CH-18 Managing Quality and Performance

CH-18 Managing Quality and Performance

1. THE MEANING OF CONTROL

   • Organizational control: the systematic process through which managers regulate organizational activities to make them consistent with expectations established in plans, targets, and standards of performance.
     • effectively controlling an organization requires information about performance standards and actual performance, as well as actions taken to correct any deviations from the standards
   • Choosing Standards and Measures
     • Most organizations focus on measuring and controlling financial performance, such as sales, revenue, and profit
   • The Balanced Scorecard
     • Organizations recognize that relying exclusively on financial measures can result in short-term, dysfunctional behavior.
       • The balanced scorecard is a comprehensive management control system that balances traditional financial measures with operational measures relating to a company’s critical success factors.
         • A balanced scorecard contains four major perspectives, financial performance, customer service, internal business processes, and the organization’s capacity for learning and growth.
           • The financial performance perspective reflects a concern that the organization’s activities contribute to improving short- and long-term financial performance.
           • Customer service indicators measure such things as how customers view the organization, as well as customer retention and satisfaction.
           • Business process indicators focus on production and operating statistics, such as order fulfillment or cost per order
           • The final component of the balanced scorecard looks at the organization’s potential for learning and growth, focusing on how well resources and human capital are being managed for the company’s future

2. FEEDBACK CONTROL MODEL

   • All well-designed control systems involve the use of feedback to determine whether performance meets established standards.
   • Managers focus on the various elements of the scorecard to set targets, evaluate performance, and guide discussion about what further actions need to be taken.
   • Steps of Feedback Control
     • Managers set up control systems that consist of the four key steps
       • Establish Standards of Performance: managers define goals for organizational departments in specific, operational terms that include a standard of performance
       • Measure Actual Performance: most organizations prepare formal reports of quantitative performance measurements. These should be related to the standards set in the first step of the control process.
       • Compare Performance to Standards: is comparing actual activities to performance standards. To correct the problems that most require attention, managers focus on variances.
       • Take Corrective Action: managers also determine what changes, if any, are needed.
   • Application to Budgeting
     • Budgetary control is the process of setting targets for an organization’s expenditures, monitoring results and comparing them to the budget, and making changes as needed
     • budgets are reports that list planned and actual expenditures for cash, assets, raw materials, salaries, and other resources.
       • A responsibility center is defined as any organizational department or unit under the supervision of a single person who is responsible for its activity
     • An EXPENSE BUDGET includes anticipated and actual expenses for each responsibility center and for the total organization.
       • It may show all types of expenses or may focus on a particular category, such as materials or research and development expenses.
     • The CASH BUDGET estimates receipts and expenditures of money on a daily or weekly basis to ensure that an organization has sufficient cash to meet its obligations
     • The CAPITAL BUDGET lists planned investments in major assets such as buildings, heavy machinery, or complex information technology systems, often involving expenditures over more than a year.
       • A budgeting process in which middle- and lower-level managers set departmental budget targets in accordance with overall company revenues and expenditures specified by top management.
       • A budgeting process in which lower-level managers budget their departments’ resource needs and pass them up to top management for approval.

3. FINANCIAL CONTROL

   • Financial Statements
     • Financial statements provide the basic information used for financial control of an organization.
       • The BALANCE SHEET shows the firm’s financial position with respect to assets and liabilities at a specific point in time
         • The balance sheet provides three types of information: assets, liabilities, and owners’ equity.
           • Assets are what the company owns, and they include current assets and fixed assets
           • Liabilities are the firm’s debts, including both current debt and long-term debt
           • Owners’ equity is the difference between assets and liabilities and is the company’s net worth in stock and retained earnings
         • INCOME STATEMENT is a statement that summarizes the firm’s financial performance for a given time interval; sometimes called a profit-and-loss statement.
           • The income statement shows revenues coming into the organization from all sources and subtracts all expenses, including cost of goods sold, interest, taxes, and depreciation
   • Financial Analysis: Interpreting the Numbers
     • The most common financial analysis focuses on ratios, statistics that express the relationships between performance indicators such as profits and assets, sales, and inventory
     • A LIQUIDITY RATIO indicates an organization’s ability to meet its current debt obligations
     • An ACTIVITY RATIO measures internal performance with respect to key activities defined by management.
     • Managers analyze a company’s profits by studying PROFITABILITY RATIOS, which state profits relative to a source of profits, such as sales or assets.
       • One important profitability ratio is the profit margin on sales, which is calculated as net income divided by sales
     • Leverage refers to funding activities with borrowed money. A company can use leverage to make its assets produce more than they could on their own

4. THE CHANGING PHILOSOPHY OF CONTROL

   • Hierarchical control and decentralized control represent different philosophies of corporate culture
   • Hierarchical versus Decentralized Approaches
     • Hierarchical control involves monitoring and influencing employee behavior through extensive use of rules, policies, hierarchy of authority, written documentation, reward systems, and other formal mechanisms
       • Hierarchical methods define explicit rules, policies, and procedures for employee behavior. Control relies on centralized authority, the formal hierarchy, and close personal supervision
     • Decentralized control is based on values and assumptions that are almost opposite to those of hierarchical control
       • Decentralized control relies on cultural values, traditions, shared beliefs, and trust to foster compliance with organizational goals
         • the organizational culture is somewhat rigid, and managers do not consider culture a useful means of controlling employees and the organization. Rules and procedures are used only when necessary
         • the culture is adaptive, and managers recognize the importance of organizational culture for uniting individual, team, and organizational goals for greater overall control
   • Open-Book Management
     • Open-book management allows employees to see for themselves— through charts, computer printouts, meetings, and so forth—the financial condition of the company.
       • shows the individual employee how his or her job fits into the big picture and affects the financial future of the organization
       • ties employee rewards to the company’s overall success.

5. TOTAL QUALITY MANAGEMENT

   • TQM: an organization-wide commitment to infusing quality into every activity through continuous improvement.
   • The TQM philosophy focuses on team-work, increasing customer satisfaction, and lowering costs.
   • Organizations implement TQM by encouraging managers and employees to collaborate across functions and departments, as well as with customers and suppliers, to identify areas for improvement, no matter how small.
   • TQM Techniques
     • The implementation of total quality management involves the use of many techniques, including:
       • A QUALITY CIRCLE is a group of 6 to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work.
       • SIX SIGMA is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects per million parts
       • CYCLE TIME refers to the steps taken to complete a company process, such as making an airline reservation, processing an online order or opening a retirement fund
       • This approach, called CONTINOUS IMPROVEMENT, or kaizen, is the implementation of a large number of small, incremental improvements in all areas of the organization on an ongoing basis
     • BENCHMARKING is defined as “the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders to identify areas for improvement.
   • TQM Success Factors
     • Many contingency factors can influence the success of a TQM program

6. TRENDS IN QUALITY AND FINANCIAL CONTROL

   • Some of the major trends in quality and fi nancial control include international quality standards, economic value-added and market value-added systems, activity-based costing, and increased corporate governance.
     • ISO 9000 standards, represent an international consensus of what constitutes effective quality management as outlined by the International Organization for Standardization
     • ISO certifiCation has become the recognized standard for evaluating and comparing companies on a global basis, and more U.S. companies are feeling the pressure to participate to remain competitive in international markets.
   • New Financial Control Systems
     • Economic Value-Added (EVA)
       • A control system that measures performance in terms of after-tax profits minus the cost of capital invested in tangible assets.
     • Market Value-Added (MVA)
       • A control system that measures the stock market’s estimate of the value of a company’s past and expected capital investment projects.
     • Activity-Based Costing (ABC)
       • A control system that identifies the various activities needed to provide a product and allocates costs accordingly.
     • corporate governance
       • The system of governing an organization so the interests of corporate owners are protected.