Question

Think about your current or former job. If the organization where you were working were to go off track strategically, was there any readily available control mechanism to alert management of the deviation?

Make sure to complete the Chapter 15 Reading, prior to beginning your participation in the Unit 5 Discussion.Understand what is meant by organizational control.

1. Differentiate among different levels, types, and forms of control.
2. Know the essentials of financial controls.
3. Know the essentials of nonfinancial controls.
4. Know the basics of lean control systems.
5. Craft a Balanced Scorecard for an organization or yourself.

This chapter helps you to understand the key elements of organizational control, often seen in the form of internal systems and processes, as they relate to the planning-organizing-leading-controlling (P-O-L-C) framework. While there are many possible forms and formats, organizational controls should serve two basic functions. First, they should help managers determine whether and why their strategy is achieving the desired results. Second, they should be an early warning system in cases where the organization is getting a little (or a lot) off track.

Figure 15.2 The P-O-L-C Framework

15.1 Case in Point: Newell Rubbermaid Leverages Cost Controls to Grow

Newell Company grew to be a diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, Newell Company’s business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s, however, the company has diversified extensively through acquisitions of businesses for paintbrushes, writing pens, pots and pans, hairbrushes, and the like. Over 90% of its growth can be attributed to these many small acquisitions, whose performance Newell improved tremendously through aggressive restructuring and its corporate emphasis on cost cutting and cost controls. Usually within a year of the acquisition, Newell would bring in new leadership and install its own financial controller in the acquired unit. Then, three standard sets of controls were introduced: an integrated financial accounting system, a sales and order processing and tracking system, and a flexible manufacturing system. Once these systems were in place, managers were able to control costs by limiting expenses to those previously budgeted. Administration, accounting, and customer-related financial accounting aspects of the acquired business were also consolidated into Newell’s corporate headquarters to further reduce and control costs.

While Newell Company’s 16 different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because Newell operates each line of business autonomously (separate manufacturing, research and development [R&D], and selling responsibilities for each), it is perhaps best described as pursuing a related, linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). Beyond its internal systems and processes, Newell was also able to control costs through outcome controls. That is, business managers were paid a bonus based on the profitability of their particular unit—in fact, the firm’s strategy is to achieve profits, not simply growth at the expense of profits. Newell managers could expect a base salary equal to the industry average but could earn bonuses ranging from 35% to 100% based on their rank and unit profitability.

In 1999, Newell acquired Rubbermaid, a U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Rubbermaid was highly innovative (over 80% of its growth has come from internal new product development), it had difficulty controlling costs and was losing ground against powerful customers like Wal-Mart. Newell believed that the market power it wielded with retailers like Wal-Mart would help it turn Rubbermaid’s prospects around. The acquisition deal between these two companies resulted in a single company that was twice as big and became known as Newell Rubbermaid Inc. (NYSE: NWL). In 2010, Fortune named Newell Rubbermaid the number 7 “Most Admired Company” in the home equipment and furnishings category.

Case written by [citation redacted per publisher request]. Based on information retrieved April 3, 2010, from http://www.bain.com/masteringthemerger/case_example_new_rbbmd_trans.asp and from the Newell Rubbermaid Web site: http://www.newellrubbermaid.com/public/Our-Company/Our-History.aspx.

DISCUSSION QUESTIONS

1. The controlling facet of the P-O-L-C framework introduces you to a variety of controls. What do other organizations you are familiar with do with regard to control that is similar to or different from what we see in the case of Newell?
2. What types of controls does Newell use?
3. Does Newell use behavioral controls? What are some examples?
4. Does Newell use outcome controls? What are some examples?
5. How do the controls Newell uses fit its strategy?
6. At the end of the case, how has Newell adjusted its strategy? What changes in controls has it made as a result

Up to this point you have probably become familiar with the planning, organizing, and leading components of the P-O-L-C framework. This section addresses the controlling component, often taking the form of internal systems and process, to complete your understanding of P-O-L-C. As you know, planning comprises all the activities associated with the formulation of your strategy, including the establishment of near- and long-term goals and objectives. Organizing and leading are the choices made about the way people work together and are motivated to achieve individual and group goals and objectives.

What Is Organizational Control?

Organizational control typically involves four steps: (1) establish standards, (2) measure performance, (3) compare performance to standards, and then (4) take corrective action as needed. Corrective action can include changes made to the performance standards—setting them higher or lower or identifying new or additional standards. Sometimes we think of organizational controls only when they seem to be absent, as in the 2008 meltdown of U.S. financial markets, the crisis in the U.S. auto industry, or the much earlier demise of Enron and MCI/Worldcom due to fraud and inadequate controls. However, as shown in the figure, good controls are relevant to a large spectrum of firms beyond Wall Street and big industry.

We tend to think about controls only in the for-profit organization context. However, controls are relevant to a broad spectrum of organizations, including governments, schools, and charities. Jack Siegel, author of A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good, outlines this top 10 list of financial controls that every charity should put in place:

Control 1—Require two signatures for checks written on bank and investment accounts. This prevents unapproved withdrawals and payments.

Control 2—The organization’s bank statements should be reconciled on a monthly basis by someone who does not have signature authority over the accounts. This is a further check against unapproved withdrawals and payments.

Control 3—Since cash is particularly susceptible to theft, organizations should eliminate the use of cash to the extent possible.

Control 4—Organizations should only purchase goods from an approved list of vendors. This provides protection from phony invoices submitted by insiders.

Control 5—Many charities have discovered “ghost employees” on their payrolls. To minimize this risk, organizations should tightly control the payroll list by developing a system of reports between payroll/accounting and the human resources department.

Control 6—Organizations should require all otherwise reimbursable expenses to be preauthorized. Travel and entertainment expenses should be governed by a clearly articulated written policy that is provided to all employees.

Control 7—Physical inventories should be taken on a regular and periodic basis and then be reconciled against the inventories carried on the books. Besides the possible detection of theft, this control also provides a basis for an insurance claim in the case of a fire, flood, or other disaster.

Control 8—Every organization should develop an annual budgeting process. The nonprofit’s employees should prepare the budget, but the board should review and approve it.

Control 9—Organizations should use a competitive bidding process for purchases above a certain threshold. In reviewing bids, organizations should look for evidence of collusion.

Control 10—Organizations that regularly received grants with specific requirements should have someone who is thoroughly versed in grant administration.

Retrieved January 30, 2009, from http://www.charitygovernance.com/charity_governance/2007/10/ten-financial-c.html#more.

The Costs and Benefits of Organizational Controls

Organizational controls provide significant benefits, particularly when they help the firm stay on track with respect to its strategy. External stakeholders, too, such as government, investors, and public interest groups have an interest in seeing certain types or levels of control are in place. However, controls also come at a cost. It is useful to know that there are trade-offs between having and not having organizational controls, and even among the different forms of control. Let’s look at some of the predominant costs and benefits of organizational controls, which are summarized in the following figure.

Costs

First, good controls help the organization to be efficient and effective by helping managers to control costs and productivity levels. Cost can be controlled using budgets, where managers compare actual expenses to forecasted ones. Similarly, productivity can be controlled by comparing how much each person can produce, in terms of service or products. For instance, you can imagine that the productivity of a fast-food restaurant like McDonald’s depends on the speed of its order takers and meal preparers. McDonald’s can look across all its restaurants to identify the target speed for taking an order or wrapping a burger, then measure each store’s performance on these dimensions.

Quality control is a second benefit of controls. Increasingly, quality can be quantified in terms of response time (i.e., How long did it take you to get that burger?) or accuracy (Did the burger weigh one-quarter pound?). Similarly, Toyota tracks the quality of its cars according to hundreds of quantified dimensions, including the number of defects per car. Some measures of quality are qualitative, however. For instance, Toyota also tries to gauge how “delighted” each customer is with its vehicles and dealer service. You also may be familiar with quality control through the Malcolm Baldrige National Quality Program Award. The Baldrige award is given by the president of the United States to businesses—manufacturing and service, small and large—and to education, health care, and nonprofit organizations that apply and are judged to be outstanding in seven areas: leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource focus; process management; and results.Retrieved January 30, 2009, from http://www.nist.gov/public_affairs/factsheet/baldfaqs.htm Controlling—how well the organization measures and analyzes its processes—is a key criterion for winning the award. The Baldrige award is given to organizations in a wide range of categories and industries, from education to ethics to manufacturing.

The third area by which organizations can benefit from controls is opportunity recognition. Opportunities can come from outside of the organization and typically are the result of a surprise. For instance, when Nestlé purchased the Carnation Company for its ice cream business, it had also planned to sell off Carnation’s pet food line of products. However, through its financial controls, Nestlé found that the pet food business was even more profitable than the ice cream, and kept both. Opportunities can come from inside the organization too, as would be the case if McDonald’s finds that one of its restaurants is exceptionally good at managing costs or productivity. It can then take this learned ability and transfer it to other restaurants through training and other means.

Controls also help organizations manage uncertainty and complexity. This is a fourth area of benefit from well-designed and implemented controls. Perhaps the most easily understood example of this type of benefit is how financial controls help an organization navigate economic downturns. Without budgets and productivity controls in place, the organization might not know it has lost sales or expenses are out of control until it is too late.

KEY TAKEAWAY

This chapter introduced the basics of controls, the process by which an organization influences its subunits and members to behave in ways that lead to attaining organizational goals and objectives. When properly designed, controls lead to better performance by enabling the organization to execute its strategy better. Managers must weigh the costs and benefits of control, but some minimum level of control is essential for organizational survival and success.

Answer 1

Think about your current or former job. If the organization where you were working were to go off track strategically, was there any readily available control mechanism to alert management of the deviation?

Strategically speaking, going off the track can prove very costly for any organization. This is where control mechanisms can prove very important. In this regard my organization has been able to use two types of controls very effectively. One is quality control and then other is proactive. Proactivity is a type of strategic control that keeps the organizations from going off track strategically. For this purpose it has used both concurrent controls and feedback mechanisms to help keep things on track inside the organization. Concurrent control is a type of real time control that can be used to address the problems in real time. However, it requires monitoring for problems all the time. The concurrent controls inside our organization allow people to raise a red flag whenever anyone feels that a significant deviation has occurred.

It is not just the supervisors but the other employees too which can raise a red flag before the management to highlight a significant deviation. If the deviation is minor and does not require immediate attention, it can be raised before the supervisor to be addressed. However, behind such controls, there is the power of organizational culture. An organization that has established a culture of innovation and empowerment finds it easier to apply such mechanisms or controls that allow people to bring significant matters immediately to light. An organizational culture can be a more pointed tool for control and can ensure that everyone remains focused in the strategic direction of the organization. Strategy is crucial for organizations but even crucial is to remain on track after having formulated a strategy. For this purpose the organizations should apply proper controls to enable the employees and projects to remain strategically on track.

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