Major Questions You Should Be Able to Answer16.1Control Whe.docx

Major Questions You Should Be Able to Answer
16.1
Control: When Managers Monitor Performance
Major Question: Why is control such an important managerial
function?
16.2
Levels & Areas of Control
Major Question: How do successful companies implement
controls?
16.3
The Balanced Scorecard, Strategy Maps, & Measurement
Management
Major Question: How can three techniques—balanced scorecard,
strategy maps, and measurement management—help me
establish standards and measure performance?
16.4
Some Financial Tools for Control
Major Question: Financial performance is important to most
organizations. What are the financial tools I need to know
about?
16.5
Total Quality Management
Major Question: How do top companies improve the quality of
their products or services?
16.6
Managing Control Effectively
Major Question: What are the keys to successful control, and
what are the barriers to control success?

16.7
Managing for Productivity
Major Question: How do managers influence productivity?
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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.
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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 16.1Controlling 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.
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1. To Adapt to Change & Uncertainty Markets shift. Consumer
tastes change. New competitors appear. Technologies are
reborn. New materials are invented. Government regulations are
altered. All organizations must deal with these kinds of
environmental changes and uncertainties. Control systems can
help managers anticipate, monitor, and react to these changes.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.
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6. To Decentralize Decision Making & Facilitate Teamwork
Controls allow top management to decentralize decision making
at lower levels within the organization and to encourage
employees to work together in teams.
Example: At General Motors, former chairman Alfred Sloan set
the level of return on investment he expected his divisions to
achieve, enabling him to push 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 16.2Six 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 16.3Steps 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.
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Nonprofit institutions might have standards for level of
charitable contributions, number of students retained, or degree
of legal compliance. For-profit organizations might have
standards of financial performance, employee hiring,
manufacturing defects, percentage increase in market share,
percentage reduction in costs, number of customer complaints,
and return on investment. More subjective standards, such as
level of employee morale, can also be set, although they may
have to be expressed more quantifiably as reduced absenteeism
and sick days and increased job applications.
One technique for establishing standards is to use the balanced
scorecard, as we explain later in this chapter.
2. Measure Performance: “What Is the Actual Outcome We
Got?” The second step in the control process is to measure
performance, such as by number of products sold, units
produced, or cost per item sold.
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.
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When performance falls significantly short of the standard,
managers should carefully examine the reasons why and take
the appropriate action. Sometimes it may turn out the standards
themselves were unrealistic, owing to changing conditions, in
which case the standards need to be altered. Sometimes it may
become apparent that employees 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.
EXAMPLE
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.
YOUR CALL
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?
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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 ManagersStrategic 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 ManagersTactical 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 ManagersOperational
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.
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Examples: 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.
EXAMPLE

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
YOUR CALL
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
FIGURE 16.4
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
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payroll obligations? What are the debt-repayment schedules?
What is the advertising budget? Clearly, the organization’s
financial controls are important because they can affect the
preceding three areas.
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.
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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.
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FIGURE 16.5The 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
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menu options. This technique has reduced the time from test
kitchen to market to six months, as opposed to the one year
needed by a key competitor.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.
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.26A
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.
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FIGURE 16.6The 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
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efficiency, 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
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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?
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Fixed versus Variable Budgets There are numerous kinds of
budgets, and some examples are listed below. (See Table 16.1.)
TABLE 16.1Examples 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.
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The Balance Sheet: Picture of Organization’s Financial Worth
for a Specific Point in TimeA 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.
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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
ExpertsAn 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.
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2. Companies Should Aim at Improving the System, Not
Blaming Workers Deming suggested that U.S. managers were
more concerned with blaming problems on individual workers
rather than on the organization’s structure, culture, technology,
work rules, and management—that is, “the system.” By treating
employees well, listening to their views and suggestions,
Deming felt, managers could bring about improvements in
products and services.
3. Improved Quality Leads to Increased Market Share, Increased
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 16.7The 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.
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These 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.
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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?
EXAMPLE
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
YOUR CALL
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?

Applying 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.
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PRACTICAL ACTION
What Makes a Service Company Successful? Four Core
Elements
With services now employing more than 75% of American
workers, universities are bringing more research attention to
what is being called “services science.” This is a field that uses
management, technology, mathematics, and engineering
expertise to improve the performance of service businesses,
such as retailing and health care.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.
YOUR CALL
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 ItOutsourcing (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

other companies outsource components inexpensively for new
integrated software systems, says one researcher, offshore
programmers make information technology affordable to small
and medium-size businesses and others who haven’t yet joined
the productivity boom.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
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for this is statistical process control, a statistical technique that
uses periodic random samples from production runs to see if
quality is being maintained within a standard range of
acceptability. If quality is not acceptable, production is stopped

to allow corrective measures.
Statistical process control is the technique that McDonald’s
uses, for example, to make sure that the quality of its burgers is
always the same, no matter where in the world they are served.
Companies such as Intel and Motorola use statistical process
control to ensure the reliability and quality of their products.
Six Sigma & Lean Six Sigma: Data-Driven Ways to Eliminate
Defects “The biggest problem with the management technique
known as Six Sigma is this: It sounds too good to be true,” says
a Fortune writer. “How would your company like a 20%
increase in profit margins within one year, followed by
profitability over the long-term that is ten times what you’re
seeing now? How about a 4% (or greater) annual gain in market
share?”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
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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?

2. 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.
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3. Overemphasis on Means Instead of Ends We said that control
activities should be strategic and results oriented. They are not
ends in themselves but the means to eliminating problems. Too
much emphasis on accountability for weekly production quotas,
for example, can lead production supervisors to push their
workers and equipment too hard, resulting in absenteeism and
machine breakdowns. Or it can lead to game playing—“beating
the system”—as managers and employees manipulate data to
seem to fulfill short-run goals instead of the organization’s
strategic plan.
4. Overemphasis on Paperwork A specific kind of misdirection

of effort is management emphasis on getting reports done, to the
exclusion of other performance activity. Reports are not the be-
all and end-all. Undue emphasis on reports can lead to too much
focus on quantification of results and even to falsification of
data.
Example: A research laboratory decided to use the number of
patents the lab obtained as a measure of its effectiveness. The
result was an increase in patents filed but 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.
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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.)
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
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the 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?
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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 becoming something 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.”
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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!
Angelo Kinicki
Brian K. Williams
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Key Terms Used in This Chapter
audits
balance sheet
balanced scorecard
budget
bureaucratic control
continuous improvement
control process steps
control standard
controlling
decentralized control
Deming management
enterprise resource planning (ERP)

external audit
financial statement
fixed budget
income statement
incremental budgeting
internal audit
ISO 9000 series
ISO 14000 series
lean Six Sigma
management by exception
operational control
PDCA cycle
RATER scale
ratio analysis
reduced cycle time
Six Sigma
special-purpose team
statistical process control
strategic control
strategy map
supply chain
tactical control
total quality management (TQM)
two core principles of TQM
variable budget
Key Points
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
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fast 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 546
to 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 [2013], 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 547
time 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 548
months 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.
FOR DISCUSSION
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.
Legal/Ethical Challenge
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.
Running Head: RESEARCH QUESTION
1
RESEARCH QUESTION 2

Research Question
Institutional Affiliation
Student’s name
Research Question
1. Barriers and issues related to research
The main barrier that is likely to be experienced when carrying
out this research is the large amount of data and information
that is available at Amazon. This will make it difficult to
determine which information is important and which one is
irrelevant. Another issue is the fact that the research is
supposed to take only 8 weeks. The time is too limited to gather
all the necessary information relevant to the research.
2. Difficult to study
The main difficulty to this study is the fact that it is team-based
which means that the team has to have a high team-work culture
for the study to be effective. Group effort and efficient
communication will be required to make the study a success.
Another difficulty that is likely to be experienced in this study
is that some sensitive and confidential information about
Amazon might not be available to the public domain and this
will limit the scope of the study.
3. Definition of terms
The key terms used in this study have been defined below:
Artificial Intelligence: This is the development of intelligence
computer systems which can think and work like humans. They

perform tasks that would normally require human intelligence
such as decision-making, visual perception, translation between
languages and speech recognition.
Customer service: This is the act of meeting the needs of the
customer through high quality service before, during and after
doing business with them. (Elaborate this topic with following
points:
Chat Bots:
Expert Systems:
Amazon:
Google:
4. Summary
In conclusion, Amazon should consider creating a healthy
balance between automated customer service and the human
aspect of customer service because there are some human
attributes that Artificial Intelligence cannot replace. (Summary
needs more details)Now Research and write about below
topic:Research Area
Technology
· Artificial Intelligence -
· Challenges of AI
· Pros/Cons
· Cost (Implementation & maintain)
· Expert Systems -
· Challenges of Expert Systems
· Pros/Cons
· Chat Bots -
· Challenges of Chat Bots
· Pros/Cons
Note: Add references
REFERENCES
Groover, M. P. (2016). Automation, production systems, and

computer-integrated manufacturing. Pearson Education India.
Project PlannerProject PlannerSelect a period to highlight at
right. A legend describing the charting follows. Period
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(beyond plan)% Complete (beyond plan)ACTIVITYPLAN
STARTPLAN DURATIONACTUAL STARTACTUAL
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