For ANN HARRIS ONLY
Resources: Ch. 16 of Management and Appendix: The Project Planner’s Toolkit of Management and the Excel Template
Apply the concepts of the tools described in the Project Planner’s Toolkit.
Refer to the Excel Template as an example.
After studying and evaluating the components included in the Project Manager’s Toolkit, evaluate which of the tools (Gantt Chart or Flow Chart) would be most appropriate for each of the following tasks and use that tool to complete the task.
Outline the steps involved in undertaking a job search and choosing a job. Include an analysis of the advantages and limitations of the tool as well as ideas for ways you can use the tool in business.
Build a schedule showing the steps for planning and preparing for your vacation. Include a description of the advantages and limitations of this tool and ideas for ways you can use it in business.
Combine the charts into one Microsoft® PowerPoint® file
Major Questions You Should Be Able to Answer
16.1Control: When Managers Monitor Performance
Major Question: Why is control such an important managerial function?
16.2Levels & Areas of Control
Major Question: How do successful companies implement controls?
16.3The 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?
16.4Some Financial Tools for Control
Major Question: Financial performance is important to most organizations. What are the financial tools I need to know about?
16.5Total Quality Management
Major Question: How do top companies improve the quality of their products or services?
16.6Managing Control Effectively
Major Question: What are the keys to successful control, and what are the barriers to control success?
16.7Managing for Productivity
Major Question: How do managers influence productivity?
the manager’s toolbox
Improving Productivity: Going beyond Control Techniques to Get the Best Results
How, as a manager, can you increase work 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
Establish Base Points, Set Goals, & Measure Results
To be able to tell whether your work unit is becoming more productive, you need to establish systems of measurement. You can start by establishing the base point, such as the number of customers served per day, quantity of products produced per hour, and the like. You can then set goals to establish new levels that you wish to attain, and institute systems of measurement with which to ascertain progress. Finally, you can measure the results and modify the goals or work processes as necessary.
Use New Technology
Clearly, this is a favorite way to enhance performance. With a word processor, you can produce more typed pages than you can with a typewriter. 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 cure-all; information technology also offers plenty of opportunities for simply wasting time.
Improve Match between Employees & Jobs
You can take steps to ensure the best fit between employees and their jobs, including improving employee selection, paying attention to training, redesigning jobs, and providing financial incentives that are tied to performance.
Encourage Employee Involvement & Innovation
Companies improve performance 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 in doing their jobs, allow employee flextime, and reward people for learning new skills and taking on additional responsibility.
Encourage Employee Diversity
By hiring people who are diverse in gender, age, race, and ethnicity, you’re more likely to have a workforce with different experiences, outlooks, values, and skills. By melding their differences, a team can achieve results that exceed the previous standards.
Redesign the Work Process
Some managers think performance can be enhanced through cost cutting, but this is not always the case. It may be that the work process can be redesigned to eliminate inessential steps.
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?
The final management function, control, is monitoring performance, comparing it with goals, and taking corrective action as needed. We define managing for performance and explain its importance. We then identify six reasons controlling is needed, explain the steps in the control process, and describe three types of control managers use. Next we cover levels and areas of control and financial tools for control. We discuss total quality management (TQM). We describe the four keys to successful control and five barriers to successful control. We conclude by considering how to achieve higher productivity.
Control: When Managers Monitor Performance
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 corrective action as needed. Controlling is the fourth management function, along with planning, organizing, and leading, and its purpose is plain: to make sure that performance meets objectives.
Planning is setting goals and deciding how to achieve them.
Organizing is arranging tasks, people, and other resources to accomplish the work.
Leading is motivating people to work hard to achieve the organization’s goals.
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 performance and productivity. (See Figure 16.1.)
FIGURE 16.1 Controlling for effective performance
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.)
Why Is Control Needed?
Lack of control mechanisms can lead to problems for both managers and companies. For example, in 2012 the CEO of Yahoo!, Scott Thompson, is discovered to have falsified his resume by claiming to have a computer science degree—and 11 days later he is out, bringing turmoil to an already troubled company.3 The senior banker of J.P. Morgan Chase, Ina Drew, contracts Lyme disease and is frequently out of the office when traders begin making more and more risky bets, culminating in a loss of at least $3 billion and public demands for greater bank regulation.4 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.5 Could greater control have helped avoid or reduce the consequences of these situations? Of course.
There are six reasons why control is needed.
Page 5131. 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.6
Example: As is certainly apparent by now, the issue of 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.7 Nearly 80% of what 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.8
2. To Discover Irregularities & Errors Small problems can mushroom into big ones. Cost overruns, manufacturing defects, employee turnover, bookkeeping errors, and customer dissatisfaction are all matters that may be tolerable in the short run. But in the long run, they can bring about even the downfall of an organization.
Example: You might not even miss a dollar a month looted from your credit card account. But an Internet hacker who does this with thousands of customers can undermine the confidence of consumers using their credit cards to charge online purchases at Amazon.com, Priceline.com, and other web retailers. Thus, a computer program 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 can reduce labor costs, eliminate waste, increase output, and increase product delivery cycles. In addition, controls can help add value to a product so that customers will be more inclined to choose them over rival products.
Example: As we have discussed early in the book (and will again in this chapter), the use of quality controls among Japanese car manufacturers resulted 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 between four states and take 100 days; after reworking the system to get rid of “hair-balls,” as the former CEO called them, now all production takes place at one hub and takes a third as much time.9
4. To Detect Opportunities Hot-selling products. Competitive prices on materials. Changing population trends. New overseas markets. Controls can help alert managers to opportunities that might have otherwise gone unnoticed.
Example: A markdown on certain grocery-store items may result in a rush of customer demand for those products, signaling store management that similar items might 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, and worker needs. Controls help managers coordinate these various elements.
Example: Many companies, such as fast-food chains, use “robo-scheduling” software that analyzes sales data to predict how many workers are needed at any given time. This control device may be good for the companies, but, points out one writer, it causes “havoc in employees’ lives: giving only a few days’ notice of working hours, sending workers home early when sales are slow, and shifting hours significantly from week to week.”10 In 2014, Starbucks revised how it sets baristas’ scheduling, but other chains still require low-wage workers to have “open availability,” meaning they must be able to work anytime they are needed, or be “on call,” meaning they find out only the morning they are needed.
Page 5146. 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 decision-making authority down to lower levels while still maintaining authority over the sprawling GM organization.11 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 16.2.)
FIGURE 16.2 Six reasons why control is needed
Steps in the Control Process
Control systems may be altered to fit specific situations, but generally they follow the same steps. The four control process steps are (1) establish standards; (2) measure performance; (3) compare performance to standards; and (4) take corrective action, if necessary. (See Figure 16.3.)
FIGURE 16.3 Steps in the control process
Paying attention to the feedback is particularly important because of its dynamic nature.
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.
Page 515Nonprofit 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.
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 top five quality automakers within five years.12 (Unfortunately, in 2014, no Hyundai cars had yet made the J.D. Power dependability list for three-year-old vehicles.13)
Performance measures are usually obtained from three sources: (1) written reports, including computerized printouts; (2) oral reports, as in a salesperson’s weekly recitation of accomplishments to the sales manager; and (3) personal observation, as when a manager takes a stroll on the factory floor to see what employees are doing.
As we’ve hinted, measurement techniques can vary for different industries, such as for manufacturing industries versus service industries. We discuss this further later in the chapter.
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, 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 difference between desired and actual performance, the greater the need for action.
How much deviation is acceptable? That depends on the range of variation built in to the standards in step 1. In voting for political candidates, for instance, there is supposed 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 regard). In political polling, however, a range of 3%–4% error is considered an acceptable range of variation. In machining parts for the spacecraft Orion (NASA’s scheduled successor to the space shuttle), the range of variation may be a good deal less tolerant than when machining parts for a power lawnmower.
The range of variation is often incorporated in computer systems into a principle called management by exception. Management by exception is a control principle that states that managers should be informed of a situation only if data show a significant deviation from standards.
4. Take Corrective Action, If Necessary: “What Changes Should We Make to Obtain Desirable Outcomes?” This step concerns feedback—modifying, if necessary, the control process according to the results or effects. This might be a dynamic process that will produce different effects every time you put the system to use.
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.
Page 516When 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 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 their efforts have been insufficient in fulfilling their part of the job bargain.
Steps in the Control Process: What’s Expected of UPS Drivers?
UPS, which employs 99,000 U.S. drivers, has established Inte-grad, an 11,500-square-foot training center 10 miles outside Washington, D.C. There trainees practice UPS-prescribed “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.14 (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.15
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 instance, the printout will show whether drivers took longer than the 15.5 seconds allowed to park a truck and retrieve one package from the cargo. A range of variation may be allowed to take into account such matters as winter or summer driving or traffic conditions that slow productivity.
Taking Corrective Action. When a UPS driver fails to perform according to the standards set for him or her, a supervisor then rides along and gives suggestions for improvement. If drivers are unable to improve, they are warned, then suspended, and then dismissed.
The UPS controls were devised by industrial engineers based on experience. Do you think the same kinds of controls could be established for, say, filling out tax forms for H&R Block?
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 garden pots store—typically have more or less independence from managerial control than those in large companies do?
Levels & Areas of Control
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 financial. Finally, you need to consider the style or control philosophy—bureaucratic, market, or clan, as we will explain.
Levels of Control: Strategic, Tactical, & Operational
There are three levels of control, which correspond to the three principal managerial levels: strategic planning by top managers, tactical planning by middle managers, and operational planning by first-line (supervisory) managers and team leaders.
1. Strategic Control by Top Managers Strategic control is monitoring performance 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 organizationwide perspective. For example, former Ford Motor Company CEO Alan Mulally (who retired in 2014) brought the company back from the financial brink by instituting a weekly meeting with senior managers. Each manager presented a report on his or her areas, coded in green, yellow, or red to indicate whether business was on target or needed improvement.16
2. Tactical Control by Middle Managers Tactical control is monitoring performance to ensure that tactical plans—those at the divisional or departmental level—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 on a weekly or monthly basis.
3. Operational Control by First-Line Managers Operational control is monitoring performance to ensure that operational plans—day-to-day goals—are being implemented and taking corrective action as needed. Operational control is done mainly by first-line managers, those with titles such as “department head” or “supervisor.” It also includes team leaders. Reporting is done on a daily basis.
Considerable interaction occurs among the three levels, with lower-level managers 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.
Page 518Examples: There are equipment controls to monitor the use of computers, cars, and other machinery. There are quality controls to make sure that products are being built according to certain acceptable standards. There are inventory-management controls to keep track of how many products are in stock, how many will be needed, and what their delivery dates are from the supply chain, the sequence of suppliers that contribute to creating and delivering a product, from raw materials to production to final buyers.
Supply-Chain Journey: The Tale of a Couch
A Discovery Channel documentary about modern China, The People’s Republic of Capitalism, traces the supply-chain path of a sofa. (See Figure 16.4.) This was an expensive Pratt sofa made and sold by Ethan Allen, the American furniture maker headquartered in Danbury, Connecticut.
Many Miles to Make. Cotton grown in North Carolina is sent to a fabric plant in China, where it is designed and weaved. That material is then shipped to an upholstery plant in Maiden, North Carolina, where factory workers using both handwork and computer technology construct the covering and part of the frame for the couch.
A factory in China contributes part of the furniture’s wooden base, which is sent to the North Carolina plant, where workers assemble the complete couch. After the sofa is inspected for quality, it is packed up, put on a truck, and sent to Long Beach, California, where it is put on a ship to China.
How Much?! In China, furniture is distributed to one of Ethan Allen’s 14 store locations—in this particular case, a store in Chongquing. The store delivers the Pratt couch to a wealthy Chinese couple, who paid the equivalent of $40,000 U.S. for it (in the U.S., it would sell for $1,900).17
How difficult do you think it is to maintain control when operating supply chains over such long distances? Could this be a reason why some American managers have pulled manufacturing back from overseas?18
The links in a supply chain
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 Page 519payroll 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.
5. Structural Area How is the organization arranged from a hierarchical or structural standpoint?19 Two examples are bureaucratic control and decentralized control.
Bureaucratic control. Bureaucratic control is an approach to organizational control that is characterized by use of rules, regulations, and formal authority to guide performance. This form of control attempts to elicit employee compliance, using strict rules, a rigid hierarchy, well-defined job descriptions, and administrative mechanisms such as budgets, performance appraisals, and compensation schemes (external rewards to get results). The foremost example of use of bureaucratic control is perhaps the traditional military organization.
Bureaucratic control works well in organizations in which the tasks are 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 people are looking for ways to stay out of trouble by simply following the rules, or if they try to beat the system by manipulating performance reports, or if they try to actively resist bureaucratic constraints.
Decentralized control. Decentralized control is an approach to organizational 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, group norms, and workers taking responsibility for their performance. Decentralized control is found in companies with a relatively flat organization.
6. Cultural Area The cultural 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 result of the values and beliefs that constitute an organization’s culture. If an organization’s culture values innovation and collaboration, then employees are likely to be evaluated on the basis of how much they engage in collaborative activities and enhance or create new products.
Bureaucratic control. In businesses such as construction of large subdivisions, tasks are explicit and certain, and employees are expected to perform them the same way each time. However, a small contractor, such as one building custom houses, need not be bureaucratic.
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?
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 evidence-based judgments about performance.
Wouldn’t you, as a top manager, like to have displayed in 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 has a name: a dashboard, like the instrument panel in a car.
“The dashboard puts me and more and more of our executives in real-time touch with the business,” said Ivan Seidenberg, former CEO at Verizon Communications. “The more eyes that see the results we’re obtaining every day, the higher the quality of the decisions we can make.”20
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 important tools that make this kind of management possible. Others are the balanced scorecard, strategy maps, and measurement management, techniques that even new managers will find useful.
The Balanced Scorecard: A Dashboard-like View of the Organization
Robert Kaplan is a professor of accounting at the Harvard Business School and a leading authority on strategic performance measurement. David Norton is co-founder of Balanced Scorecard Collaborative. Kaplan and Norton developed what they call the balanced scorecard, which gives top managers a fast but comprehensive view of the organization via four indicators: (1) customer satisfaction, (2) internal processes, (3) innovation and improvement activities, and (4) financial measures.
“Think of the balanced scorecard as the dials and indicators 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.”21 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.22
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, opposite page.)
1. Financial Perspective: “How Do We Look to Shareholders?” Typical financial goals have to do with profitability, growth, and shareholder values. Financial measures such as quarterly sales have been criticized as being shortsighted and not reflecting contemporary value-creating activities. Moreover, critics say that traditional financial measures don’t improve customer satisfaction, quality, or employee motivation.
Page 521FIGURE 16.5 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.
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.”23
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 Page 522menu 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.24
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.25
Top management’s judgment about key internal processes must be linked to measures of employee actions at the lower levels, such as time to process customer orders, get materials from suppliers, produce products, and deliver them to customers. Computer information systems can help, for example, in identifying late deliveries, tracing the problem to a particular plant.
4. Innovation & Learning Perspective: “Can We Continue to Improve & Create Value?” Learning and growth of employees is the foundation for all other goals in the balanced scorecard. The idea here is that capable and motivated employees, who possess the resources and culture needed to get the job done, will provide higher quality products and services in a more efficient manner. Making this happen requires a commitment to invest in progressive human resource practices and technology. An organization’s commitment to innovation and learning is often assessed via employee surveys like the one used in the self-assessment below.
To what extent was your current or past employer committed to the innovation and learning of its employees? You can find out by completing Self-Assessment 16.1.
Assessing the Innovation & Learning Perspective of the Balanced Scorecard
The following survey was designed to assess the innovation and learning perspective of the balanced scorecard. Go to connect.mheducation.com and take Self-Assessment 16.1. When you’re done, answer the following questions:
1. Where does the company stand in terms of commitment to innovation and learning? Are you surprised by the results?
2. Use the three highest and lowest scores to identify the strengths and weaknesses of this company’s commitment to innovation and learning.
3. Based on your answer to question 2, provide three suggestions for what management could do to improve its commitment to innovation and learning.
Strategy Map: Visual Representation of a Balanced Scorecard
Since they devised the balanced scorecard, Kapan and Norton have come up with an improvement called the strategy map.26 A strategy map is a visual representation of the four perspectives of the balanced scorecard that enables managers to communicate their goals so that everyone in the company can understand how their 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 create desired outcomes,” such as objectives for revenue growth, targeted customer markets, the role of excellence and innovation in products, and so on.
An example of a strategy map for a company such as Target is shown on the next page, with the goal of creating long-term value for the firm by increasing productivity growth and revenue growth. (See Figure 16.6, next page.) Measures and standards can be developed in each of the four operational areas—financial goals, customer goals, internal goals, and learning and growth goals—for the strategy.
Page 523FIGURE 16.6 The strategy map
This example might be used for a retail chain such as Target or Walmart.
Source: From T. S. Bateman and S. A. Snell, Management Leading & Collaborating in a Competitive World 7E, 2007, p. 124. Reprinted with permission of The McGraw-Hill Companies, Inc.
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.27
Is this really true? Concepts such as the balanced scorecard seem like good ideas, but how well do they actually work?28 John Lingle and William Schiemann, principals in a New Jersey consulting firm specializing in strategic assessment, decided to find out.29
In a survey of 203 executives in companies of varying size they identified the organizations as being of two types: measurement-managed and non-measurement-managed. 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 Page 524efficiency, customer satisfaction, employee performance, innovation/change, and community/environment.
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:30
Top executives agree on strategy. Most top executives in measurement-managed companies agreed on business strategy, whereas most of those in non-measurement-managed companies reported disagreement. Translating strategy into measurable objectives helps make them specific.
Communication is clear. The clear message in turn is translated into good communication, which was characteristic of managed-measurement organizations and not of non-measurement-managed ones.
There is better focus and alignments. Measurement-managed companies reported more frequently that unit (division or department) performance measures were linked to strategic company measures and that individual performance measures were linked to unit measures.
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.
Four Barriers to Effective Measurement The four most frequent barriers to effective measurement, according to Lingle and Schiemann, are as follows:
Objectives are fuzzy. Company objectives are often precise in the financial and operational areas but not in areas of customer satisfaction, employee performance, and rate of change. Managers need to work at making “soft” objectives measurable.
Managers put too much trust in informal feedback systems. Managers tend to overrate feedback mechanisms such as customer complaints or sales-force criticisms about products. But these mechanisms aren’t necessarily accurate.
Employees resist new measurement systems. Employees want to see how well measures work before they are willing to tie their financial futures to them. Measurement-managed companies tend to involve the workforce in developing 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.”31 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.32
Some Financial Tools for Control
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. Whether your organization is for-profit or nonprofit, you need to be sure that revenues are covering costs.
There are a great many kinds of financial controls, but here let us look at the following: budgets, financial statements, ratio analysis, and audits. (Necessarily this is merely an overview of this topic. Financial controls are covered in detail in other business courses.)
Budgets: Formal Financial Projections
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 against which managers can measure performance and make comparisons (as with other departments or previous years).
Incremental Budgeting Managers can take essentially two budget-planning approaches. One of them, zero-based budgeting (ZBB), which forces each department to start from zero in projecting funding needs, is no longer favored. The other approach, the traditional form of budget, which is mainly used now, is incremental budgeting.
Incremental budgeting allocates increased or decreased funds to a department by using the last budget period as a reference point; only incremental changes in 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.
Line items. Trucks at a Walmart warehouse. Clearly, the capital budget in large companies would be complex. What types of data would be needed to justify expansion of a company’s truck fleet?
Page 526Fixed versus Variable Budgets There are numerous kinds of budgets, and some examples are listed below. (See Table 16.1.)
TABLE 16.1 Examples of Types of Budgets
In general, however, budgets may be categorized as two types: fixed and variable.
Fixed budgets—where resources are allocated on a single estimate of costs. Also known as a static budget, a fixed budget allocates resources on the basis of a single estimate of costs. That is, there is only one set of 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.
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.
Page 527The Balance Sheet: Picture of 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 one year’s time. Examples are inventory, sales for which payment has not been received (accounts receivable), and U.S. Treasury bills or money market mutual funds. Fixed assets are property, buildings, equipment, and the like that have a useful life that exceeds one year but that are usually harder to convert to cash. Liabilities are claims, or debts, by suppliers, lenders, and other nonowners of the organization against a company’s assets.
The Income Statement: Picture of Organization’s Financial Results for a Specified Period of Time The balance sheet depicts the organization’s 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 resulting from 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 line, represents the profits or losses incurred over the specified period of time.
Ratio Analysis: Indicators of an Organization’s Financial Health
The bottom line may be the most important indicator of an organization’s financial health, but it isn’t the only one. Managers often use ratio analysis—the practice of evaluating financial ratios—to determine an organization’s financial health.
Among the types of financial ratios are those used to calculate liquidity, debt management, asset management, and return. Liquidity ratios indicate how easily an organization’s assets can be converted into cash (made liquid). Debt management 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, but besides verifying the accuracy and fairness of financial statements, the audit also is intended to be a tool for management decision making. Audits are formal verifications of an organization’s financial and operational systems.
Audits are of two types—external and internal.
External Audits—Financial Appraisals by Outside Financial Experts An external audit is a formal verification of an organization’s financial accounts and statements by outside experts. The auditors are certified public accountants (CPAs) 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.
Accountants at the Academy Awards? No, these are the 2014 Oscar winners. Matthew McConaughey was voted Best Actor for his role in Dallas Buyers Club, and Cate Blanchett was voted Best Actress for her role in Blue Jasmine.But every year since 1929 the secret ballots for Oscar nominees voted on by members of the Academy of Motion Picture Arts and Sciences have been tabulated by accountants from the firm now known as PricewaterhouseCoopers. The accounting firm takes this event very seriously; secrecy is tight, and there is no loose gossip around the office water cooler. 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.
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.
We would like to end this section on financial tools in a more personal manner by assessing your financial literacy. Self-Assessment 16.2 evaluates your knowledge in matters associated with interest-bearing accounts, investments, inflation, pensions, creditworthiness, and insurance. It’s a fun way to find out if your financial literacy is up to speed.
Assessing Your Financial Literacy
The following survey was designed to assess your financial literacy. Go to connect.mheducation.com and take Self-Assessment 16.2. When you’re done, answer the following questions:
1. Where do you stand in terms of financial literacy?
2. Look at the statements you got incorrect, and identify the specific aspects of financial knowledge that you may be lacking.
3. What can you do to improve your financial literacy? Be specific.
Total Quality Management
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.
The Ritz-Carlton Hotel Co., LLC, a luxury chain of 86 hotels in 29 countries that is an independently operated division of Marriott International, puts a premium on doing things right. First-year managers and employees receive 250–310 hours of training. The president meets each employee at a new hotel to ensure he or she understands the Ritz-Carlton standards for service. The chain has also developed a database that records the preferences of more than 1 million customers, so that each hotel can anticipate guests’ needs.33 (Attentive service may be helped by Ritz-Carlton’s employee policies: A 2014 survey rated it No. 2 among top companies for work-life balance.34)
Because of this diligence, the Ritz-Carlton has twice been the recipient (in 1992 and in 1999) of the Malcolm Baldrige National Quality Award. The 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 annually to U.S. organizations in manufacturing, service, small business, health care, education, and nonprofit fields.35 (That the award actually means something is shown by a study that found that hospitals that received the honor significantly outperformed other hospitals on nearly every count.36)
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 products made overseas, especially Japan, equal or superior in quality to U.S.-made products. As we saw in Chapter 2, much of the impetus for quality improvements in Japanese products came from American consultants W. Edwards Deming and Joseph M. Juran. As we mentioned, two strategies for ensuring quality are quality control, the strategy for minimizing errors by managing each stage of production, and quality assurance, focusing on the performance of workers and urging them to strive for “zero defects.”
Quality award winner. The Pewaukee (Wisconsin) School District was one of the winners of the 2013 Malcolm Baldrige National Quality Award, the nation’s highest honor for organizational innovation and performance excellence, which is given to organizations both large and small, profit and nonprofit. “It may seem like Baldrige is all results and processes,” said the superintendent of the 2,800-student school district. “But at the heart there’s a culture around continuous improvement [and] also around a passion for core values.” How do you think organizations instill this approach?
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:
1. Quality Should Be Aimed at the Needs of the Consumer “The consumer is the most important part of the production line,” Deming wrote.37 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.
Page 5302. 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 Company Prospects, & Increased Employment When companies work to improve the quality of goods and services, they produce less waste, fewer delays, and are more efficient. Lower prices and superior quality lead to greater market share, which in turn leads to improved business prospects and consequently increased employment.
4. Quality Can Be Improved on the Basis of Hard Data, Using the PDCA Cycle Deming suggested that quality could be improved by acting on the basis of hard data. The process for doing this came to be known as the PDCA cycle, a Plan-Do-Check-Act cycle using observed data for continuous improvement of operations. (See Figure 16.7.) Like the steps in the control process in Figure 16.3 (page 514), step 3 (“Check”) is a feedback step, in which performance is compared to goals. Feedback is instrumental to control.
FIGURE 16.7 The PDCA cycle: Plan-Do-Check-Act
The four steps continuously follow each other, resulting in continuous improvement.
Source: From W. Edwards Deming. Out of the Crisis, Plan Do Study Act Cycle, page 88, © 2000 Massachusetts Institute of Technology, by permission of MIT Press.
Core TQM Principles: Deliver Customer Value & Strive for Continuous Improvement
Total quality management (TQM) is defined as a comprehensive approach—led by 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:
1. Make continuous improvement a priority.
2. Get every employee involved.
3. Listen to and learn from customers and employees.
4. Use accurate standards to identify and eliminate problems.
Page 531These may be summarized as two core principles of TQM—namely, (1) people orientation—everyone involved with the organization should focus on delivering value to customers—and (2) improvement orientation—everyone should work on continuously improving the work processes.38 Let’s look at these further.
1. People Orientation—Focusing Everyone on Delivering Customer Value Organizations adopting TQM value people as their most important resource—both those who create a product or service and those who receive it. Thus, not only are employees given more decision-making power, so are suppliers and customers.
This people orientation operates under the following assumptions.
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. Teamwork is considered important because many quality problems are spread across functional areas. For example, if cell-phone design specialists conferred with marketing specialists (as well as customers and suppliers), they would find the real challenge of using a cell phone 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.39
2. Improvement Orientation—Focusing Everyone on Continuously Improving Work Processes Americans seem to like big schemes, grand designs, and crash programs. Although these approaches certainly have their place, the lesson of the quality movement from overseas is that the way to success is through continuous small improvements. Continuous improvement is defined as ongoing small, incremental improvements in all parts of an organization—all products, services, functional areas, and work processes.40
This improvement orientation has the following assumptions.
It’s less expensive to do it right the first time. TQM assumes that it’s better 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 customers, junked materials, time spent reworking, and frequent inspection, for example.41
It’s better to do small improvements all the time. This is the assumption that continuous improvement must be an everyday matter, that no improvement is too small, that there must be an ongoing effort to make things better a little bit at a time all the time.
Accurate standards must be followed to eliminate small variations. TQM emphasizes the collection of accurate data throughout every stage of the work process. It also stresses the use of accurate standards (such as benchmarking) to evaluate progress and eliminate small variations, which are the source of many quality defects.
There must be strong commitment from top management. Employees and suppliers won’t focus on making small incremental improvements unless managers go beyond lip service to support high-quality work, as do the top managers at Ritz-Carlton, Amazon.com, and Ace Hardware.
Continuous improvement. Instead of making a walkway or street by laying bricks one at a time, how about using something like this? Dave Dyer of Swiss firm ABB Consulting points to this brick-laying machine as a great example of continuous improvement, one of the two core principles of TQM. The operators, he writes, “feed the bricks into the machine via gravity, there are no moving parts, and the path is laid as the machine moves. It’s amazing!” What examples of continuous improvement can you think of?
Is Chrysler’s New Quality Strategy Working?
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.42
Looking for One-Millimeter Defects. Chrysler is working hard to achieve what Ford and General Motors (following trail blazers Toyota and Honda) have already been doing—namely, raise quality and leave behind a reputation for lousy craftsmanship.43 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 were 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.
Moving Up. In 2008, when Chrysler was controlled by private-equity firm Cerberus Capital Management L.P., the company’s reputation was so bad that a review of the now-discontinued 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.44 The ratings have held up for the next couple of years as well, especially for the Chrysler 300.
Still, there have been setbacks, with Chrysler recalling late model Dodge Charger and Chrysler 300 sedans because of stability control and brake-system problems. There have also been electrical problems on 2011 Chryslers, Dodge, and Jeep vehicles, such as stalling, failure to start, and headlights switching off at night.45
It’s easy for a company to lose its reputation. How long do you think it takes to get it back? Is Chrysler there yet, in your opinion?
Page 533Applying TQM to Services
Manufacturing industries provide 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 automated teller machines). Finally, services are generally provided at locations and times convenient for customers; that is, customers are much more involved in the delivery of services than they are in the delivery of manufactured products.
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, because it comes down to meeting the customer’s satisfaction, which may be a matter of perception. (After all, some hotel guests, restaurant diners, and supermarket patrons, for example, are more easily satisfied than others.)
Some people view college students as customers. Do you? For those schools that care about the quality of what they offer, it is important to assess student satisfaction with the college or university as a whole. If you are curious about your level of satisfaction with your college or university, then complete Self-Assessment 16.3.
Assessing Your Satisfaction with Your College or University Experience
The following survey was designed to assess the extent to which you are satisfied with your college experience. Go to connect.mheducation.com and take Self-Assessment 16.3. When you’re done, answer the following questions:
1. What is your level of satisfaction? Are you surprised by the results?
2. Based on your scores, identify three things that your college or university might do to improve student satisfaction? Be specific.
3. Are students really customers? Explain your rationale.
The RATER Scale How, then, can we measure the quality of a delivered service? For one, we can use the RATER scale, which enables customers to rate the quality of a service along five dimensions—reliability, assurance, tangibles, empathy, and responsiveness (abbreviated RATER)—each on a scale from 1 (for very poor) to 10 (for very good).46 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.
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.47
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:48
The Offering: Which Features Are Given Top-Quality Treatment? Which service attributes, as informed by the needs of customers, does the company target for excellence and which does it target for inferior performance? Does a bank, for example, offer more convenient hours and friendlier tellers (excellence) but pay less attractive interest rates (inferior performance)?
The Funding Mechanism: Who Pays for the Service? How should the company fund its services? Should it have the customer pay for them? This can be done in a palatable way, as when Starbucks funds its stuffed-chair ambience by charging more for coffee. Or it can be done by making savings in service features, as when Progressive Casualty Insurance cuts down on frauds and lawsuits by deploying its own (rather than independent) representatives to the scene of an auto accident.
Or should the company cover the cost of excellence with operational savings, as by spending now to save later or having the customer do the work? Call centers usually charge for customer support, but Intuit offers free support and has product-development people, as well as customer-service people, field calls so that subsequent developments in Intuit software are informed by direct knowledge of customer problems. Other companies, such as most 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 check-in. 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.
Pick a services company you’re familiar with, such as Domino’s Pizza, Starbucks, Amazon, REI, 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 long-term 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. We described benchmarking in Chapter 10. Here we describe outsourcing, reduced cycle time, ISO 9000 and ISO 14000, statistical process control, and Six Sigma.
Outsourcing: Let Outsiders Handle It Outsourcing (discussed in detail in Chapter 4) is the subcontracting of services and operations to an outside vendor. Usually this is done because the subcontractor vendor can do the job better or cheaper. Or, stated another way, when the services and operations are done in-house, they are not done as efficiently or are keeping personnel from doing more important things.
For example, despite its former 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.49 And when IBM and Page 535other 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.50 (One American software developer was even caught outsourcing his own job to China, allowing people to assume the work was his.51)
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.
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 or personal assurances. In 1979, the International Organization for Standardization (ISO), based in Geneva, Switzerland, created a set of quality standards known as the 9000 series—“a kind of Good Housekeeping seal of approval for global business,” in one description.52 There are two such standards:
ISO 9000. The ISO 9000 series consists of quality-control procedures companies must install—from purchasing to manufacturing to inventory to shipping—that can be audited by independent quality-control experts, or “registrars.” The goal is to reduce flaws in manufacturing and 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 as traceable changes and easy reporting.
The ISO 9000 designation is now recognized by more than 100 countries around the world, and a quarter of the corporations around the globe insist that suppliers have ISO 9000 certification. “You close some expensive doors if you’re not certified,” says Bill Ekeler, general manager of Overland Products, a Nebraska tool-and-die-stamping firm.53 In addition, because the ISO process forced him to analyze his company from the top down, Ekeler found ways to streamline manufacturing processes that improved his bottom line.
ISO 14000. The ISO 14000 series extends the concept, identifying standards for environmental performance. ISO 14000 dictates standards for documenting a company’s management of pollution, efficient use of raw materials, and reduction of the firm’s impact on the environment.
Statistical Process Control: Taking Periodic Random Samples As the pages of this book were being printed, instruments called densitometers and colorimeters were used to measure ink density and trueness of color, taking samples of printed pages at fixed intervals. This is an ongoing 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 Page 536for 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.
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 Fortunewriter. “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?”54
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, the fewer the defects. Developed by Motorola in 1985, Six Sigma has since been embraced by General Electric, Allied Signal, American Express, and other companies.55 There are two variations, Six Sigma and lean Six Sigma.
Six Sigma. Six Sigma is a rigorous statistical analysis process that reduces defects in manufacturing and service-related processes. By testing thousands of variables and eliminating guesswork, a company using the technique attempts to improve quality and reduce waste to the point where errors nearly vanish. In everything from product design to manufacturing to billing, the attainment 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 failures per million is bad,” says a vice president of consulting firm A. T. Kearney.56 Six Sigma means being 99.9997% perfect. By contrast, Three Sigma or Four Sigma means settling for 99% perfect—the equivalent of no electricity for 7 hours each month, two short or long landings per day at each major airport, or 5,000 incorrect surgical operations per week.57
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. The method preaches the use of Define, Measure, Analyze, Improve, and Control (DMAIC). Team leaders may be awarded a Six Sigma “black belt” for applying DMAIC.
Lean Six Sigma. More recently, companies are using an approach known as lean Six Sigma, which focuses on problem solving and performance improvement—speed with excellence—of a well-defined project.58
Xerox Corp., for example, has focused on getting new products to customers 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.59 The grocery chain Albertsons Inc. launched Six Sigma training to reduce customer dissatisfaction and waste to the lowest level possible.60 Lean Six Sigma has also been used to improve communications from senior managers.61
Six Sigma and lean Six Sigma may not be perfect, since they cannot compensate for human error or control events outside a company.62 Still, they let managers approach problems with the assumption that there’s a data-oriented, tangible way to approach problem solving.63
Managing Control Effectively
What are the keys to successful control, and what are the barriers to control success?
THE BIG PICTURE
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.64
The Keys to Successful Control Systems
Successful control systems have a number of common characteristics: (1) They are strategic and results oriented. (2) They are timely, accurate, and objective. (3) They are realistic, positive, and understandable and they encourage self-control. (4) They are flexible.65
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 achieving strategic goals, that is the point at which they should pay attention to developing control standards that will measure how well the plans are being achieved.
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 more Americans feel guilty for not living greener.66 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 with Subaru of Indiana in Chapter 3.67
Charity control. Laura Arrillaga-Andreessen (shown here with husband Marc Andreessen, left, and Facebook CEO Mark Zuckerberg at a 2012 conference in Sun Valley, Idaho) is a Stanford University professor of philanthropy who aims to make giving not only more effective and wide ranging but also more accessible to people of all ages and income levels, including Millennials. Part of her vision is to enable donations through mobile microfinancing and smartphone money transfers. Do you think that philanthropy should be subject to the same planning-organizing-leading-control ideas as other institutions?
Page 5382. They Are Timely, Accurate, & Objective Good control systems—like good information of any kind—should . . .
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, unknown data, and so on), information that is not objective is inaccurate for a special reason: It is biased or prejudiced. Control systems need to be considered unbiased for everyone involved so that they will be respected for their fundamental purpose—enhancing performance.
3. They Are Realistic, Positive, & Understandable & Encourage Self-Control Control systems have to focus on working for the people who will have to live with them. Thus, they operate best when they are made acceptable to the organization’s members who are guided by them. Thus, they should . . .
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 emphasize development and improvement. They should avoid emphasizing punishment and reprimand.
Be understandable. They should fit the people involved, be kept as simple as possible, and present data in understandable terms. They should avoid complicated computer printouts and statistics.
Encourage self-control. They should encourage good communication and mutual participation. They should not be the basis for creating distrust between employees and managers.
4. They Are Flexible Control systems must leave room for individual judgment, so that they can be modified when necessary to meet new requirements.
Barriers to Control Success
Among the several barriers to a successful control system are the following:68
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.
Page 5393. 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 a decrease in the number of successful research projects.69
5. Overemphasis on One Instead of Multiple Approaches One control may not be enough. By having multiple control activities and information systems, an organization can have multiple performance indicators, thereby increasing accuracy and objectivity.
Example: An obvious strategic goal for gambling casinos is to prevent employee theft of the cash flowing through their hands. Thus, casinos control card dealers by three means. First, they require they have a dealer’s license 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 gambling chips) can be audited.70
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.
Managing for Productivity
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.
In Chapter 1, we pointed out that as a manager in the 21st century you will operate in a complex environment in which you will need to deal with seven challenges—managing for (1) competitive advantage, (2) diversity, (3) globalization, (4) information technology, (5) ethical standards, (6) sustainability, and (7) your own happiness and life goals.
Within this dynamic world, you will draw on the practical and theoretical knowledge described in this book to make decisions about the four management functions of planning, organizing, leading, and controlling.
The purpose is to get the people reporting to you to achieve productivity and realize results.
This process is diagrammed below, pulling together the main topics of this book. (See Figure 16.8.)
Managing for productivity & results
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 Page 541the goods and services produced. Inputs are not only labor but also capital, materials, and energy. That is,
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 back-hoe instead of laborers with shovels to dig a hole.71 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.
Why Increasing Productivity Is Important
”Productivity growth is the elixir that makes an economy flourish,” says one business article.72 “Our society is wealthy,” says another, “precisely because it can churn out products like automobiles, flush toilets, and Google search algorithms at relatively low cost.”73 That is, the more goods and services that are produced and made easily available to us and for export, the higher our standard of living. Increasing the gross domestic product—the total dollar value of all the goods and services produced in the United States—depends on raising productivity, as well as on a growing workforce.
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 second jobs or worked longer hours to keep from falling behind. From 1995 to 2000, however, during the longest economic boom in American history, the productivity rate jumped to 2.5% annually, as the total output of goods 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 annual rate of 2.7%.74 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 history,” says Newsweek—and it also rose an impressive 4.1% in 2010.75 However, it has averaged only about 1.1% since 2011—less than half the historical rate since 1948 of 2.5%—as companies began to approach the limit of how much they could squeeze from the workforce.76
The Role of Information Technology Most economists seem to think the recent productivity growth is the result of organizations’ huge investment in information technology—computers, the Internet, other telecommunications advances, and computer-guided production line improvements.77 From 1995 to 2001, for example, labor productivity in services grew at a 2.6% rate (out-pacing the 2.3% for goods-producing sectors), the result, economists think, of information technology.78 (Since 2001, productivity has continued to advance in the service sectors in relation to the goods-producing sectors.79) 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.
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?
Epilogue: The Keys to Your Managerial Success
What are eight keys to personal managerial success?
THE BIG PICTURE
As we end the book, this section describes some life lessons to take away.
We have come to the end of the book, our last chance to offer some suggestions to take with you that we hope will benefit you in the coming years. Following are some life lessons pulled from various sources that can make you a “keeper” in an organization and help you be successful.
Find your passion and follow it. “The mission matters,” writes Gary Hamel, co-founder of the Management Innovation Lab. “People change for what they care about.” Employees aren’t motivated much by the notion of “increasing shareholder value” (or if they are, the result may be an environment in which greed overwhelms higher-minded goals). Says Hamel, “A company must forever be on the way to becomingsomething more than it is right now.”80 And the same should apply to you. Find something you love to do, and do it vigorously.
Encourage self-discovery, and be realistic. To stay ahead of the pack, you need to develop self-awareness, have an active mind, and be willing to grow and change. Here’s a life lesson: “Be brutally honest with yourself about what you know, and ask what skills you need to take the next step.” This includes not just the tools of your trade—finance, technology, and so on—but most importantly people skills.
Every situation is different, so be flexible. No principle, no theory will apply under all circumstances. Industries, cultures, supervisors, customers will vary. If you’re the new kid in a new job, for instance, you should know that “culture is critical,” suggests Angeli R. Rasbury in Black Enterprise. A life lesson: “Before you can begin to set goals, know the organization in which you’re working. Learn how employees conduct business and view success, and how the company rewards achievement. An organization’s culture defines its management and business guidelines.”81 Another life lesson: “Remove ‘It’s not my job’ from your vocabulary.”
Fine-tune your soft skills—your people skills. The workplace is not an area where lone individuals make their silent contributions. Today we live and work in a team universe. If, as is the case with Whole Foods Market, getting and keeping a job depends on the reviews of your peers, with teammates voting on your fate, you can see that communication skills become ever more important. Recommendation: Get feedback on your interpersonal skills and develop a plan for improvement.
Learn how to develop leadership skills. Every company should invest in the leadership development of its managers if it is to improve the quality of its future leaders. But you can also work to develop your own leadership skills. An example and a life lesson: “Leaders who wait for bad news to come to them are taking a major risk, so learn to seek it out—as by encouraging employees to bring you news of potential problems and thanking them for it, not punishing them for their candor.”82 You can also pick up news about problems, potential and actual, by practicing “management by wandering around.” Another life lesson: “If you set the bar high, even if you don’t reach it, you end up in a pretty good place—that is, achieving a pretty high mark.”
Page 543 Treat people as if they matter, because they do. If you treat employees and customers with dignity, they respond accordingly. The highly successful online shoe retailer Zappos, for instance, “is fanatical about great service,” says the writer of a Harvard Business Publishing online blog, “not just satisfying customers, but amazing them,” as in promising delivery in four days and delivering in one. How? It’s all in the hiring, which Zappos does with great intensity. After four weeks’ training, new call-center employees are offered $1,000 on top of what they have earned to that point if they want to quit—the theory being that people who take the money “obviously don’t have the commitment” that Zappos requires of its employees. (About 10% of the trainees take the offer.)83 The life lesson: “Companies don’t engage emotionally with their customers—people do. If you want to create a memorable company, you have to fill your company with memorable people.”
Draw employees and peers into your management process. The old top-down, command-and-control model of organization is moving toward a flattened, networked kind of structure. Managers now work more often with peers, where lines of authority aren’t always clear or don’t exist, so that one’s persuasive powers become key. Power has devolved to front-line employees who are closest to the customer and to small, focused, self-managed teams that have latitude to pursue new ideas. The life lesson: “The best organizations will be those whose employees have the power to innovate, not just follow orders from on high.”
Be flexible, keep your cool, and take yourself lightly. Things aren’t always going to work out your way, so flexibility is important. In addition, the more unflappable you appear in difficult circumstances, the more you’ll be admired by your bosses and coworkers. Having a sense of humor helps, since there are enough people spreading gloom and doom in the workplace. Life lesson: “When you’re less emotional, you’re better able to assess a crisis and develop a workable solution.”
We wish you the very best of luck. And we mean it!
Brian K. Williams
Page 544Key Terms Used in This Chapter
control process steps
enterprise resource planning (ERP)
ISO 9000 series
ISO 14000 series
lean Six Sigma
management by exception
reduced cycle time
statistical process control
total quality management (TQM)
two core principles of TQM
16.1 Control: When Managers Monitor Performance
• Controlling is defined as monitoring performance, comparing it with goals, and taking corrective action as needed.
• There are six reasons why control is needed: (1) to adapt to change and uncertainty; (2) to discover irregularities and errors; (3) to reduce costs, increase productivity, or add value; (4) to detect opportunities; (5) to deal with complexity; and (6) to decentralize decision making and facilitate teamwork.
• There are four control process steps. (1) The first step is to set standards. A control standard is the desired performance level for a given goal. (2) The second step is to measure performance, based on written reports, oral reports, and personal observation. (3) The third step is to compare measured performance against the standards established. (4) The fourth step is to take corrective action, if necessary, if there is negative performance.
16.2 Levels & Areas of Control
• In applying the steps and types of control, managers need to consider (1) the level of management at which they operate, (2) the areas they can draw on for resources, and (3) the style of control philosophy.
• There are three levels of control, corresponding to the three principal managerial levels. (1) Strategic control, done by top managers, is monitoring performance to ensure that strategic plans are being implemented. (2) Tactical control, done by middle managers, is monitoring performance to ensure that tactical plans are being implemented. (3) Operational control, done by first-level or supervisory managers, is monitoring performance to ensure that dayto-day goals are being implemented.
• Most organizations have six areas that they can draw on for resources. (1) The physical area includes buildings, equipment, and tangible products; these use equipment control, inventory-management control, and quality controls. (2) The human resources area uses personality tests, drug tests, performance tests, employee surveys, and the like as controls to monitor people. (3) The informational area uses production schedules, sales forecasts, environmental impact statements, and the like to monitor the organization’s various resources. (4) The financial area uses various kinds of financial controls, as we discuss in Section 16.4. (5) The structural area uses hierarchical or other arrangements such as bureaucratic control, which is characterized by use of rules, regulations, and formal authority to guide performance, or decentralized control, which is characterized by informal and organic structural arrangements. (6) The cultural area influences the work process and levels of performance through the set of norms that develop as a result of the values and beliefs that constitute an organization’s culture.
16.3 The Balanced Scorecard, Strategy Maps, & Measurement Management
• To establish standards, managers often use the balanced scorecard, which provides a Page 545fast but comprehensive view of the organization via four indicators: (1) financial measures, (2) customer satisfaction, (3) internal processes, and (4) innovation and improvement activities.
• The strategy map, a visual representation of the four perspectives of the balanced scorecard—financial, customer, internal business, and innovation and learning—enables managers to communicate their goals so that everyone in the company can understand how their jobs are linked to the overall objectives of the organization.
• Measurement-managed companies use measurable criteria for determining strategic success, and management updates and reviews three or more of six primary performance areas: financial performance, operating efficiency, customer satisfaction, employee performance, innovation/change, and community/environment.
• Four mechanisms that contribute to the success of such companies are top executives agree on strategy, communication is clear, there is better focus and alignments, and the organizational culture emphasizes teamwork and allows risk taking.
• Four barriers to effective measurement are objectives are fuzzy, managers put too much trust in informal feedback systems, employees resist new management systems, and companies focus too much on measuring activities instead of results.
• Some areas are difficult to measure, such as those in service industries.
16.4 Some Financial Tools for Control
• Financial controls include (1) budgets, (2) financial statements, (3) ratio analysis, and (4) audits.
• A budget is a formal financial projection. The most important budget-planning approach is incremental budgeting, which allocates increased or decreased funds to a department by using the last budget period as a reference point; only incremental changes in the budget request are reviewed. Budgets are either fixed, which allocate resources on the basis of a single estimate of costs, or variable, which allow resource allocation to vary in proportion with various levels of activity.
• A financial statement is a summary of some aspect of an organization’s financial status. One type, the balance sheet, summarizes an organization’s overall financial worth—assets and liabilities—at a specific point in time. The other type, the income statement, summarizes an organization’s financial results—revenues and expenses—over a specified period of time.
• Ratio analysis is the practice of evaluating financial ratios. Managers may use this tool to determine an organization’s financial health, such as liquidity ratios, debt management ratios, or return ratios.
• Audits are formal verifications of an organization’s financial and operational systems. Audits are of two types. An external audit is formal verification of an organization’s financial accounts and statements by outside experts. An internal audit is a verification of an organization’s financial accounts and statements by the organization’s own professional staff.
16.5 Total Quality Management
• Much of the impetus for quality improvement came from W. Edwards Deming, whose philosophy, known as Deming management, proposed ideas for making organizations more responsive, more democratic, and less wasteful.
• Among the principles of Deming management are (1) quality should be aimed at the needs of the consumer; (2) companies should aim at improving the system, not blaming workers; (3) improved quality leads to increased market share, increased company prospects, and increased employment; and (4) quality can be improved on the basis of hard data, using the PDCA, or plan-do-check-act, cycle.
• Total quality management (TQM) is defined as a comprehensive approach—led by top management and supported throughout the organization—dedicated to continuous quality improvement, training, and customer satisfaction. The two core principles of TQM are people orientation and improvement orientation.
• In the people orientation, everyone involved with the organization is asked to focus on delivering value to customers, focusing on quality. TQM requires training, teamwork, and cross-functional efforts.
• In the improvement orientation, everyone involved with the organization is supposed to make ongoing small, incremental improvements in all parts of the organization. This orientation assumes that it’s less expensive to do things right the first time, to do small improvements all the time, and to follow accurate standards to eliminate small variations.
• TQM can be applied to services using the RATER scale, which stands for reliability, assurance, tangibles, empathy, and responsiveness.
• Several techniques are available for improving quality. (1) Employee involvement can be implemented through self-managed teams, and special-purpose teams—teams that meet Page 546to solve a special or one-time problem. (2) Outsourcing is the subcontracting of services and operations to an outside vendor. (3) Reduced cycle time consists of reducing the number of steps in a work process. (4) Statistical process control is a statistical technique that uses periodic random samples from production runs to see if quality is being maintained within a standard range of acceptability.
16.6 Managing Control Effectively
• Successful control systems have four common characteristics: (1) They are strategic and results oriented. (2) They are timely, accurate, and objective. (3) They are realistic, positive, and understandable and they encourage self-control. (4) They are flexible.
• Among the barriers to a successful control system are the following: (1) Organizations may exert too much control. (2) There may be too little employee participation. (3) The organization may overemphasize means instead of ends. (4) There may be an overemphasis on paperwork. (5) There may be an overemphasis on one approach instead of multiple approaches.
16.7 Managing for Productivity
• A manager has to deal with six challenges—managing for competitive advantage, diversity, globalization, information technology, ethical standards, sustainability, and his or her own happiness and meaningfulness.
• The manager must 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.
• Much of productivity growth is thought to result from the implementation of information technology, including enterprise resource planning (ERP) systems. Productivity depends on control.
Understanding the Chapter: What Do I Know?
1. What is control, and what are six reasons control is needed?
2. Explain the steps in the control process, and describe the three levels of control.
3. Distinguish among the six areas of organizational control: physical, human, informational, financial, structural, and cultural.
4. Explain the four indicators of the balanced scorecard, and state what a strategy map is.
5. What are four mechanisms of success for measurement-managed firms and four barriers to effective measurement?
6. Define incremental budgeting and give some examples of types of budgets.
7. Explain the following financial tools used for control: financial statement, balance sheet, income statement, ratio analysis, and audits (both external and internal).
8. Discuss total quality management, its two core principles, and the concept of continuous improvement.
9. Explain the following TQM tools and techniques: reduced cycle time, the ISO 9000 series, the ISO 14000 series, statistical process control, and Six Sigma and lean Six Sigma.
10. What is the formula for defining productivity?
Management in Action
UPS Relies on Sophisticated Control Systems to Manage Package Deliveries
Scott Abell is fretting about free-range turkeys. It’s November 20 , and United Parcel Service will soon pick up 11,000 of them from a ranch in northern California and ship them overnight to customers of Williams-Sonoma in time for Thanksgiving. Abell, a 31-year veteran of UPS, is known inside the organization as Mr. Peak. He plans next-day, two-day, and three-day shipments during the holidays, UPS’s busiest Page 547time of the year. He starts drafting his plan in January and spends the rest of the year refining it. The turkeys are his first big test of the 2013 peak season, which starts in five days.
The birds are impressive: A 24-pounder sells for $185—plus shipping. UPS must handle them gently. The turkeys are not frozen but “meticulously chilled” at around 37F to keep them fresh. . . .
An athletic 53-year-old with wire-rimmed glasses, a neatly trimmed mustache, and carefully parted graying hair, Abell is unfailingly gracious, if a little high-strung. He has an elaborate delivery process in store for the “Willie Birds.” On November 25, three days before Thanksgiving, UPS drivers will pick them up at the ranch and transport them to two of the company’s large distribution centers. From there, they will be flown to UPS sorting facilities. The ones bound for the Southwest will be divvied up at UPS distribution in Ontario, California. The ones headed east of the Rockies will be processed at Worldport, an enormous operation near Abell’s office in Louisville. Then the turkeys will be jetted to local UPS hubs and handed over to drivers who will carry them to their final destinations. Ideally, this will all happen in 24 hours.
The flight of the Willie Birds has become a holiday ritual for UPS. Concerned about getting it right, Abell has even distributed pictures of Willie Bird boxes to the 6,000 workers who sort packages daily at Worldport so they recognize them. The last thing Mr. Peak wants is for the birds to arrive spoiled. If they’re late, UPS has to reimburse the disappointed Thanksgiving diners.
Coordinating the most time-sensitive shipments during the most hectic time of year has always been a challenge for UPS, but the Internet has made Abell’s job more crucial than ever. It’s become so easy for people to shop via computers and smartphones that they frequently delay their purchases until the last minute. Mr. Peak’s job, in effect, is to fulfill the Internet’s promise of instant gratification.
If Abell can’t come up with a viable scheme, UPS is in trouble. The company expects to ship more than 132 million parcels globally during the week before Christmas alone. If it can’t find space for them all, retailers will almost surely turn to FedEx. In addition, Abell must keep a lid on costs. In the past some investors have worried that UPS is too e-commerce focused. David Vernon, an analyst for AllianceBernstein, notes that it’s usually more profitable to carry large shipments to businesses than to transport books to the cozy homes of Internet shoppers. But he says UPS is managing to turn a profit on the latter with careful planning. “I think some of those fears are starting to recede,” he says.
Maintaining profitability is especially difficult during peak season when UPS’s delivery expenses rise. This year, UPS is adding 55,000 part-time holiday workers, leasing 23 extra planes, and effectively building a second trucking fleet to handle the seasonal package flow. None of this is cheap. It’s up to Mr. Peak to plan accordingly.
Perhaps the biggest holiday challenge for UPS is satisfying Amazon.com, which doesn’t behave like a traditional retailer. In November, Amazon unveiled a plan to deliver packages on Sundays with the help of the U.S. Postal Service rather than UPS. In December, Jeff Bezos, Amazon’s chief executive officer, told 60 Minutes the company was experimenting with delivering packages by drone. Many people snickered. UPS did not. Ross McCullough, vice president of corporate strategy, says UPS is studying drone delivery, too. “I believe these things will be part of the system in the future,” he says. “I don’t know when.” He says UPS is also weighing the potential use of driverless vehicles.
Then there are the factors Mr. Peak can’t control. This year there are only 26 shopping days between Thanksgiving and Christmas, compared with 32 last year. That means UPS has to shove what it describes as a record number of parcels through a smaller window. Winter storms can also upset Abell’s plans. “The biggest challenge is the weather. When you have a shorter season, you have less time for recovery,” says UPS CEO D. Scott Davis. “You just hope you don’t have ice storms.” It isn’t only that ice can ground UPS jets and halt its trucks. The company has found that when people are snowed in, they do more online shopping. So when UPS digs itself out, it has to deliver even more presents. Abell doesn’t know what to expect this year from the weather, but he is ready to sort boxes by hand himself if an emergency arises. “I hustled boxes before,” he says. “I can do it again.”. . .
In October, UPS and FedEx announced their holiday shipping forecasts. FedEx said it would carry more than 85 million shipments in the first week of December. UPS predicted it would deliver 129 million packages that same week, easily topping its rival. And UPS will see a second holiday rush during the week before Christmas. . . .
Abell and his team meet with most of their 25 largest customers to see how they feel about the way things went. They’re especially attentive to Nordstrom. UPS develops an annual 50-page peak season plan solely for the store. Early in the season, the high-end retailer relies heavily on UPS’s trucks to deliver items within five days. But during the week before Christmas, Nordstrom runs out of time and has to start moving packages by jet. That means Abell has to schedule several daily flights in and out of the UPS hub in Cedar Rapids, Iowa, near Nordstrom’s distribution center. . . .
Armed with data from its largest clients, UPS creates a preliminary plan in March. It’s really 60 plans in one, taking into account how time-sensitive packages will flow through the system depending on the day of the week, how fast they must be delivered, and whether there are special customer requests. Over the next Page 548months the peak team revises it, producing two more versions, one in August and a final version in September. They will be circulated to the company’s 15 district managers who have their own gripes and suggestions. “That’s why peak planning goes on all year long,” says Marty Fry, one of Abell’s planners. . . .
But plans can be ephemeral. Abell grows slightly exasperated talking about a last-minute decision by one of his largest customers that will dump a huge number of packages into UPS’s network on the weekend before Christmas. As a result, Abell spent five days developing a new plan allowing UPS to operate double shifts at Worldport during the final weekend before Christmas. By late November, Abell finally had all the pieces in place: the planes, the pilots, and the extra package handlers. . . .
During the holidays, the peak planning team works closely with the UPS contingency department, located one floor below in the same building. The peak guys and their contingency peers have a complicated relationship: The contingency team responds when the peak team’s planning goes awry. Often because of the weather and the whims of customers, crises emerge. Among other things, the contingency department has 18 planes positioned around the country that can take off at 30 minutes’ notice in emergencies to ensure that boxes are delivered on schedule. Until two years ago the two groups operated in different buildings. Abell says he liked it that way.
Source: Excerpted from “He’ll Make Your Dreams Come True,” Bloomberg Businessweek, December 23, 2013–January 5, 2014. Used with permission of Bloomberg L. P. Copyright (c) 2014. All rights reserved.
1. Which of the six reasons that control is needed are apparent in this case? Explain.
2. To what extent does the process Scott Abell uses to manage shipments of packages during holiday periods follow the control process shown in Figure 16.3? Discuss.
3. If you were charged with creating a balanced scorecard for Scott Abell, what SMART goals (see Chapter 5), would you use as standards to assess performance in the four categories in your scorecard? Develop one SMART goal for each scorecard category.
4. To what extent does UPS use the PDCA process? Explain your rationale.
5. Which of the keys to successful control systems are being used by UPS? Explain.
6. What are the most important takeaways from this case? Discuss.
Should Companies Be Allowed to Administer Untested Drugs on People with Ebola?
The Ebola outbreak in West Africa has killed over 1,000 people as of August 2014. The current outbreak started in Guinea in December 2013 and has spread to Liberia, Sierra Leone, and Nigeria and is expected to spread to other neighboring countries. The World Health Organization (WHO) “declared the outbreak a public health emergency of international concern and called for an international response,” says one report.84
Normally, drugs are not given to people until they have passed rigorous testing and verification. In this case, the WHO decided to allow the use of experimental drugs that have not been tested on humans. Marie Paule Kieny, assistant director-general of WHO, said that “we find ourselves facing a dilemma. Far too many lives are being lost right now.” She feels that it is okay in the current situation to use drugs that have shown some promise with animal research but have not been examined on humans. Others are questioning WHO’s decision about using experimental drugs to treat the Ebola outbreak.85
What is your view about the application of untested drugs on humans?
SOLVING THE CHALLENGE
1. I think it is okay in very limited cases, and the Ebola outbreak is one of them. I also believe that patients need to be informed that they are being treated with untested drugs and that there are risks. People can make their own informed decisions.
2. I do not think it’s a good idea because it creates a slippery slope of deciding when it is appropriate to use experimental drugs on people. Who makes the call?
3. I don’t like the idea because it would motivate manufacturers to produce products before completing the proper amount of experimental testing.
4. Invent other options.
The Project Planner’s Toolkit
Flowcharts, Gantt Charts, & Break-Even Analysis
Major Question You Should Be Able to Answer
How can you use planning tools to enhance your performance and achieve utmost success?
THE BIG PICTURE
Three tools used in project planning, which was covered in Chapter 5, are flowcharts, Gantt charts, and break-even analysis.
Project planning may begin (in the definition stage) as a back-of-the-envelope kind of process, but the client will expect a good deal more for the time and money being invested. Fortunately, there are various planning and monitoring tools that give the planning and execution of projects more precision. Three tools in the planner’s tool-kit are (1) flowcharts, (2) Gantt charts, and break-even analysis.
Tool #1: Flowcharts—for Showing Event Sequences & Alternate Decision Scenarios
A flowchart is a useful graphical tool for representing the sequence of events required to complete a project and for laying out “what-if” scenarios. Flowcharts have been used for decades by computer programmers and systems analysts to make a graphical “road map,” as it were, of the flow of tasks required. These professionals use their own special symbols (indicating “input/output,” “magnetic disk,” and the like), but there is no need for you to make the process complicated. Generally, only three symbols are needed: (1) an oval for the “beginning” and “end,” (2) a box for a major activity, and (3) a diamond for a “yes or no” decision. (See Figure A.1, next page.)
Computer programs such as iGrafx’s ABC FlowCharter are available for constructing flowcharts. You can also use the drawing program in word processing programs such as Microsoft Word.
Page A2FIGURE A.1 Flowchart: website, print, or television?
Example of a flowchart for improving a company’s advertising
Benefits Flowcharts have two benefits:
Planning straightforward activities. A flowchart can be quite helpful for planning ordinary activities—figuring out the best way to buy textbooks or a car, for example. It is also a straightforward way of indicating the sequence of events in, say, thinking out a new enterprise that you would then turn into a business plan.
Page A3 Depicting alternate scenarios. A flowchart is also useful for laying out “what-if” scenarios—as in if you answer “yes” to a decision question you should follow Plan A, if you answer “no” you should follow Plan B.
Limitations Flowcharts have two limitations:
No time indication. They don’t show the amounts of time required to accomplish the various activities in a project. In building a house, the foundation might take only a couple of days, but the rough carpentry might take weeks. These time differences can’t be represented graphically on a flowchart (although you could make a notation).
Not good for complex projects. They aren’t useful for showing projects consisting of several activities that must all be worked on at the same time. An example would be getting ready for football season’s opening game, by which time the players have to be trained, the field readied, the programs printed, the band rehearsed, the ticket sellers recruited, and so on. These separate activities might each be represented on their own flowcharts, of course. But to try to express them all together all at once would produce a flowchart that would be unwieldy, even unworkable.
Tool #2: Gantt Charts—Visual Time Schedules for Work Tasks
We have mentioned how important deadlines are to making a project happen. Unlike a flowchart, a Gantt chart can graphically indicate deadlines.
The Gantt chart was developed by Henry L. Gantt, a member of the school of scientific management (discussed in Chapter 2). A Gantt chart is a kind of time schedule—a specialized bar chart that shows the relationship between the kind of work tasks planned and their scheduled completion dates. (See Figure A.2, below.)
A number of software packages can help you create and modify Gantt charts on your computer. Examples are CA-SuperProject, Microsoft Project, Primavera SureTrak Project Manager, and TurboProject Professional.
FIGURE A.2 Gantt chart for designing a website
This shows the tasks accomplished and the time planned for remaining tasks to build a company website.
Page A4Benefits There are three benefits to using a Gantt chart:
Express time lines visually. Unlike flowcharts, Gantt charts allow you to indicate visually the time to be spent on each activity.
Compare proposed and actual progress. A Gantt chart may be used to compare planned time to complete a task with actual time taken to complete it, so that you can see how far ahead or behind schedule you are for the entire project. This enables you to make adjustments so as to hold to the final target dates.
Simplicity. There is nothing difficult about creating a Gantt chart. You express the time across the top and the tasks down along the left side. As Figure A.2 shows, you can make use of this device while still in college to help schedule and monitor the work you need to do to meet course requirements and deadlines (for papers, projects, tests).
Limitations Gantt charts have two limitations:
Not useful for large, complex projects. Although a Gantt chart can express the interrelations among the activities of relatively small projects, it becomes cumbersome and unwieldy when used for large, complex projects. More sophisticated management planning tools may be needed, such as PERT networks.
Time assumptions are subjective. The time assumptions expressed may be purely subjective; there is no range between “optimistic” and “pessimistic” of the time needed to accomplish a given task.
Tool #3: Break-Even Analysis—How Many Items Must You Sell to Turn a Profit?
Break-even analysis is a way of identifying how much revenue is needed to cover the total costs of developing and selling a product. Let’s walk through the computation of a break-even analysis, referring to the illustration. (See Figure A.3.) We assume you are an apparel manufacturer making shirts or blouses. Start in the lower-right corner of the diagram on the previous page and follow the circled numbers as you read the descriptions below.
FIGURE A.3 Break-even analysis
Benefits Break-even analysis has two benefits:
For doing future “what-if” alternate scenarios of costs, prices, and sales. This tool allows you to vary the different possible costs, prices, and sales quantities to do rough “what-if” scenarios to determine possible pricing and sales goals. Since the numbers are interrelated, if you change one, the others will change also.
For analyzing the profitability of past projects. While break-even analysis is usually used as a tool for future projects, it can also be used retroactively to find out whether the goal of profitability was really achieved, since costs may well have changed during the course of the project. In addition, you can use it to determine the impact of cutting costs once profits flow.
Break-Even Analysis: Why Do Airfares Vary So Much?
Why do some airlines charge four times more than others for a flight of the same distance?
There are several reasons, but break-even analysis enters into it.
United Airlines’ average cost for flying a passenger 1 mile in a recent year was 11.7 cents, whereas Southwest’s was 7.7 cents. Those are the break-even costs. What they charged beyond that was their profit.
Why the difference? One reason, according to a study by the U.S. Department of Transportation, is that Southwest’s expenses are lower. United flies more long routes than short ones, so its costs are stretched out over more miles, making its costs for flying shorter routes higher than Southwest’s.
Another factor affecting airfares is the type of passengers flying a particular route—whether they are high-fare-paying business travelers or more price-conscious leisure travelers. Business travelers often don’t mind paying a lot (they are reimbursed by their companies), and those routes (such as Chicago to Cincinnati) tend to have more first-class seats, which drives up the average price. Flights to vacation spots (such as Las Vegas) usually have more low-price seats because people aren’t willing to pay a lot for pleasure travel. Also, nonstop flight fares often cost more than flights with connections.
Limitations Break-even analysis is not a cure-all.
It oversimplifies. In the real world, things don’t happen as neatly as this model implies. For instance, fixed and variable costs are not always so readily distinguishable. Or fixed costs may change as the number of sales units goes up. And not all customers may pay the same price (some may get discounts).
The assumptions may be faulty. On paper, the formula may work perfectly for identifying a product’s profitability. But what if customers find the prices too high? Or what if sales figures are outrageously optimistic? In the marketplace, your price and sales forecasts may really be only good guesses.