and a muchpromoted national strategy. But after losing money in 2007, CEO Terry Lundgren began altering course from a one-size-fits-all nationwide approach to a strategy that tailors the merchandise in local stores to cater to local tastes.19 Control Systems & Quality Management ✽ CHAPTER 16 515 kin29546_ch16_510-548.indd Page 516 7/24/12 2:33 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 6. To Decentralize Decision Making & Facilitate Teamwork Controls allow top management to decentralize decision making at lower levels within the organization and to encourage employees to work together in teams. Example: At General Motors, former chairman Alfred Sloan set the level of return on investment he expected his divisions to achieve, enabling him to push decisionmaking authority down to lower levels while still maintaining authority over the sprawling GM organization.20 Later GM used controls to facilitate the team approach in its joint venture with Toyota at its California plant. The six reasons are summarized below. (See Figure 16.3.) figure 16.3 SIX REASONS WHY CONTROL IS NEEDED 4. …detect opportunities 1. …adapt to change & uncertainty 2. …discover irregularities & errors 3. …reduce costs, increase productivity, or add value F I N D L E Y , 5. …deal with complexity Control helps an organization… 6. …decentralize decision making & facilitate teamwork Steps in the Control Process figure 16.4 STEPS IN THE CONTROL PROCESS Control systems may be altered S to fit specific situations, but generally they follow the same steps. The four control process A steps are (1) establish standards; (2) measure performance; (3) compare performance to standards; and (4) take corrective acR tion, if necessary. (See Figure 16.4.) A Step 1. Establish standards. Step 2. Measure performance. Step 3. 5Compare performance 3to standards. 1 9 B U Step 4. Take corrective action, if necessary. If yes, take corrective action; perhaps revise standards. If no, continue work progress & recognize success. Let’s consider these four steps. 1. Establish Standards: “What Is the Outcome We Want?” A control standard, or performance standard or simply standard, is the desired performance level for a given goal. Standards may be narrow or broad, and they can be set for almost anything, although they are best measured when they can be made quantifiable. 516 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 517 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Nonprofit institutions might have standards for level of charitable contributions, number of students retained, or degree of legal compliance. For-profit organizations might have standards of financial performance, employee hiring, manufacturing defects, percentage increase in market share, percentage reduction in costs, number of customer complaints, and return on investment. More subjective standards, such as level of employee morale, can also be set, although they may have to be expressed more quantifiably as reduced absenteeism and sick days and increased job applications. One technique for establishing standards is to use the balanced scorecard, as we explain later in this chapter. 2. Measure Performance: “What Is the Actual Outcome We Got?” The second step in the control process is to measure performance, such as by number of products sold, units produced, or cost per item sold. For example, Hyundai has a quality goal signified by GQ 3-3-5-5. The goal represents the company’s desire, expressed in 2010, to finish in the top three in quality ratings provided by J. D. Power’s dependability survey within three years, and to be among the F top five quality automakers within five years.21 (In 2012, the Hyundai Genesis was named the most dependable I midsize premium car by J. D. Power.)22 Performance measures are usually obtained from Nthree sources: (1) written reports, including computerized printouts; (2) oral reports, as in a salesperson’s weekly D recitation of accomplishments to the sales manager; and (3) personal observation, as L what employees are doing. when a manager takes a stroll of the factory floor to see As we’ve hinted, measurement techniques can vary for E different industries, as for manufacturing industries versus service industries. We discuss this further later in the chapter. Y 3. Compare Performance to Standards: “How Do the Desired & Actual Outcomes Differ?” The third step in the control ,process is to compare measured performance against the standards established. Most managers are delighted with performance that exceeds standards, which becomes an occasion for handing out bonuses, S promotions, and perhaps offices with a view. For performance that is below standards, they need to ask: Is the deviation from performance significant? The greater the differA ence between desired and actual performance, the greater the need for action. R How much deviation is acceptable? That depends on the range of variation built in A for instance, there is supto the standards in step 1. In voting for political candidates, posed to be no range of variation; as the expression goes, “every vote counts” (although the 2000 U.S. presidential election was an eye-opener for many people in this 5 error is considered an acceptregard). In political polling, however, a range of 3%–4% able range of variation. In machining parts for the spacecraft Orion (NASA’s sched3 uled 2015 successor to the space shuttle), the range of variation may be a good deal 1 less tolerant than when machining parts for a power lawnmower. The range of variation is often incorporated in computer systems into a principle 9 called management by exception. Management by exception is a control principle that states that managers should be informed of aBsituation only if data show a significant deviation from standards. U 4. Take Corrective Action, If Necessary: “What Changes Should We Make to Obtain Desirable Outcomes?” There are three possibilities here: (1) Make no changes. (2) Recognize and reinforce positive performance. (3) Take action to correct negative performance. When performance meets or exceeds the standards set, managers should give rewards, ranging from giving a verbal “Job well done” to more substantial payoffs such as raises, bonuses, and promotions to reinforce good behavior. When performance falls significantly short of the standard, managers should carefully examine the reasons why and take the appropriate action. Sometimes it may turn out the standards themselves were unrealistic, owing to changing conditions, in which case the standards need to be altered. Sometimes it may become apparent that employees Control Systems & Quality Management ✽ CHAPTER 16 517 kin29546_ch16_510-548.indd Page 518 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles haven’t been given the resources for achieving the standards. And sometimes the employees may need more attention from management as a way of signaling that they have been insufficient in fulfilling their part of the job bargain. ● EXAMPLE Steps in the Control Process: What’s Expected of UPS Drivers? UPS, which employs 99,000 U.S. drivers, has established Integrad, an 11,500-square-foot training center 10 miles outside Washington, D.C. There trainees practice UPSprescribed “340 Methods” shown to save seconds and improve safety. Graduates of the training, who are generally former package sorters, are eligible to do a job that pays an average of $74,000 annually.23 (Because about 30% of driver candidates flunk training based on books and lectures, UPS now uses videogames, a contraption that simulates walking on ice, and an obstacle course around an artificial village.) Establishing Standards. UPS establishes certain standards for its drivers that set projections for the number of miles driven, deliveries, and pickups. For instance, drivers are taught to walk at a “brisk pace” of 2.5 paces per second, except under icy or other unsafe conditions. However, because conditions vary depending on whether routes are urban, suburban, or rural, standards vary for different routes.24 Measuring Performance. Every day, UPS managers look at a computer printout showing the miles, deliveries, and pickups a driver attained during his or her shift the previous day. In general, drivers are expected to make five deliveries in 19 minutes. Comparing Performance to Standards. UPS managers compare the printout of a driver’s performance (miles driven and number of pickups and deliveries) with the standards that were set for his or her particular route. For inF stance, the printout will show whether drivers took longer I the 15.5 seconds allowed to park a truck and retrieve than one package from the cargo. A range of variation may be N allowed to take into account such matters as winter or D driving or traffic conditions that slow productivity. summer L Taking Corrective Action. When a UPS driver fails toEperform according to the standards set for him or her, aY supervisor then rides along and gives suggestions for improvement. If drivers are unable to improve, they are , warned, then suspended, and then dismissed. YOUR CALL S The UPS controls were devised by industrial engineers based A on experience. Do you think the same kinds of controls could be established for, say, filling out tax forms R for H&R Block? A 5 3 1 9 B U 518 PART 6 ✽ Controlling Small business. How important is it for small businesses to implement all four steps of the control process? Do you think that employees in small companies—such as a bicycle shop, restaurant, or landscaping firm—typically have more or less independence from managerial control than those in large companies do? kin29546_ch16_510-548.indd Page 519 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 16.3 LEVELS & AREAS OF CONTROL ? major question How do successful companies implement controls? THE BIG PICTURE This section describes three levels of control—strategic, tactical, and operational— and six areas of control: physical, human, informational, financial, structural (bureaucratic and decentralized), and cultural. How are you going to apply the steps of control to your own management area? Let’s look at this in three ways: First, you need to consider the level of management at which you operate—top, middle, or first level. Second, you need to consider the areas that you draw on for resources—physical, human, information, and/or F financial. Finally, you need to consider the style or control philosophy—bureaucratic, market, or clan, as we will explain. I Levels of Control: Strategic, Tactical, N & Operational There are three levels of control, which correspond toDthe three principal managerial levels: strategic planning by top managers, tactical planning by middle managers, and L operational planning by first-line (supervisory) managers. E 1. Strategic Control by Top Managers Strategic control is monitoring perforY mance to ensure that strategic plans are being implemented and taking corrective action as needed. Strategic control is mainly performed by top managers, those at the CEO , and VP levels, who have an organization-wide perspective. For example, Ford Motor Company CEO Alan Mulally and his senior managers meet every Thursday to review performance across the company’s global operations. They specifically review the performance S of its suppliers because these companies have a significant effect on Ford’s profitability and quality. They ultimately determine which suppliers toAkeep and which ones to let go. 25 R control is monitoring perfor2. Tactical Control by Middle Managers Tactical mance to ensure that tactical plans—those at the divisional or departmental level— A are being implemented and taking corrective action as needed. Tactical control is done mainly by middle managers, those with such titles as “division head,” “plant manager,” and “branch sales manager.” Reporting is done on5a weekly or monthly basis. 3 3. Operational Control by First-Level Managers Operational control is monitoring performance to ensure that operational plans—day-to-day goals— 1 are being implemented and taking corrective action as needed. Operational control 9 such as “department head,” is done mainly by first-level managers, those with titles “team leader,” or “supervisor.” Reporting is done on aB daily basis. U with lower-level managers Considerable interaction occurs among the three levels, providing information upward and upper-level managers checking on some of the more critical aspects of plan implementation below them. Six Areas of Control The six areas of organizational control are physical, human, informational, financial, structural, and cultural. 1. Physical Area The physical area includes buildings, equipment, and tangible products. Examples: There are equipment controls to monitor the use of computers, cars, and other machinery. There are inventory-management controls to keep track of how many products are in stock, how many will be needed, and what their delivery Control Systems & Quality Management ✽ CHAPTER 16 519 kin29546_ch16_510-548.indd Page 520 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles dates are from suppliers. There are quality controls to make sure that products are being built according to certain acceptable standards. 2. Human Resources Area The controls used to monitor employees include personality tests and drug testing for hiring, performance tests during training, performance evaluations to measure work productivity, and employee surveys to assess job satisfaction and leadership. 3. Informational Area Production schedules. Sales forecasts. Environmental impact statements. Analyses of competition. Public relations briefings. All these are controls on an organization’s various information resources. 4. Financial Area Are bills being paid on time? How much money is owed by customers? How much money is owed to suppliers? Is there enough cash on hand to meet payroll obligations? What are the debt-repayment schedules? What is the advertising budget? Clearly, the organization’s financial controls are important because they can affect the preceding three areas. F 5. Structural Area How is the I organization arranged from a hierarchical or structural standpoint?26 Two examples are bureaucratic control and decentralized control. N ■ Bureaucratic control. Bureaucratic control is an approach to organizational D by use of rules, regulations, and formal aucontrol that is characterized thority to guide performance. This form of control attempts to elicit employee L compliance, using strict rules, a rigid hierarchy, well-defined job descriptions, E and administrative mechanisms such as budgets, performance appraisals, and compensation schemes (external rewards to get results). The foremost example Y of use of bureaucratic control is perhaps the traditional military organization. , works well in organizations in which the tasks are Bureaucratic control explicit and certain. While rigid, it can be an effective means of ensuring that performance standards are being met. However, it may not be effective if peoS ple are looking for ways to stay out of trouble by simply following the rules, or if they try to beat theAsystem by manipulating performance reports, or if they try to actively resist bureaucratic constraints. R Decentralized control. Decentralized control is an approach to organizaA tional control that is characterized by informal and organic structural arrangements, the opposite of bureaucratic control. This form of control aims to get increased employee commitment, using the corporate culture, 5 taking responsibility for their performance. Decengroup norms, and workers tralized control is found3in companies with a relatively flat organization. ■ Bureaucratic control. In businesses such as large railroads, tasks are explicit and certain, and employees are expected to perform them the same way each time. However, a small railroad, such as one line serving tourists, need not be bureaucratic. 520 6. Cultural Area The cultural 1 area is an informal method of control. It influences the work process and levels of performance through the set of norms that develop as a 9 result of the values and beliefs that constitute an organization’s culture. If an organization’s culture values innovationBand collaboration, then employees are likely to be evaluated on the basis of how much U they engage in collaborative activities and enhance or create new products. Example: Earlier (Chapter 12), we mentioned that Google, the search-engine company, which appeared as No. 1 on Fortune’s 2012 list of “100 Best Companies to Work For,” is a good example of an organization that promotes, measures, and rewards employee motivation. For instance, in a program called Innovation Time Off, engineers are encouraged to spend 20% of their workweek on pet projects, which has led to such new products as Gmail and Google News. Google’s tremendous revenue growth over the last decade is clearly driven by a set of cultural values, norms, and internal processes that reinforce creativity.27 ● PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 521 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 16.4 THE BALANCED SCORECARD, STRATEGY MAPS, & MEASUREMENT MANAGEMENT How can three techniques—balanced scorecard, strategy maps, and measurement management—help me establish standards and measure performance? ? major question THE BIG PICTURE To establish standards, managers often use the balanced scorecard, which provides four indicators for progress. A visual representation of the balanced scorecard is the strategy map. Measurement management techniques help managers make evidencebased judgments about performance. F I Wouldn’t you, as a top manager, like to have displayedNin easy-to-read graphics all the information on sales, orders, and the like assembled from data pulled in real time from corporate software? The technology exists and it hasDa name: a dashboard, like the instrument panel in a car. L “The dashboard puts me and more and more of our executives in real-time touch E at Verizon Communications. with the business,” says Ivan Seidenberg, former CEO “The more eyes that see the results we’re obtaining every Y day, the higher the quality of the decisions we can make.”28 , Throughout this book we have stressed the importance of evidence-based management—the use of real-world data rather than fads and hunches in making management decisions. When properly done, the dashboard is an example of the S important tools that make this kind of management possible. Others are the balanced scorecard, strategy maps, and measurementAmanagement, techniques that even new managers will find useful. R A The Balanced Scorecard: A Dashboard-like View of the Organization 5 Robert Kaplan is a professor of accounting at the Harvard Business School. David 3 Norton is founder and president of Renaissance Strategy Group, a Massachusetts con1 sulting firm. Kaplan and Norton developed what they call the balanced scorecard, which gives top managers a fast but comprehensive 9 view of the organization via four indicators: (1) customer satisfaction, (2) internal processes, (3) innovation B and improvement activities, and (4) financial measures. “Think of the balanced scorecard as the dials andUindicators in an airplane cockpit,” write Kaplan and Norton. For a pilot, “reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.”29 It is not enough, say Kaplan and Norton, to simply measure financial performance, such as sales figures and return on investment. Operational matters, such as customer satisfaction, are equally important.30 The Balanced Scorecard: Four “Perspectives” The balanced scorecard establishes (a) goals and (b) performance measures according to four “perspectives” or areas—financial, customer, internal business, and innovation and learning. (See Figure 16.5, next page.) Control Systems & Quality Management ✽ CHAPTER 16 521 kin29546_ch16_510-548.indd Page 522 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 1. Financial Perspective “How do we look to shareholders?” Goals Measures 2. Customer Perspective 3. Internal Business Perspective “How do customers see us?” “At what must we excel?” Goals F I N D L 4. Innovation &E Learning Perspective Y “Can we continue to improve , and create value?” Measures Goals figure 16.5 Goals Measures Measures S A R A THE BALANCED SCORECARD: FOUR PERSPECTIVES Source: Reprinted by permission of Harvard Business Review. Exhibit from “The Balanced Scorecard—Measures That Drive Performance,” by R. S. Kaplan and D. P. Norton, February 1992. Copyright © 1992 by the Harvard Business School Publishing Corporation; all rights reserved. 5 3 1 1. Financial Perspective: “How Do We Look to Shareholders?” Typical 9 financial goals have to do with profitability, growth, and shareholder values. Financial measures such as quarterly B sales have been criticized as being shortsighted and not reflecting contemporary value-creating activities. Moreover, critics say that tradiU tional financial measures don’t improve customer satisfaction, quality, or employee motivation. However, making improvements in just the other three operational “perspectives” we will discuss won’t necessarily translate into financial success. Kaplan and Norton mention the case of an electronics company that made considerable improvements in manufacturing capabilities that did not result in increased profitability. The hard truth is that “if improved [operational] performance fails to be reflected in the bottom line, executives should reexamine the basic assumptions of their strategy and mission,” say Kaplan and Norton. “Not all long-term strategies are profitable strategies. . . . A failure to convert improved operational performance, as measured in the scorecard, into improved financial performance should send executives back to their drawing boards to rethink the company’s strategy or its implementation plans.”31 522 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 523 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 2. Customer Perspective: “How Do Customers See Us?” Many organizations make taking care of the customer a high priority. The balanced scorecard translates the mission of customer service into specific measures of concerns that really matter to customers—time between placing an order and taking delivery, quality in terms of defect level, satisfaction with products and service, and cost. Quiznos is a good example. The company uses a speed-dining approach to develop new products and test out different pricing strategies. The company invites groups of 25 people to a location in which they move from station to station and try out new menu options. This technique has reduced the time from test kitchen to market to six months, as opposed to the one year needed by a key competitor.32 3. Internal Business Perspective: “What Must We Excel At?” This part translates what the company must do internally to meet its customers’ expectations. These are business processes such as quality, employee skills, and productivity.33 Top management’s judgment about key internal processes must be linked to meaF to process customer orders, sures of employee actions at the lower levels, such as time get materials from suppliers, produce products, and deliver them to customers. ComI puter information systems can help, for example, in identifying late deliveries, tracing N earlier, can aid this technothe problem to a particular plant. (ERP systems, mentioned logical boost.) D L Continue to Improve & 4. Innovation & Learning Perspective: “Can We Create Value?” Learning and growth of employees E is the foundation for innovation and creativity. Thus, the organization must create a culture that encourages rankY and-file employees to make suggestions and question the status quo and it must , needed to do their jobs. The provide employees with the environment and resources company can use employee surveys and analysis of training data to measure the degree of learning and growth. S A Strategy Map: Visual Representation R of a Balanced Scorecard A Since they devised the balanced scorecard, Kaplan and Norton have come up with an improvement called the strategy map.34 A strategy map is a visual representation of the four perspectives of the balanced scorecard that 5 enables managers to communicate their goals so that everyone in the company can understand how their 3 jobs are linked to the overall objectives of the organization. As Kaplan and Norton state, “Strategy maps show the cause-and-effect links by which specific improvements 1 create desired outcomes,” such as objectives for revenue growth, targeted customer 9 and so on. markets, the role of excellence and innovation in products, An example of a strategy map for a company such Bas Target is shown on the next page, with the goal of creating long-term value for the firm by increasing productivity U.) Measures and standards can growth and revenue growth. (See Figure 16.6, next page be developed in each of the four operational areas—financial goals, customer goals, internal goals, and learning and growth goals—for the strategy. Measurement Management: “Forget Magic” “You simply can’t manage anything you can’t measure,” said Richard Quinn, then– vice president of quality at the Sears Merchandising Group.35 Is this really true? Concepts such as the balanced scorecard seem like good ideas, but how well do they actually work? John Lingle and William Schiemann, principals in a New Jersey consulting firm specializing in strategic assessment, decided to find out.36 Control Systems & Quality Management ✽ CHAPTER 16 523 kin29546_ch16_510-548.indd Page 524 8/8/12 3:27 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Long-Term Value Financial Goals Customer Goals Internal Goals Learning & Growth Goals Productivity Growth • Reducing expenses • Increasing efficiency Operational Excellence • Competitive pricing • Product quality • Speedy delivery Innovation • New products/ services • New market segments Revenue Growth • New markets • New products • Increasing value to existing customers • New customers Customer F Intimacy • Exceptional service I solutions • Effective N D L E Increased Y Customer Value • Deepened , relationship with existing customers S Operational Improvements • Lower cost • Higher quality • Greater speed A R A Improved Competence/ Skills of Workforce Effective Information/ Technology Systems Product Leadership • Product functionality • Product features • Product performance Good Corporate Citizenship • Effective relationships with employees, suppliers, regulators, others Supportive Values & Practices 5 3 figure 16.6 1 THE STRATEGY MAP 9 This example might be used for a retail chain such as Target or Walmart. Source: From T.S. Bateman and S.A. Snell, Management: B Leading & Collaborating in a Competitive World 7E, 2007, p. 124. Reprinted with permission of The McGraw-Hill Companies, Inc. U In a survey of 203 executives in companies of varying size they identified the organizations as being of two types: measurement-managed and non-measurementmanaged. The measurement-managed companies were those in which senior management reportedly agreed on measurable criteria for determining strategic success, and management updated and reviewed semiannual performance measures in three or more of six primary performance areas. The six areas were financial performance, operating efficiency, customer satisfaction, employee performance, innovation/change, and community/environment. 524 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 525 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles The results: “A higher percentage of measurement-managed companies were identified as industry leaders,” concluded Lingle and Schiemann, “as being financially in the top third of their industry, and as successfully managing their change effort.” (The last indicator suggests that measurement-managed companies tend to anticipate the future and are likely to remain in a leadership position in a rapidly changing environment.) “Forget magic,” they say. “Industry leaders we surveyed simply have a greater handle on the world around them.” Why Measurement-Managed Firms Succeed: Four Mechanisms of Success Why do measurement-managed companies outperform those that are less disciplined? The study’s data point to four mechanisms that contribute to these companies’ success:37 ■ ■ ■ ■ Top executives agree on strategy. Most top executives in measurementmanaged companies agreed on business strategy, whereas most of those in F disagreement. Translating non-measurement-managed companies reported strategy into measurable objectives helps make I them specific. Communication is clear. The clear message in turn is translated into good N communication, which was characteristic of managed-measurement organizations and not of non-measurement-managed ones. D There is better focus and alignments. Measurement-managed companies L reported more frequently that unit (division or department) performance meaE and that individual perforsures were linked to strategic company measures mance measures were linked to unit measures. Y The organizational culture emphasizes teamwork and allows risk taking. , Managers in measurement-managed companies more frequently reported strong teamwork and cooperation among the management team and more willingness to take risks. S Afour most frequent barriers to Four Barriers to Effective Measurement The effective measurement, according to Lingle and Schiemann, R are as follows: ■ ■ ■ ■ A often precise in the financial Objectives are fuzzy. Company objectives are and operational areas but not in areas of customer satisfaction, employee performance, and rate of change. Managers need to work at making “soft” objec5 tives measurable. Managers put too much trust in informal feedback systems. Managers tend 3 to overrate feedback mechanisms such as customer complaints or sales-force 1 criticisms about products. But these mechanisms aren’t necessarily accurate. 9 Employees want to see how Employees resist new measurement systems. well measures work before they are willingB to tie their financial futures to them. Measurement-managed companies tend to involve the workforce in deU veloping measures. Companies focus too much on measuring activities instead of results. Too much concern with measurement that is not tied to fine-tuning the organization or spurring it on to achieve results is wasted effort. Are There Areas That Can’t Be Measured? It’s clear that some areas are easier to measure than others—manufacturing, for example, as opposed to services. We can understand how it is easier to measure the output of, say, a worker in a steel mill than that of a bellhop in a hotel or a professor in a classroom. Nevertheless, human resource professionals are trying to have a greater focus on employee productivity “metrics.”38 In establishing quantifiable goals for “hard to measure” jobs, managers should seek input from the employees involved, who are usually more familiar with the details of the jobs.39 ● Control Systems & Quality Management ✽ CHAPTER 16 525 kin29546_ch16_510-548.indd Page 526 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 16.5 SOME FINANCIAL TOOLS FOR CONTROL ? major question Financial performance is important to most organizations. What are the financial tools I need to know about? THE BIG PICTURE Financial controls are especially important.These include budgets, financial statements, ratio analysis, and audits. Do you check your credit card statement line by line when it comes in? Or do you just look at the bottom-line amount owed and write a check? Just as you should monitor your personal finances to ensure your survival and avoid catastrophe, so managers need to do likewise with an organization’s finances. F Whether your organization is for-profit or nonprofit, you need to be sure that revenues are covering costs. I There are a great many kinds of financial controls, but here let us look at the folN ratio analysis, and audits. (Necessarily this is lowing: budgets, financial statements, merely an overview of this topic.D Financial controls are covered in detail in other business courses.) L E Budgets: Formal Financial Projections Y A budget is a formal financial projection. It states an organization’s planned activities for a given period of time in, quantitative terms, such as dollars, hours, or number of products. Budgets are prepared not only for the organization as a whole but also for the divisions and departments within it. The point of a budget is to provide a yardstick S performance and make comparisons (as with against which managers can measure other departments or previous years). A R Incremental Budgeting Managers can take essentially two budget-planning approaches. One of them, zero-based budgeting (ZBB), which forces each departA ment to start from zero in projecting funding needs, is no longer favored. The other approach, the traditional form of a budget, which is mainly used now, is incremental budgeting. 5 Incremental budgeting allocates increased or decreased funds to a department 3 by using the last budget period as a reference point; only incremental changes in 1 9 B U 526 PART 6 ✽ Controlling Passing fancy. The truck fleet represents a huge part of a beer distributor’s capital expenditures budget. What types of data would be needed to justify expansion of this delivery system? kin29546_ch16_510-548.indd Page 527 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles the budget request are reviewed. One difficulty is that incremental budgets tend to lock departments into stable spending arrangements; they are not flexible in meeting environmental demands. Another difficulty is that a department may engage in many activities—some more important than others—but it’s not easy to sort out how well managers performed at the various activities. Thus, the department activities and the yearly budget increases take on lives of their own. Fixed Versus Variable Budgets There are numerous kinds of budgets, and some examples are listed below. (See Table 16.1.) In general, however, budgets may be categorized as two types: fixed and variable. table 16.1 EXAMPLES OF TYPES OF BUDGETS Type of Budget Cash or cashflow budget Capital expenditures budget Sales or revenue budget Expense budget Financial budget Operating budget F I Forecasts all sourcesNof cash income and cash expenditures for daily, weekly, or monthly period D Anticipates investments L in major assets such as land, buildings, and major equipment E Projects future sales, Yoften by month, sales area, or product , Description Projects expenses (costs) for given activity for given period S Projects organization’s A source of cash and how it plans to spend it in the forthcoming period R Projects what an organization will create in goods or A services, what financial resources are needed, and what income is expected 5 Nonmonetary budget ■ ■ Deals with units other than dollars, such as hours of 3 footage labor or office square 1 9 Fixed budgets—where resources are allocated B on a single estimate of costs. Also known as a static budget, a fixed budget allocates resources on U is, there is only one set of the basis of a single estimate of costs. That expenses; the budget does not allow for adjustment over time. For example, you might have a budget of $50,000 for buying equipment in a given year—no matter how much you may need equipment exceeding that amount. Variable budgets—where resources are varied in proportion with various levels of activity. Also known as a flexible budget, a variable budget allows the allocation of resources to vary in proportion with various levels of activity. That is, the budget can be adjusted over time to accommodate pertinent changes in the environment. For example, you might have a budget that allows you to hire temporary workers or lease temporary equipment if production exceeds certain levels. Control Systems & Quality Management ✽ CHAPTER 16 527 kin29546_ch16_510-548.indd Page 528 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Financial Statements: Summarizing the Organization’s Financial Status A financial statement is a summary of some aspect of an organization’s financial status. The information contained in such a statement is essential in helping managers maintain financial control over the organization. There are two basic types of financial statements: the balance sheet and the income statement. The Balance Sheet: Picture of an Organization’s Financial Worth for a Specific Point in Time A balance sheet summarizes an organization’s overall financial worth—that is, assets and liabilities—at a specific point in time. Assets are the resources that an organization controls; they consist of current assets and fixed assets. Current assets are cash and other assets that are readily convertible to cash within 1 year’s time.FExamples are inventory, sales for which payment has not been received (accounts receivable), and U.S. Treasury bills or money market muI tual funds. Fixed assets are property, buildings, equipment, and the like that have a Nare usually harder to convert to cash. Liabilities are useful life that exceeds 1 year but claims, or debts, by suppliers, lenders, D and other nonowners of the organization against a company’s assets. L E The Income Statement: Picture of an Organization’s Financial Results Y The balance sheet depicts the organization’s for a Specified Period of Time overall financial worth at a specific point in time. By contrast, the income statement , summarizes an organization’s financial results—revenues and expenses—over a specified period of time, such as a quarter or a year. Revenues are assets resultingSfrom the sale of goods and services. Expenses are the costs required to produce those goods and services. The difference between revenues and expenses, called the bottom A line, represents the profits or losses incurred over the specified period of time. R A Ratio Analysis: Indicators of an Organization’s 5 Financial Health 3 important indicator of an organization’s financial The bottom line may be the most health, but it isn’t the only one.1Managers often use ratio analysis—the practice of evaluating financial ratios—to determine an organization’s financial health. 9 Among the types of financial ratios are those used to calculate liquidity, debt Band return. Liquidity ratios indicate how easily an management, asset management, organization’s assets can be converted into cash (made liquid). Debt management U ratios indicate the degree to which an organization can meet its long-term financial obligations. Asset management ratios indicate how effectively an organization is managing its assets, such as whether it has obsolete or excess inventory on hand. Return ratios— often called return on investment (ROI) or return on assets (ROA)—indicate how effective management is in generating a return, or profits, on its assets. Audits: External Versus Internal When you think of auditors, do you think of grim-faced accountants looking through a company’s books to catch embezzlers and other cheats? That’s one function of auditing, 528 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 529 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles F I N D L Accountants at the Academy Awards? No, these are the 2012 Oscar winners. E Meryl Streep was voted Best Actress for her role as prime minister Margaret Thatcher in The Iron Lady, and Jean Dujardin was voted Best Actor for his role in The Artist. But every year since 1929 the secret ballots Y for Oscar nominees voted on by members of the Academy of Motion Picture Arts and Sciences have been tabulated by accountants from the , this event very seriously; secrecy is firm now known as PricewaterhouseCoopers. The accounting firm takes tight, and there is no loose gossip around the office watercooler. Two accountants tally the votes, stuff the winners’ names in the envelopes—the ones that will be handed to award presenters during the Academy Awards—and then memorize the winners’ names, just in case the envelopes don’t make it to the show. Accounting is an important business because investors depend on independent auditors to verify that a company’s finances are what they are purported to be. S A R A but besides verifying the accuracy and fairness of financial statements it also is intended to be a tool for management decision making. Audits5are formal verifications of an organization’s financial and operational systems. 3 Audits are of two types—external and internal. 1 9 External Audits—Financial Appraisals by Outside Financial Experts An B external audit is a formal verification of an organization’s financial accounts and statements by outside experts. The auditors are certified public accountants (CPAs) U who work for an accounting firm (such as PricewaterhouseCoopers) that is independent of the organization being audited. Their task is to verify that the organization, in preparing its financial statements and in determining its assets and liabilities, followed generally accepted accounting principles. Internal Audits—Financial Appraisals by Inside Financial Experts An internal audit is a verification of an organization’s financial accounts and statements by the organization’s own professional staff. Their jobs are the same as those of outside experts—to verify the accuracy of the organization’s records and operating activities. Internal audits also help uncover inefficiencies and thus help managers evaluate the performance of their control systems. ● Control Systems & Quality Management ✽ CHAPTER 16 529 kin29546_ch16_510-548.indd Page 530 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 16.6 TOTAL QUALITY MANAGEMENT ? major question How do top companies improve the quality of their products or services? THE BIG PICTURE Total quality management (TQM) is dedicated to continuous quality improvement, training, and customer satisfaction. Two core principles are people orientation and improvement orientation. Some techniques for improving quality are employee involvement, benchmarking, outsourcing, reduced cycle time, and statistical process control. F I N a luxury chain of 77 hotels worldwide in 25 counThe Ritz-Carlton Hotel Co., LLC, tries that is an independently operated division of Marriott International, puts a preD mium on doing things right. First-year managers and employees receive 250–310 hours of training. The presidentLmeets each employee at a new hotel to ensure he or she understands the Ritz-CarltonEstandards for service. The chain has also developed a database that records the preferences of more than 1 million customers, so that each Y40 hotel can anticipate guests’ needs. Because of this diligence, the , Ritz-Carlton has twice been the recipient (in 1992 and in 1999) of the Malcolm Baldrige National Quality Award. This award was created by Congress in 1987 to be the most prestigious recognition of quality—the total ability of a product or service to meet customer needs—in the United States. It is given annuS ally to U.S. organizations in manufacturing, service, small business, health care, eduA the award actually means something is shown by a cation, and nonprofit fields.41 (That study that found that hospitals that Rreceived the honor significantly outperformed other hospitals on nearly every count.)42 A The Baldrige award is an outgrowth of the realization among U.S. managers in the early 1980s that three-fourths of Americans were telling survey takers that the label “Made in America” no longer represented excellence—that they considered 5 products made overseas, especially in Japan, to be equal or superior in quality to U.S.-made products. As we saw3in Chapter 2, much of the impetus for quality improvements in Japanese products 1 came from American consultants W. Edwards Deming and Joseph M. Juran. As we mentioned, two strategies for ensuring quality are quality control, the strategy9for minimizing errors by managing each stage of production, and quality assurance, B focusing on the performance of workers and urging them to strive for “zero defects.” U Deming Management: The Contributions of W. Edwards Deming to Improved Quality Previously, Frederick Taylor’s scientific management philosophy, designed to maximize worker productivity, had been widely instituted. But by the 1950s, scientific management had led to organizations that were rigid and unresponsive to both employees and customers. W. Edwards Deming’s challenge, known as Deming management, proposed ideas for making organizations more responsive, more democratic, and less wasteful. These included the following principles: 530 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 531 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 1. Quality Should Be Aimed at the Needs of the Consumer “The consumer is the most important part of the production line,” Deming wrote.43 Thus, the efforts of individual workers in providing the product or service should be directed toward meeting the needs and expectations of the ultimate user. 2. Companies Should Aim at Improving the System, Not Blaming Workers Deming suggested that U.S. managers were more concerned with blaming problems on individual workers rather than on the organization’s structure, culture, technology, work rules, and management—that is, “the system.” By treating employees well, listening to their views and suggestions, Deming felt, managers could bring about improvements in products and services. 3. Improved Quality Leads to Increased Market Share, Increased F When companies work to Company Prospects, & Increased Employment improve the quality of goods and services, they produce less waste, fewer delays, I and are more efficient. Lower prices and superior quality lead to greater market N share, which in turn leads to improved business prospects and consequently increased employment. D L 4. Quality Can Be Improved on the Basis of Hard E Data, Using the PDCA Cycle Deming suggested that quality could be improved by acting on the basis of Y hard data. The process for doing this came to be known as the PDCA cycle, a plan-do, improvement of operations. check-act cycle using observed data for continuous (See Figure 16.7.) figure 16.7 THE PDCA CYCLE: PLAN-DO-CHECK-ACT S A R A The four steps continuously follow each other, resulting in continuous improvement. 5 1 PLAN desired and important changes, based on observed data. Make pilot test, if necessary. 2 DO implement the 3 change or make a small-scale test. 1 4 ACT on lessons learned, after study of results. Determine if predictions can be made as basis for new methods. 3 CHECK or observe what happened after the change or during the test. 9 B U Source: From W. Edwards Deming, Out of the Crisis. Copyright © 2000 Massachusetts Institute of Technology, by permission of MIT Press. Control Systems & Quality Management ✽ CHAPTER 16 531 kin29546_ch16_510-548.indd Page 532 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Continuous improvement. In the 1980s, building contractor Fred Carl found restaurant-style commercial stoves impractical for his own home kitchen, so he designed his own. He then opened a manufacturing plant in Greenwood, Mississippi, under the name Viking Range Corporation. From Toyota, Viking borrowed Japanese manufacturing techniques grouped under the word kaizen, which translates into continuous improvement. Production is set up so that if there is a problem everyone on the line is instantly aware of it, and the problem is solved right on the plant floor—so that customers are continuously supplied with elegant yet dependable stoves like the one shown here. F I N D L Deliver Customer Value Core TQM Principles: & Strive for Continuous Improvement E Y is defined as a comprehensive approach—led by Total quality management (TQM) top management and supported , throughout the organization—dedicated to continuous quality improvement, training, and customer satisfaction. In Chapter 2 we said there are four components to TQM: S 1. 2. 3. 4. Make continuous improvement a priority. A Get every employee involved. Listen to and learn fromRcustomers and employees. Use accurate standards to A identify and eliminate problems. These may be summarized as two core principles of TQM—namely, (1) people orientation—everyone involved5with the organization should focus on delivering value to customers—and (2) improvement orientation—everyone should work on 3 processes.44 Let’s look at these further. continuously improving the work 1 1. People Orientation—Focusing Everyone on Delivering Customer Value Organizations adopting9TQM value people as their most important resource— both those who create a product B or service and those who receive it. Thus, not only are employees given more decision-making power, so are suppliers and customers. U under the following assumptions. This people orientation operates ■ Delivering customer value is most important. The purpose of TQM is to focus people, resources, and work processes to deliver products or services that create value for customers. People will focus on quality if given empowerment. TQM assumes that employees (and often suppliers and customers) will concentrate on making quality improvements if given the decision-making power to do so. The reasoning here is that the people actually involved with the product or service are in the best position to detect opportunities for quality improvements. TQM requires training, teamwork, and cross-functional efforts. Employees and suppliers need to be well trained, and they must work in teams. ■ ■ 532 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 533 8/1/12 3:54 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Teamwork is considered important because many quality problems are spread across functional areas. For example, if cellphone design specialists conferred with marketing specialists (as well as customers and suppliers), they would find the real challenge of using a cellphone for older people is pushing 11 tiny buttons to call a phone number. Teams may be self-managed teams, as described in Chapter 13, with groups of workers given administrative oversight of activities such as planning, scheduling, monitoring, and staffing for their task domains. Sometimes, however, an organization needs a special-purpose team to meet to solve a special or onetime problem. The team then disbands after the problem is solved. These teams are often cross-functional, drawing on members from different departments. American medicine, for instance, is moving toward a team-based approach for certain applications, involving multiple doctors as well as nurse practitioners and physician assistants.45 F 2. Improvement Orientation—Focusing Everyone on Continuously Improving Work Processes Americans seem Ito like big schemes, grand designs, and crash programs. Although these approaches certainly have their place, the lesson of the quality movement from overseas is thatNthe way to success is through continuous small improvements. Continuous improvement is defined as ongoing D small, incremental improvements in all parts of an organization—all products, L services, functional areas, and work processes.46 This improvement orientation has the following assumptions. E ■ ■ ■ ■ Y TQM assumes that it’s better It’s less expensive to do it right the first time. to do things right the first time than to do costly , reworking. To be sure, there are many costs involved in creating quality products and services—training, equipment, and tools, for example. But they are less than the costs of dealing with poor quality—those stemming from lost S customers, junked materials, time spent reworking, and frequent inspection, for example.47 A It’s better to do small improvements all the time. This is the assumption R matter, that no improvethat continuous improvement must be an everyday ment is too small, that there must be an ongoing A effort to make things better a little bit at a time all the time. Accurate standards must be followed to eliminate small variations. TQM 5 emphasizes the collection of accurate data throughout every stage of the work process. It also stresses the use of accurate standards (such as benchmarking, 3 as we discuss) to evaluate progress and eliminate small variations, which are 1 the source of many quality defects. There must be strong commitment from top 9 management. Employees and suppliers won’t focus on making small incremental improvements unless B managers go beyond lip service to support high-quality work, as do the top managers at Ritz-Carlton, Amazon.com, and Ace U Hardware. EXAMPLE Chrysler Does a Makeover: Initiating a New Quality Strategy When in 2009 Italian carmaker Fiat SpA took control of the Chrysler Group, the third of the Big Three U.S. auto companies, it gave quality control chief Doug Betts far- reaching authority. “Betts can shut the whole company down and nobody is going to overrule him, including me,” CEO Sergio Marchionne is reported to have said.48 Control Systems & Quality Management ✽ CHAPTER 16 533 kin29546_ch16_510-548.indd Page 534 7/23/12 9:14 PM user-f502 Looking for One-Millimeter Defects. Chrysler is working hard to achieve what Ford and General Motors (following trailblazers Toyota and Honda) have already been doing—namely, raise quality and leave behind a reputation for lousy craftsmanship.49 This covers everything from safety to interior materials to how parts fit together. For instance, in 2011, the company spent $50,000 modifying a part involving a barely noticeable (one-millimeter) projection on a taillight of a Chrysler 300 prototype, enough to “catch a rag if someone was hand-washing” the car, Betts said. Assembly plants are being outfitted with special clean zones, where workers use devices (called Meisterbock gauges) that laser-scan the surface of a vehicle for defects as small as a few millimeters, which trigger adjustments at the plant or with suppliers. /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Moving Up. In 2008, when Chrysler was controlled by private-equity firm Cerberus Capital Management LP, the company’s reputation was so bad that a review of the nowdiscontinued Sebring called it “almost certainly the worst car in the entire world.” Three years later, Consumer Reports gave Chrysler’s brands the highest reliability ratings in years, moving them from the bottom to the middle of the list.50 Still, there have been setbacks, with Chrysler recalling late model Dodge Charger and Chrysler 300 sedans because of stability control and brake-system problems. YOUR CALL It’s Feasy for a company to lose its reputation. How long do you think it takes to get it back? Is Chrysler there yet, inIyour opinion? N D L Applying TQM to Services E Manufacturing industries provide Y tangible products (think jars of baby food), service industries provide intangible products (think child care services). Manufactured products can be stored , (such as dental floss in a warehouse); services generally need to be consumed immediately (such as dental hygiene services). Services tend to involve a good deal of people effort (although there is some automation, as with bank automatedSteller machines). Finally, services are generally provided at locations and times Aconvenient for customers; that is, customers are much more involved in the delivery of services than they are in the delivery of R manufactured products. A Customer Satisfaction: A Matter of Perception? Perhaps you’re beginning to see how judging the quality of services is a different animal from judging the quality of manufactured goods, 5 because it comes down to meeting the customer’s satisfaction, which may be a matter of perception. (After all, some hotel guests, 3 restaurant diners, and supermarket patrons, for example, are more easily satisfied 1 than others.) 9 The RATER Scale How, then, can we measure the quality of a delivered serB vice? For one, we can use the RATER scale, which enables customers to rate the quality of a service along five U dimensions—reliability, assurance, tangibles, empathy, and responsiveness (abbreviated RATER)—each on a scale from 1 (for very poor) to 10 (for very good).51 The meanings of the RATER dimensions are as follows: ■ Reliability—ability to perform the desired service dependably, accurately, and consistently. Assurance—employees’ knowledge, courtesy, and ability to convey trust and confidence. Tangibles—physical facilities, equipment, appearance of personnel. Empathy—provision of caring, individualized attention to customers. Responsiveness—willingness to provide prompt service and help customers. ■ ■ ■ ■ 534 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 535 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles PRACTICAL ACTION What Makes a Service Company Successful? Four Core Elements With services now employing more than 75% of American workers, universities are bringing more research attention to what is being called “services science.” This is a field that uses management, technology, mathematics, and engineering expertise to improve the performance of service businesses, such as retailing and health care.52 Harvard Business School scholar Frances X. Frei has determined that a successful service business must make the right decisions about four core elements and balance them effectively:53 F I N Which service attributes, as informed by the needs of D customers, does the company target for excellence and L which does it target for inferior performance? Does a E bank, for example, offer more convenient hours and friendlier tellers (excellence) but pay less attractive interY est rates (inferior performance)? , The Offering: Which Features Are Given Top-Quality Treatment? The Funding Mechanism: Who Pays for the Service? S How should the company fund its services? Should it have the customer pay for them? This can be done in A a palatable way, as when Starbucks funds its stuffed-chair R ambience by charging more for coffee. Or it can be done A by making savings in service features, as when Progressive Casualty Insurance cuts down on frauds and lawsuits by deploying its own representatives to the scene of an 5 auto accident. Or should the company cover the cost of excellence 3 with operational savings, as by spending now to save later 1 or having the customer do the work? Call centers usually 9 charge for customer support, but Intuit offers free support and has product-development people, as well as B customer-service people, field calls so that subsequent U developments in Intuit software are informed by direct knowledge of customer problems. Other companies, such as gas stations, save money by having customers pump their own gas. The Employee Management System: How Are Workers Trained & Motivated? Service companies need to think about what makes their employees able to achieve excellence and what makes them reasonably motivated to achieve excellence. For instance, bank customers may expect employees to meet a lot of complex needs, but the employees aren’t able to meet these needs because they haven’t been trained. Or they aren’t motivated to achieve excellence because the bank hasn’t figured out how to screen in its hiring, as in hiring people for attitude first and training them later versus paying more to attract highly motivated people. The Customer Management System: How Are Customers “Trained”? Like employees, customers in a service business must also be “trained” as well, as the airlines have done with checkin. At Zipcar, the popular car-sharing service, the company keeps its costs low by depending on customers to clean, refuel, and return cars in time for the next user. In training customers, service companies need to determine which customers they’re focusing on, what behaviors they want, and which techniques will most effectively influence customer behavior. YOUR CALL Pick a services company you’re familiar with, such as Domino’s Pizza, Starbucks, or the college bookstore. In integrating the four core features just discussed, a service company needs to determine the following: Are the decisions it makes in one area supported by those it makes in the other areas? Does the service model create longterm value for customers, employees, and shareholders? Is the company trying to be all things to all people or specific things to specific people? How do you think the company you picked rates? Some TQM Tools & Techniques Several tools and techniques are available for improving quality. Here we describe benchmarking, outsourcing, reduced cycle time, ISO 9000 and ISO 14000, statistical process control, and Six Sigma. Control Systems & Quality Management ✽ CHAPTER 16 535 kin29546_ch16_510-548.indd Page 536 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Benchmarking: Learning from the Best Performers We discussed benchmarking briefly in Chapter 10. As we stated there, benchmarking is a process by which a company compares its performance with the best practices of high-performing organizations. For example, at Xerox Corp., generally thought to be the first American company to use benchmarking, it is defined as, in one description, “the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders.”54 EXAMPLE Do Social Media Ads Work? The Need for Benchmarking F Benchmarking is a search for “best practices” that can advertising works is incredibly difficult to do,” says a be applied to one’s own business. Southwest Airlines, I Today report, citing an analyst at media research USA for instance, studied auto-racing pit crews to learn how firm N BIA/Kelsey. “The big problem Facebook and many to reduce the turnaround time of its aircraft at each social-media sites have . . . is that they don’t have consisscheduled stop. Toyota managers got the idea for justD clear-cut metrics that prove advertising on their tent, in-time inventory deliveries by looking at how U.S. susites L works.”56 Even by traditional measures, such as permarkets replenish their shelves. AutoNation, a how many people click on an ad, Facebook doesn’t look conglomeration of car dealers, tested what combinaE particularly effective: 57% of Facebook users in one poll tion of factors made for more effective newspaper ads Y they never click on the site’s ads.57 (Other research said by using multivariable testing, a statistical technique disagrees.) , originated during World War II to better shoot down German bombers. YOUR CALL The Trouble with Facebook. Sometimes, however, benchmarking is difficult. In May 2012, General Motors made headlines when it announced that it would no longer run paid ads on Facebook because they had little impact on car buyers. 55 “Proving that social-media S you think that GM abandoned Facebook too soon, Do that A social-media marketing and metrics are still maturing? (Ford, by contrast, increased its expenditures on soRmedia, including Later, in July 2012, Facebook and GM cial began A discussions about possibly re-engaging.) 5 3 1 Outsourcing: Let Outsiders Handle It Outsourcing (discussed in detail in 9 Chapter 4) is the subcontracting of services and operations to an outside vendor. B subcontractor vendor can do the job better or Usually this is done because the cheaper. Or, stated another way, U when the services and operations are done inhouse, they are not done as efficiently or are keeping personnel from doing more important things. For example, despite its former (2004–2009) well-known advertising campaign, “An American Revolution,” Chevrolet outsources the engine for its Chevrolet Equinox to China, where it found it could get high-quality engines built at less cost.58 And when IBM and other companies outsource components inexpensively for new integrated software systems, says one researcher, offshore programmers make information technology affordable to small and medium-size businesses and others who haven’t yet joined the productivity boom.59 Outsourcing is also being done by many state and local governments, which, under the banner known as privatization, have subcontracted traditional government services such as fire protection, correctional services, and medical services. 536 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 537 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Reduced Cycle Time: Increasing the Speed of Work Processes Another TQM technique is the emphasis on increasing the speed with which an organization’s operations and processes can be performed. This is known as reduced cycle time, or reduction in steps in a work process, such as fewer authorization steps required to grant a contract to a supplier. The point is to improve the organization’s performance by eliminating wasteful motions, barriers between departments, unnecessary procedural steps, and the like. ISO 9000 & ISO 14000: Meeting Standards of Independent Auditors If you’re a sales representative for Du Pont, the American chemical company, how will your overseas clients know that your products have the quality they are expecting? If you’re a purchasing agent for an Ohio-based tire company, how can you tell if the synthetic rubber you’re buying overseas is adequate? At one time, buyers and sellers simply had to rely on a supplier’s past reputation F or personal assurances. In 1979, the International Organization for Standardization (ISO), based in Geneva, Switzerland, created a set ofIquality standards known as the 9000 series—“a kind of Good Housekeeping seal of approval for global business,” in N one description.60 There are two such standards: ■ ■ D L quality-control procedures ISO 9000. The ISO 9000 series consists of companies must install—from purchasing Eto manufacturing to inventory to shipping—that can be audited by independent quality-control Y flaws in manufacturing and experts, or “registrars.” The goal is to reduce improve productivity. Companies must document the procedures and train , their employees to use them. For instance, DocBase Direct is a web-delivered document and forms-management system that helps companies comply with key ISO management standards, such S as traceable changes and easy reporting. A by more than 100 counThe ISO 9000 designation is now recognized tries around the world, and a quarter of theR corporations around the globe insist that suppliers have ISO 9000 certification. “You close some expenA Ekeler, general manager of sive doors if you’re not certified,” says Bill Overland Products, a Nebraska tool-and-die-stamping firm.61 In addition, because the ISO process forced him to analyze his company from the top 5 down, Ekeler found ways to streamline manufacturing processes that improved his bottom line. 3 ISO 14000. The ISO 14000 series extends 1 the concept, identifying standards for environmental performance. ISO 14000 dictates standards for 9 documenting a company’s management of pollution, efficient use of raw materials, and reduction of the firm’s impact on B the environment. U Statistical Process Control: Taking Periodic Random Samples As the pages of this book were being printed, every now and then a press person would pull a few pages out of the press run and inspect them (under a bright light) to see that the consistency of the color and quality of the ink were holding up. This is an ongoing human visual check for quality control. All kinds of products require periodic inspection during their manufacture: hamburger meat, breakfast cereal, flashlight batteries, wine, and so on. The tool often used for this is statistical process control, a statistical technique that uses periodic random samples from production runs to see if quality is being maintained within a standard range of acceptability. If quality is not acceptable, production is stopped to allow corrective measures. Control Systems & Quality Management ✽ CHAPTER 16 537 kin29546_ch16_510-548.indd Page 538 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles Statistical process control is the technique that McDonald’s uses, for example, to make sure that the quality of its burgers is always the same, no matter where in the world they are served. Companies such as Intel and Motorola use statistical process control to ensure the reliability and quality of their products. Six Sigma & Lean Six Sigma: Data-Driven Ways to Eliminate Defects “The biggest problem with the management technique known as Six Sigma is this: It sounds too good to be true,” says a Fortune writer. “How would your company like a 20% increase in profit margins within one year, followed by profitability over the long-term that is ten times what you’re seeing now? How about a 4% (or greater) annual gain in market share?”62 What is this name, Six Sigma (which is probably Greek to you), and is it a path to management paradise? The name comes from sigma, the Greek letter that statisticians use to define a standard deviation. The higher the sigma, the fewer the deviations from the norm—that is, F the fewer the defects. Developed by Motorola in 1985, Six Sigma has since been embraced by General Electric, Allied Signal, I American Express, and other companies. There are two variations, Six Sigma and lean Six Sigma. N D ■ Six Sigma. Six Sigma is a rigorous statistical analysis process that reduces L and service-related processes. By testing thoudefects in manufacturing sands of variables and eliminating guesswork, a company using the technique E attempts to improve quality and reduce waste to the point where errors nearly Y product design to manufacturing to billing, the atvanish. In everything from tainment of Six Sigma means there are no more than 3.4 defects per million , products or procedures. “Six Sigma gets people away from thinking that 96% is good, to thinking that 40,000 failuresSper million is bad,” says a vice president of consulting firm A. T. Kearney.63 Six Sigma means being 99.9997% perfect. By contrast, Three Sigma A or Four Sigma means settling for 99% perfect—the equivalent of no electricity R for 7 hours each month, two short or long landings per day at each major airport, or 5,000 incorrect surgical operations A per week.64 Six Sigma may also be thought of as a philosophy—to reduce variation in your company’s business and make customer-focused, data-driven decisions. 5 The method preaches the use of Define, Measure, Analyze, Improve, and 3 leaders may be awarded a Six Sigma “black belt” Control (DMAIC). Team for applying DMAIC. 1 Lean Six Sigma. More recently, companies are using an approach known 9 focuses on problem solving and performance as lean Six Sigma, which improvement—speed B with excellence—of a well-defined project.65 Xerox Corp., for example, has focused on getting new products to cusU tomers faster, which has meant taking steps out of the design process without loss of quality. A high-end, $200,000 machine that can print 100 pages a minute traditionally has taken three to five cycles of design; removing just one of those cycles can shave up to a year off time to market.66 The grocery chain Albertsons Inc. announced in 2004 that it was going to launch Six Sigma training to reduce customer dissatisfaction and waste to the lowest level possible.67 ■ Six Sigma and lean Six Sigma may not be perfect, since they cannot compensate for human error or control events outside a company. Still, they let managers approach problems with the assumption that there’s a data-oriented, tangible way to approach problem solving.68 ● 538 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 539 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 16.7 MANAGING CONTROL EFFECTIVELY What are the keys to successful control, and what are the barriers to control success? THE BIG PICTURE ? major question This section describes four keys to successful control and five barriers to successful control. How do you as a manager make a control system successful, and how do you identify and deal with barriers to control? We consider these topics next.69 F I The Keys to Successful Control Systems N Successful control systems have a number of common D characteristics: (1) They are strategic and results oriented. (2) They are timely, accurate, and objective. (3) They L are realistic, positive, and understandable and they encourage self-control. (4) They 70 are flexible. E Y , 1. They Are Strategic & Results Oriented Control systems support strategic plans and are concentrated on significant activities that will make a real difference to the organization. Thus, when managers are developing strategic plans for Sthey should pay attention to achieving strategic goals, that is the point at which developing control standards that will measure how A well the plans are being achieved. R Example: Global warming is now shifting the climate on a continental scale, changing the life cycle of animals and plants, scientists say, and surveys show A more Americans feel guilty for not living greener.71 A growing number of companies are discovering that embracing environmental safe practices is paying off in savings of hundreds of millions of dollars, as we saw 5 with Subaru of Indiana in Chapter 3.72 3 1 9 B U Doing good. Created by Microsoft founder Bill Gates and his wife, the Bill & Melinda Gates Foundation of Seattle is the largest private foundation in the world. It aims to reduce poverty and enhance health care throughout the world and to expand educational opportunities in the United States. The way it seeks to apply business techniques to giving makes it a leader in global philanthropy. Control Systems & Quality Management ✽ CHAPTER 16 539 kin29546_ch16_510-548.indd Page 540 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 2. They Are Timely, Accurate, & Objective information of any kind—should . . . ■ Good control systems—like good Be timely—meaning when needed. The information should not necessarily be delivered quickly, but it should be delivered at an appropriate or specific time, such as every week or every month. And it certainly should be often enough to allow employees and managers to take corrective action for any deviations. Be accurate—meaning correct. Accuracy is paramount, if decision mistakes are to be avoided. Inaccurate sales figures may lead managers to mistakenly cut or increase sales promotion budgets. Inaccurate production costs may lead to faulty pricing of a product. Be objective—meaning impartial. Objectivity means control systems are impartial and fair. Although information can be inaccurate for all kinds of reasons (faulty communication, F unknown data, and so on), information that is not objective is inaccurate for a special reason: It is biased or prejudiced. Control I systems need to be considered unbiased for everyone involved so that they will be respected for their fundamental purpose—enhancing performance. N ■ ■ D & Understandable & Encourage Self3. They Are Realistic, Positive, Control Control systems have Lto focus on working for the people who will have to live with them. Thus, they operate best when they are made acceptable to the organizaE them. Thus, they should . . . tion’s members who are guided by Y ■ Be realistic. They should incorporate realistic expectations. If employees feel performance results are, too difficult, they are apt to ignore or sabotage the performance system. Be positive. They should S emphasize development and improvement. They should avoid emphasizing punishment and reprimand. A should fit the people involved, be kept as simple as Be understandable. They possible, and present data R in understandable terms. They should avoid complicated computer printouts and statistics. A Encourage self-control. They should encourage good communication and mutual participation. They should not be the basis for creating distrust between employees and managers. 5 ■ ■ ■ 3 systems must leave room for individual judgment, 4. They Are Flexible Control so that they can be modified when 1 necessary to meet new requirements. 9 Barriers to Control Success B Among the several barriers to a successful control system are the following:73 U 1. Too Much Control Some organizations, particularly bureaucratic ones, try to exert too much control. They may try to regulate employee behavior in everything from dress code to timing of coffee breaks. Allowing employees too little discretion for analysis and interpretation may lead to employee frustration—particularly among professionals, such as college professors and medical doctors. Their frustration may lead them to ignore or try to sabotage the control process. 2. Too Little Employee Participation As highlighted by W. Edwards Deming, discussed elsewhere in the book (Chapter 2), employee participation can enhance productivity. Involving employees in both the planning and execution of control systems can bring legitimacy to the process and heighten employee morale. 540 PART 6 ✽ Controlling kin29546_ch16_510-548.indd Page 541 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles 3. Overemphasis on Means Instead of Ends We said that control activities should be strategic and results oriented. They are not ends in themselves but the means to eliminating problems. Too much emphasis on accountability for weekly production quotas, for example, can lead production supervisors to push their workers and equipment too hard, resulting in absenteeism and machine breakdowns. Or it can lead to game playing—“beating the system”—as managers and employees manipulate data to seem to fulfill short-run goals instead of the organization’s strategic plan. 4. Overemphasis on Paperwork A specific kind of misdirection of effort is management emphasis on getting reports done, to the exclusion of other performance activity. Reports are not the be-all and end-all. Undue emphasis on reports can lead to too much focus on quantification of results and even to falsification of data. Example: A research laboratory decided to use the number of patents the lab obtained as a measure of its effectiveness. The result was an increase in patents filed but F 74 a decrease in the number of successful research projects. I 5. Overemphasis on One Instead of Multiple Approaches One control N and information systems, an may not be enough. By having multiple control activities organization can have multiple performance indicators, D thereby increasing accuracy and objectivity. L casinos is to prevent emExample: An obvious strategic goal for gambling ployee theft of the cash flowing through their hands. E Thus, casinos control card dealers by three means. First, they require prospective hires to have a dealer’s liY cense before they are hired. Second, they put them under constant scrutiny, using , direct supervision by on-site pit bosses as well as observation by closed-circuit TV cameras and through overhead one-way mirrors. Third, they require detailed reports at the end of each shift so that transfer of cash and cash equivalents (such as S gambling chips) can be audited.75 ● A R A Temptation. Because legal gambling is a heavy cash business, casinos need to institute special controls against employee theft. One of them is the “eye in the sky” over card and craps tables. 5 3 1 9 B U Control Systems & Quality Management ✽ CHAPTER 16 541 kin29546_ch16_510-548.indd Page 542 7/23/12 9:14 PM user-f502 /202/MH01824/kin29546_disk1of1/0078029546/kin29546_pagefiles EPILOGUE: THE KEYS TO YOUR MANAGERIAL SUCCESS ...
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Management case study
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How does a company restore its reputation?
Company reputation is one of the key factors that determine the success and survival of a
business organization. Company reputation ensures that customers have the trust and confidence
in the organization's products and services hence ensuring the survival and growth of a company
(Flamholtz, 2012). Good company reputation often ensures that customers in the marketplace
place prefer the organization’s products or services even in cases where the same products or
services are offered at different prices.
Companies that have had the reputation negatively affected like Netflix when it decided
to double user rates are required to come up with strategies that ensure customer trust and
confidence is restored in order to ensure their survival and growth. The first step that a company
can take to restore its reputation is to understand the reasons and the root cause for reputation
damage. Identifying the reasons for the damage of reputation ensure that the company can take
measures such as halting the services that are damaged the reputation and issuing an apology to
its customers and shareholder. For example, Netflix should have halted the decision to double
user rate in order to provide DVD rentals and movies online since it was the root cause of its
reputation damage.
C...


Anonymous
Excellent resource! Really helped me get the gist of things.

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