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 Chapter 19 126

CHAPTER 19

MANAGING QUALITY AND PERFORMANCE

CHAPTER OUTLINE

Improvement Attitude
I. The Meaning of Control
II. Feedback Control Model
A. Four Steps of Feedback Control
B. The Balanced Scorecard
III. The Changing Philosophy of Control
A. Hierarchical Versus Decentralized Approaches
B. Open-Book Management
New Manager Self-Test: What Is Your Attitude Toward Organizational Regulation and
Control?
IV. Total Quality Management
A. TQM Techniques
B. TQM Success Factors
V. Budgetary Control
A. Expense Budget
B. Revenue Budget
C. Cash Budget
D. Capital Budget
E. Zero-Based Budget
VI. Financial Control
A. Financial Statements
B. Financial Analysis: Interpreting the Numbers
VII. Trends in Quality and Financial Control
A. International Quality Standards
B. Corporate Governance

ANNOTATED LEARNING OBJECTIVES


After studying this chapter, students should be able to:

1. Define organizational control and explain why it is a key management function.

Organizational control is defined as the systematic process through which managers regulate
organizational activities to make them consistent with the expectations established in plans,
targets, and standards of performance. Control, especially quality control, is an issue facing
every manager in every organization today.

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127  Chapter 19

Control is a key management function because it is the mechanism managers use to steer the
organization toward its objectives. Organizational control is a process of ensuring that objectives
are met and that resources are allocated in the best way to achieve those objectives.

2. Explain the four steps in the control process.

Based on our definition of organizational control, a well-designed control system consists of the
following four key steps:
 Establish standards of performance. Managers define goals for organizational departments in
specific, operational terms that comprise a standard of performance against which to compare
organizational activities.
 Measure actual performance. Managers develop quantitative measurements of performance
that can be reviewed on a daily, weekly, or monthly basis.
 Compare performance to standards. This is an explicit comparison of actual activities to
performance standards.
 Feedback. Corrective action is a change in work activities to bring them back to acceptable
performance standards.

3. Describe the benefits of using the balanced scorecard to track the performance and control
of the organization.

The balanced scorecard is a comprehensive management control system that balances traditional
financial measures with operational measures relating to a company’s critical success factors. A
balanced scorecard contains four major perspectives: financial performance, customer service,
internal business processes, and the organization’s capacity for learning and growth.

4. Contrast the hierarchical and decentralized methods of control.

An organization’s approaches to quality are based on its basic philosophy of control. With many
organizations moving toward participation and employee empowerment, a choice must be made
between hierarchical and decentralized approaches. Hierarchical control involves monitoring
and influencing employee behavior through rules, policies, hierarchy of authority, written
documentation, and reward systems. Hierarchical methods define explicit rules, policies, and
procedures for employee behavior. Control relies on centralized authority, the formal hierarchy,
and close personal supervision. Responsibility for quality control rests with quality control
inspectors and supervisors rather than with employees. Hierarchical control techniques can
enhance organizational efficiency and effectiveness.

Decentralized control represents cultural values almost the opposite of bureaucratic control.
Decentralized control relies on social values, traditions, shared beliefs, and trust to foster
compliance with organizational goals. Employees are trusted, and managers believe employees
are willing to perform correctly without extensive rules or supervision. Decentralized control is
implemented through the corporate culture, peer groups, self-control, and employee selection and
socialization.

5. Identify the benefits of open-book management.

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Managing Quality and Performance  128

Open-Book Management allows employees to see for themselves – through charts, computer
printouts, meetings, and so forth – the financial condition of the company. Open-book
management also shows the individual employee how his or her job fits into the big picture and
affects the financial future of the organization.

6. Describe the concept of total quality management (TQM) and major TQM techniques, such
as quality circles, benchmarking, Six Sigma principles, quality partnering, and continuous
improvement.

Total quality management (TQM) is a philosophy of organization-wide commitment to


continuous improvement, with the focus on teamwork, increasing customer satisfaction, and
lowering costs. TQM works through horizontal collaboration across functions and departments
and extends to include customers and suppliers. Teams of workers are trained and empowered to
make decisions that help the organization achieve high standards of quality. This is a revolution
in management thinking because quality control departments and formal control systems no
longer have primary control responsibility. Quality control thus becomes part of the day-to-day
business of every employee.

A quality circle is a group of six to 12 volunteer employees who meet regularly to discuss and
solve problems affecting the quality of their work. They meet during work hours to identify
problems and find solutions. The reason for using quality circles is to push decision making to a
level at which recommendations can be made by those who do the job.

Benchmarking is the continuous process of measuring products, services, and practices against
the toughest competitors or those companies recognized as industry leaders. The key to
successful benchmarking lies in analysis. A company must honestly analyze its current
procedures and determine areas for improvement. A company carefully selects competitors
worthy of copying and emulates their internal processes and procedures.

Six Sigma is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects
per million parts. Six Sigma has become a generic term for a quality control approach that takes
nothing for granted and emphasizes higher quality and lower costs. The discipline is based on
DMAIC (Define, Measure, Analyze, Improve, and Control). This methodology provides a
structured way for solving problems. Effectively implementing Six Sigma requires a major
commitment from top management because widespread change is required.

Cycle time refers to the steps taken to complete a company process, such as teaching a class,
publishing a textbook, or designing a new car. The focus is on improved responsiveness and
acceleration of activities into a shorter time. Reduction in cycle time improves overall company
performance as well as quality.

Continuous improvement is the implementation of a large number of small, incremental


improvements in all areas of the organization on an on-going basis. All employees are expected
to contribute by initiating changes in their own job activities. There is no end to the process.
Innovations can start simply, and employees can build on their success.

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129  Chapter 19

7. Discuss the use of financial statements, financial analysis, and budgeting as management
controls.

Budget and financial controls tell whether the organization is on sound financial footing and they
can be useful indicators of others kinds of performance problems. Managers need to be able to
evaluate financial reports that compare their organization’s performance with earlier data or
industry norms. The most common financial analysis focuses on ratios. Liquidity ratios, activity
ratios, profitability ratios, and leverage ratios are among the most common ratios. Budgets are a
useful tool for planning an organization’s expenditures. Examples of types of budgets managers
use are expense budgets, revenue budgets, cash budgets, and capital budgets.

8. Identify current trends in quality and financial control, including ISO 9000 and corporate
governance, and discuss their impact on organizations.

International Quality Standards - Many countries have endorsed a universal framework for
quality assurance called ISO 9000, a set of international standards for quality management
adopted in the late 1980s by more than 50 nations, including the United States. These standards
set uniform guidelines defining what manufacturing and service organizations should do to
ensure their products conform to high-quality requirements.

Economic Value Added (EVA) Systems - Hundreds of companies have set up economic value
added (EVA) measurement systems as a new way to gauge financial performance. EVA is
defined as a company’s net (after-tax) operating profit minus the cost of capital invested in the
company’s tangible assets. Measuring performance in terms of EVA is intended to capture all the
things a company can do to add value from its activities.

Market Value Added (MVA) Systems adds another dimension because it measures the stock
market’s estimate of the value of a company’s past and projected capital investment projects. A
positive MVA usually goes hand-in-hand with a high EVA measurement.

Activity-Based Costing (ABC) - Identifies various activities needed to provide a product and
determines the cost of each of those activities. ABC allocates costs across business processes; it
provides a more accurate picture of the cost of various products and services. In addition, it
enables managers to evaluate whether more costs go to activities that add value or to activities
that do not add value.

Corporate governance refers to the system of governing an organization so that the interests of
corporate shareholders are protected. The financial reporting systems and the roles of boards of
directors are being scrutinized in organizations around the world to ensure that top leaders are
keeping a close eye on the activities of lower-level managers and employees.

LECTURE OUTLINE

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Managing Quality and Performance  130

IMPROVEMENT ATTITUDE
In organizations, continuous improvement in quality sometimes competes with managerial
desires for production efficiency. Efficiency can be maximized by eliminating changes and
quality improvements. Continuous improvement, however, is an attitude that productivity can
always get better, and each employee can take responsibility to improve it. This attitude is
appropriate for quality-conscious managers. Introducing frequent small changes that may
temporarily reduce efficiency is the best path to continuous improvement.

I. THE MEANING OF CONTROL

Control, including quality control, also involves office productivity, such as improved
customer service, elimination of bottlenecks, and reduction in paperwork mistakes. Lack of
effective control can seriously damage an organization’s health and threaten its future.
Organizational control is the systematic process through which managers regulate
organizational activities to make them consistent with the expectations established in plans,
targets, and standards of performance. To effectively control an organization, managers (or
workers) require information about performance standards, actual performance, and actions
to correct deviations from the standards. Most organizations measure and control
performance using quantitative financial measures.

Discussion Question #2: You’re a manager who employs a participative control approach.
You’ve concluded that corrective action is necessary to improve customer satisfaction, but first
you need to convince your employees that the problem exists. What kind of evidence do you think
employees will find more compelling: quantitative measurements or anecdotes from your
interactions with customers? Explain your answer.

NOTES________________________________________________________________________
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II. FEEDBACK CONTROL MODEL Exhibit 19.1

A. Four Steps of Feedback Control

1. Establish Standards of Performance

a. Within the organization’s overall strategic plan, managers define goals for
organizational departments in specific, operational terms. These include
standards of performance against which to compare organizational activities.

b. To effectively evaluate and reward employees for the achievement of standards,


managers need clear standards that reflect activities that contribute to the
organization’s strategy. Standards should be defined clearly and precisely so
employees know what they need to do and can determine whether their activities
are on target.

2. Measure Actual Performance


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131  Chapter 19

a. Most organizations prepare formal reports of quantitative performance


measurements that managers review daily, weekly, or monthly. These
measurements should be related to the standards set in the first step of the control
process. Managers do not rely exclusively on quantitative measurements.

b. Managers observe for themselves whether employees are participating in decision


making and have opportunities to add to and share their knowledge. Managers
also monitor real-time data that show the popularity of certain products in specific
delivery zones and time slots.

3. Compare Performance to Standards

a. The third step in the control process compares actual activities to performance
standards. When performance deviates from a standard, managers must interpret
the deviation. They must dig beneath the surface and find the cause of the
problem.

b. Effective management control involves subjective judgment and employee


discussions, as well s objective analysis of performance data.

4. Take Corrective Action

a. Managers also determine what changes are necessary; managers may encourage
employees to work harder, redesign the production process, or fire employees.
Managers in a participative control approach collaborate with employees to
determine the corrective action necessary.

b. Managers may take corrective action to change performance standards.


Performance standards may need to be altered to make them realistic and provide
motivation.

Discussion Question #6: Think of a class that you’ve taken in the past. What standards of
performance did your professor establish? How was your actual performance measured? How
was your performance compared to the standards? Do you think the standards and methods of
measurement were fair? Were they appropriate to your assigned work? Why or why not?

NOTES________________________________________________________________________
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B. The Balanced Scorecard Exhibit 19.2

1. The balanced scorecard is a comprehensive management control system that


balances traditional financial measures with operational measures relating to a
company’s critical success factors. A balanced scorecard contains four major
perspectives.
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Managing Quality and Performance  132

a. The financial performance perspective reflects a concern that the organization’s


activities contribute to improving short- and long-term financial performance.

b. Customer service indicators measure such things as how customers view the
organization, as well as customer retention and satisfaction.

c. Internal business process indicators focus on production and operating statistics.

d. Potential for learning and growth indicators focus on how well resources and
human capital are being managed for the company’s future.

2. Managers focus on various elements of the scorecard to set targets, evaluate


performance, and guide discussion about what further actions to take. The balanced
scorecard is not right for every organization in every situation. The simplicity of the
system causes managers to underestimate the time and commitment needed. A key to
successful implementation of the balanced scorecard approach is a performance
management orientation rather than a performance measurement orientation.

Discussion Question #3: Describe the advantages of using a balanced scorecard to measure and
control organizational performance. Suppose you created a balanced scorecard for Walmart.
What specific customer service measures would you include?

NOTES________________________________________________________________________
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III. THE CHANGING PHILOSOPHY OF CONTROL

A. Hierarchical versus Decentralized Approaches Exhibit 19.3

1. Hierarchical control involves monitoring and influencing employee behavior


through rules, policies, hierarchy of authority, written documentation, and reward
systems. Hierarchical methods define explicit rules, policies, and procedures for
employee behavior. Control relies on centralized authority, the formal hierarchy, and
close personal supervision. Responsibility for quality control rests with quality
control inspectors and supervisors rather than with employees. Hierarchical control
techniques can enhance organizational efficiency and effectiveness.

2. Decentralized control relies on shared values and goals to control employee


behavior. Managers operate on the assumption that employees are trustworthy and
willing to perform effectively without extensive rules and close supervision. The
organization places great emphasis on the selection and socialization of employees to
ensure that workers have the values needed to influence behavior which meets goals.
With decentralized control, the culture is adaptive, and managers recognize the
importance of culture for uniting individual, team, and organizational goals for
greater overall control.
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133  Chapter 19

NEW MANAGER SELF-TEST: WHAT IS YOUR ATTITUDE TOWARD ORGANIZATIONAL


REGULATION AND CONTROL?

Enthusiastic new managers may exercise too much of their new control and get a negative
backlash. However, too little control may mean less accountability and productivity. The
challenge for new managers is to strike the right balance for the job and people involved.

B. Open-Book Management Exhibit 19.4

1. Open-book management allows employees to see the financial condition of the


company for themselves through charts, computer printouts, meetings, and so forth.
Open-book management shows the individual employee how his or her job fits into
the big picture and affects the financial future of the organization. In addition, it ties
employee rewards to the company’s overall success. The goal of open-book
management is to get every employee thinking and acting like a business owner
rather than like a hired hand.

2. In some countries, managers have trouble running an open-book company because


the prevailing attitudes and standards foster confidentiality and secrecy. Many
business people in countries like China, Russia, and South Korea are not accustomed
to publicly disclosing financial details.

3. The Opacity Index indicates the degree to which various countries are open regarding
economic matters. The higher the rating, the more opaque, or hidden, is the economy.
The U.S. has an opacity rating of 22, which is fairly low. In countries with higher
ratings, financial figures are typically closely guarded and managers do not share
information. Globalization has an impact on economic opacity by encouraging a
convergence toward global accounting standards that support accurate collection,
recording, and reporting of financial information.

Discussion Quesstion #1: You have been hired to manage a 20-person staff for Nightlight
Travels, a travel agency in Las Vegas. For five years, sales have been hammered by the global
recession, and staff morale has plummeted as star employees have left for positions in more
secure industries. Key customer relationships have been damaged by the sloppy and
unprofessional work habits of the remaining staff members. Your first responsibility as new
manager is to create next year’s budget for all planned expenditures. But first you must decide if
you will adopt a hierarchical approach or a decentralized approach to control. Which one
would you choose, and why?

NOTES_______________________________________________________________________
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IV. TOTAL QUALITY MANAGEMENT (TQM)

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Managing Quality and Performance  134

One popular approach based on decentralized control philosophy is total quality


management (TQM). TQM infuses quality into every activity in a company through
continuous improvement. The TQM philosophy focuses on teamwork, increasing customer
satisfaction, and lowering costs. Organizations implement TQM by encouraging managers
and employees to collaborate across functions and departments, as well as with customers
and suppliers, to identify areas for improvement, no matter how small. Each quality
improvement is a step toward perfection and meeting a goal of zero effects.

A. TQM Techniques

1. Quality Circles

a. A quality circle is a group of six to 12 volunteer employees who meet regularly


to discuss and solve problems affecting the quality of their work. They meet
during work hours to identify problems and find solutions.
b. The reason for using quality circles is to push decision making to a level at which
recommendations can be made by those who do the job.

2. Benchmarking Exhibit 19.5

a. Benchmarking is the continuous process of measuring products, services, and


practices against the toughest competitors or those companies recognized as
industry leaders. The key to successful benchmarking lies in analysis.

b. A company must honestly analyze its current procedures and determine areas for
improvement. A company carefully selects competitors worthy of copying and
emulates their internal processes and procedures.

3. Six Sigma Exhibit 19.6

a. Six Sigma is a highly ambitious quality standard that specifies a goal of no more
than 3.4 defects per million parts. That means being defect-free 99.9997 percent
of the time. Six Sigma has become a generic term for a quality control approach
that takes nothing for granted and emphasizes higher quality and lower costs.

b. The discipline is based on DMAIC (Define, Measure, Analyze, Improve, and


Control). This methodology provides a structured way for solving problems.
Effectively implementing Six Sigma requires a major commitment from top
management because widespread change is required.

Discussion Question #7: Some critics argue that Six Sigma is a collection of superficial changes
that often result in doing a superb job of building the wrong product or offering the wrong
service. Do you agree or disagree? Explain.

NOTES_______________________________________________________________________
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135  Chapter 19

4. Quality partnering

a. Quality partnering involves assigning dedicated personnel with a particular


functional area of the business. In this approach, the quality control personnel
work alongside others within a functional area identifying opportunities for
quality improvements throughout the work process.

b. This integrated, partnering approach to quality makes it possible to detect and


address defects early in the product life cycle, when they can be corrected most
easily.

5. Continuous Improvement Exhibit 19.7

a. Continuous improvement is the implementation of a large number of small,


incremental improvements in all areas of the organization on an on-going basis.

b. All employees are expected to contribute by initiating changes in their own job
activities. There is no end to the process. Innovations can start simply, and
employees can build on their success.

B. TQM Success Factors

1. Many organizational contingency factors influence the success of a TQM program.

2. Some of these factors include:

a. Quality circles are most beneficial when employees have challenging jobs.

b. TQM is most successful when it enriches jobs and improves employee


motivation.

c. When participation improves employees’ problem-solving skills, productivity is


likely to increase.

d. Quality programs have the greatest chance of success in corporate cultures that
value quality and stress continuous improvement as a way of life.

Discussion Question #9: Why is benchmarking an important component of TQM programs? Do


you believe a company could have a successful TQM program without using benchmarking?

NOTES________________________________________________________________________
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V. BUDGETARY CONTROL
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Managing Quality and Performance  136

Budgetary control sets targets for an organization’s expenditures, monitors results, compare
them to the budget, and makes changes as needed. As a control device, budgets are reports
that list planned and actual expenditures for cash, assets, raw materials, salaries, and other
resources. Budget reports usually list the variance between the budgeted and actual amounts
for each item. A budget is created for every division or department within an organization so
long as it performs a distinct project, program, or function. The fundamental unit of analysis
for a budget control system is called a responsibility center. A responsibility center is any
organizational department or unit under the supervision of a single person who is responsible
for its activity. Types of budgets managers use include expense budgets, revenue budgets, and
capital budgets.

A. Expense budget. An expense budget includes anticipated and actual expenses for each
responsibility center and for the total organization. It may show all expenses or focus on a
particular category, such as materials or research and development expenses. When actual
expenses exceed budgeted amounts, the difference signals the need for managers to
identify whether a problem exists and if so, take action.

B. Revenue budget. A revenue budget lists forecasted and actual revenues of the
organization. Revenues below the budgeted amount signal a need to investigate the
problem to see whether the organization can improve revenues. Revenues above the
budget require determining whether the organization can obtain the resources to meet the
higher demand for products.

C. Cash budget. A cash budget estimates receipts and expenditures of money on a daily or
weekly basis to ensure that an organization has sufficient cash to meet its obligations. It
shows the level of funds flowing through the organization and the nature of cash
disbursements. If the cash budget shows that the firm has more cash than necessary to
meet its short-term needs, the company can invest the excess funds. If the cash budget
shows a payroll expense that exceeds the amount of money in the bank, the organization
must borrow cash to meet the payroll.

D. Capital budget. A capital budget lists planned investments in major assets such
as buildings, trucks, and heavy machinery, often involving expenditures over more than a
year. A capital budget is necessary to plan the impact of these expenditures on cash flow
and profitability.

E. Zero-Based budget. A zero-based budgeting is an approach to planning and decision


making that requires a complete justification for every line-item in the budget, instead of
carrying forward a prior budget and applying percentage change. A zero-based budget
begins with a starting point of $0, and every dollar added to the budget is reflected by an
actual, documented need.

F. Budgeting as part of organizational planning and control.

1 Many traditional companies use top-down budgeting, meaning that the budgeted
amounts for the coming year are imposed on middle- and lower-level managers.
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137  Chapter 19

2. Others are beginning to adopt bottom-up budgeting, in which lower-level managers


anticipate their departments’ resource needs and pass them up to top management for
approval.

Discussion Question #4: In zero-based budgeting, every account starts at $0, and every dollar
added to the budget is reflected by an actual, documented need. Identify the possible advantages
of bottom-up budgeting

NOTES_______________________________________________________________________
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VI. FINANCIAL CONTROL

A. Financial Statements Exhibit 19.8

1. Financial statements provide the basic information used for financial control of an
organization.

2. Two major financial statements—the balance sheet and the income statement—are
the starting points for financial control.

a. The balance sheet shows the firm’s financial position with respect to assets and
liabilities at a specific point in time. It provides three types of information: assets
—what the company owns—includes current assets and fixed assets; liabilities—
the firm’s debts—includes both current debt and long-term debt; and owners’
equity—the difference between assets and liabilities—is the company’s net worth
in stock and retained earnings.
Exhibit 19.9

b. The income statement, also called a profit-and-loss statement or “P & L,”


summarizes the firm’s financial performance for a given time interval, usually one
year. The bottom line indicates the net income—profit or loss—for the given time
period.

Discussion Question #8: What types of analysis can managers perform to help them diagnose a
company’s financial condition? How might a review of financial statements help managers
diagnose other kinds of performance problems as well?

NOTES________________________________________________________________________
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______________________________________________________________________________

B. Financial Analysis: Interpreting the Numbers Exhibit 19.10

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Managing Quality and Performance  138

1. Financial analysis allows managers to be able to evaluate financial reports that


compare their organization’s performance with earlier data or industry norms.

2. The most common financial analysis focuses on ratios, which express the
relationships between performance indicators such as profits and assets, sales, and
inventory. Managers decide which ratios reveal the most important relationships for
their businesses.

a. A liquidity ratio indicates an organization’s ability to meet its current debt


obligations. The current ratio (current assets divided by current liabilities) tells
whether there are sufficient assets to convert into cash to pay off debts, if needed.
Another liquidity ratio is the quick ratio, which is typically expressed as cash plus
accounts receivable divided by current liabilities.

b. An activity ratio measures internal performance with respect to key activities


defined by management. Inventory turnover is calculated by dividing the total
sales by average inventory; this tells how many times the inventory is used to
meet the sales figure. The conversion ratio is purchase orders divided by
customer inquiries; this ration indicates effectiveness in converting inquiries into
sales.

c. A profitability ratio states profits relative to a source of profits, such as sales or


assets. The profit margin on sales is calculated as net income divided by total
sales. The gross margin is the gross (before-tax) profit divided by total sales.

 Another profitability measure is return on assets (ROA), a percentage


representing company earnings from assets, computed as net income divided
by total assets. ROA is a valuable yardstick for comparing a company’s
ability to generate earnings with other investment opportunities. A company
should earn more by using its assets than it could by putting its investment in
the bank.

d. Leverage ratio. Leverage refers to funding activities with borrowed money. A


company uses leverage to make its assets produce more than they could on their
own. Too much borrowing can put the organization at risk such that it will be
unable to keep up with repayment of its debt. Managers track the debt ratio, or
total debt divided by total assets, to make sure that it does not exceed a level they
consider acceptable.

VII. TRENDS IN QUALITY AND FINANCIAL CONTROL

A. International Quality Standards

1. The increasing significance of the global economy provides one impetus for total
quality management in the United States. ISO 9000 standards are based on a set of
international standards for quality management systems established by the
International Standards Organization (ISO) in Geneva, Switzerland. Hundreds of
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139  Chapter 19

thousands of organizations in 157 countries have been certified to demonstrate their


commitment to quality.

2. ISO certification has become the recognized standard for evaluating and comparing
companies on a global basis, and more U.S. companies are feeling the pressure to
participate in order to remain competitive in international markets. Many countries
and companies require ISO certification before they will do business with an
organization.

B. Corporate Governance

1. Corporate governance refers to the system of governing an organization so that the


interests of corporate shareholders are protected. The financial reporting systems and
the roles of boards of directors are being scrutinized in organizations around the
world to ensure that top leaders are keeping a close eye on the activities of lower-
level managers and employees.

2. Some corporate failures can be attributed to undercontrol because top managers did
not keep personal tabs on everything in a large, global organization. The Sarbanes-
Oxley Act of 2002 requires several types of reforms, including better internal
monitoring to reduce the risk of fraud, certification of financial reports by top leaders,
improved measures for external auditing, and enhanced public financial disclosure.
Some critics argue that Sarbanes-Oxley is creating a culture of overcontrol that is
stifling innovation and growth.

Discussion Question #10: What is ISO certification? Why would a global company like GE
want ISO certification?

NOTES________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Answers to End-of-Chapter Discussion Questions

1. You have been hired to manage a 20-person staff for Nightlight Travels, a travel agency in
Las Vegas. For five years, sales have been hammered by the global recession, and staff
morale has plummeted as star employees have left for positions in more secure industries.
Key customer relationships have been damaged by the sloppy and unprofessional work
habits of the remaining staff members. Your first responsibility as new manager is to create
next year’s budget for all planned expenditures. But first you must decide if you will adopt a
hierarchical approach or a decentralized approach to control. Which one would you choose,
and why?

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Managing Quality and Performance  140

A decentralized approach to control seems favorable for the above scenario. Decentralized
control relies on shared values and goals to control employee behavior. Managers operate on
the assumption that employees are trustworthy and willing to perform effectively without
extensive rules and close supervision. The organization places great emphasis on the
selection and socialization of employees to ensure that workers have the values needed to
influence behavior which meets goals. Self-discipline and self-control are what keep workers
performing their jobs up to expected standards. Empowerment of employees, effective
socialization, and training can contribute to internal standards that provide self-control.

With a decentralized approach, power will be dispersed and based on knowledge and
experience as much as position. The organization structure is flat and horizontal with flexible
authority, and teams of workers solving problems and making improvements. This will be a
great way to improve the sloppy and unprofessional work habits of the remaining staff
members, as everyone will be involved in the quality control on an ongoing basis. Managers
can not only make use of extrinsic rewards, but also intrinsic rewards for meaningful work
and the opportunity to learn and grow. With decentralized control, the culture is adaptive, and
managers recognize the importance of culture for uniting individual, team, and organizational
goals for greater overall control.

2. You’re a manager who employs a participative control approach. You’ve concluded that
corrective action is necessary to improve customer satisfaction, but first you need to
convince your employees that the problem exists. What kind of evidence do you think
employees will find more compelling: quantitative measurements or anecdotes from your
interactions with customers? Explain your answer.

Students may suggest that some employees will be more convinced by quantitative
measurements because they consider them to be objective and factual rather than subjective
and story bound. Indeed, a few employees may be more convinced by quantitative evidence;
however, recall from the discussion in Chapter 17 that presenting hard facts and figures
rarely has the same power as storytelling. Stories draw on people’s imaginations and
emotions, which help managers make sense of a fast-changing environment in ways that
people can understand and share. Managers who use symbols, metaphors, and stories to
deliver their messages have an easier time influencing and persuading others. Evidence of
the compatibility of stories with human thinking was demonstrated by a study at Stanford
Business School in which students presented with a vivid story alone (as opposed to a story
and quantitative data or quantitative data alone) were most convinced that the company truly
practiced a policy of avoiding layoffs.

3. Describe the advantages of using a balanced scorecard to measure and control


organizational performance. Suppose you created a balanced scorecard for Walmart. What
specific customer service measures would you include?

The balanced scorecard is a comprehensive management control system that balances


traditional financial measures with operational measures relating to a company’s critical
success factors. A balanced scorecard contains four major perspectives: financial
performance, customer service, internal business processes, and the organization’s capacity
for learning and growth. Within these four areas, managers identify key performance metrics
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141  Chapter 19

the organization will track. The financial perspective reflects a concern that the
organization’s activities contribute to improving short- and long-term financial performance.
It includes traditional measures such as net income and return on investment. Customer
service indicators measure such things as how customers view the organization, as well as
customer retention and satisfaction. Business process indicators focus on production and
operating statistics, such as order fulfillment or cost per order. The final component looks at
the organization’s potential for learning and growth, focusing on how well resources and
human capital are being managed for the company’s future. Metrics may include such things
as employee retention, business process improvements, and the introduction of new products.
The components of the scorecard are designed in an integrative manner. The balanced
scorecard helps managers focus on key performance measures and communicate them clearly
throughout the organization. It has become a core management control system for many
organizations today, and can be applied to most any business. Obviously, the magnitude of
this type of control system will be much less in a small, localized storefront business than in
a large corporation, with a similar contrast in the benefit to be derived from implementing
such a system.

Some specific customer service measures students’ might mention in relation to Walmart
include length of wait in cashier lines, ease of finding desired products, availability of desired
products, store cleanliness, and in-store services such as eye-care centers, banking facilities,
fast food franchises, etc.

4. In zero-based budgeting, every account starts at $0, and every dollar added to the budget is
reflected by an actual, documented need. Identify the possible advantages of bottom-up
budgeting.

In bottom-up budgeting, lower-level managers anticipate their departments’ resource needs


and pass them up to top management for approval. Companies of all kinds are involving line
managers in the budgeting process. This can help in redirecting resources as needed to
achieve goals within budget constraints.

5. Most companies have policies that regulate employees’ personal use of work computers
during work hours. Some even monitor employee e-mails and track the Web sites that have
been visited. Do you consider this type of surveillance an invasion of privacy? What are the
advantages of restricting employee use of the Internet and e-mail at work?

Computers used for Internet and e-mail at work belong to the employer, not the employee,
which gives the employer the right to monitor how its computers are used. Restricting use of
the Internet and e-mail prevent employees from engaging in inappropriate (i.e., not work
related) Internet surfing and personal e-mail communication. Moreover, such restrictions
keep employees more focused on work by preventing them from abusing (i.e., wasting)
company time surfing the Internet or reading/writing personal e-mails.

6. Think of a class you’ve taken in the past. What standards of performance did your professor
establish? How was your actual performance measured? How was your performance
compared to the standards? Do you think the standards and methods of measurement were
fair? Were they appropriate to your assigned work? Why or why not?
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Managing Quality and Performance  142

Performance standards are normally set forth by the professor in determining the grading
procedure of a course. An example could be 90-100 A’s, 80-89 B’s, 70-79 C’s, etc. The
actual performance is determined through student test grades, case method analysis, research
papers, participation in class, and other assessment methods. The teacher can compare
performance against the standards when these assessment measures are evaluated. When
these results are given back to students, corrective action can be forthcoming based on the
performance when compared against the standard. Performance standards and measurement
methods should be administered in a manner consistent with the syllabus and the general
practices of the university, and should be directly related to stated expectations of
performance.

7. Some critics argue that Six Sigma is a collection of superficial changes that often result in
doing a superb job of building the wrong product or offering the wrong service. Do you
agree or disagree? Explain.

Based on the Greek letter sigma, which statisticians use to measure how far something
deviates from perfection, Six Sigma is a highly ambitious quality standard that specifies a
goal of no more than 3.4 defects per million parts. In recent years, Six Sigma has deviated
from this precise definition to become a generic term for a quality-control approach that takes
nothing for granted and emphasizes a disciplined and relentless pursuit of higher quality and
lower costs. The discipline is based on a five-step methodology that provides a structured
way for organizations to approach and solve problems.

While saving time and money and reducing defects is an admirable and certainly worthwhile
pursuit, Six Sigma does nothing to determine whether the organization is saving time and
money and reducing defects with regard to the right products or services. Thus, one can
make a valid argument that it is rather superficial and useless if the company is producing
goods or offering services with little demand. On the other hand, Six Sigma was not
intended to be a business strategy improvement model; it assumes the strategy and
product/service mix are correct at the outset and is aimed at cost reduction and improvement
of product/service quality.

8. What types of analysis can managers perform to help them diagnose a company’s financial
condition? How can a review of financial statements help managers diagnose other kinds of
performance problems as well?

Managers can perform a financial analysis of an income statement and balance sheet of a
company to ascertain its strengths and weaknesses. The balance sheet shows the firm’s
financial position with respect to assets and liabilities at a specific point in time. The balance
sheet provides three types of information: assets, liabilities, and owners’ equity. Assets are
what the company owns, and they include current assets (those that can be converted into
cash in a short time period) and fixed assets (such as buildings and equipment that are long
term in nature.) Liabilities are the firm’s debts, including both current debt (obligations that
will be paid by the company in the near future) and long-term debt (obligations payable over
a long period.) Owners’ equity is the difference between assets and liabilities and is the
company’s net worth in stock and retained earnings.
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143  Chapter 19

The income statement, sometimes called a profit-and-loss statement or “P&L” for short,
summarizes the firm’s financial performance for a given time interval, usually one year. The
income statement shows revenues coming into the organization from all sources and
subtracts all expenses, including cost of goods sold, interest, taxes, and depreciation. The
bottom line indicates the net income—profit or loss—for the given time period. Financial
statements are indicators of performance problems. For example, a sales decline many signal
problems with products, customer service, or sales for effectiveness.

Managers need to be able to evaluate financial reports that compare their organization’s
performance with earlier data or industry norms. These comparisons enable them to see
whether the organization is improving and whether it is competitive with others in the
industry.

9. Why is benchmarking an important component of TQM programs? Do you believe a


company could have a successful TQM program without using benchmarking?

Benchmarking is an important component of total quality management because it is defined


as “the continuous process of measuring products, services, and practices against the toughest
competitors or those companies recognized as industry leaders.” Benchmarking is a major
TQM component and without it the program is not going to be successful. The key to
successful benchmarking lies in analysis. Starting with its own mission statement, a
company should honestly analyze its current procedures and determine areas for
improvement. As a second step, a company carefully selects competitors worthy of copying.
Companies can emulate internal processes and procedures of competitors, but must take care
to select companies whose methods are compatible. Once a strong, compatible program is
found and analyzed, the benchmarking company can then devise a strategy for implementing
a new program.

10. What is ISO certification? Why would a global company like General Electric want ISO
certification?

ISO certification refers to International Quality Standards. Many countries have endorsed a
universal framework for quality assurance called ISO 9000, a set of international standards
for quality management adopted in the late 1980s by more than 50 nations, including the
United States. These standards set uniform guidelines defining what manufacturing and
service organizations should do to ensure their products conform to high-quality
requirements.

Many companies around the world will not do business with other companies that are not
ISO certified. Even a global company like General Electric wants ISO certification so that it
will not be deterred from doing business with other companies.

Apply Your Skills: Experiential Exercise

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Managing Quality and Performance  144

Is Your Budget in Control?

Students will range from having the most disciplined budgeting habits, to adequate budgeting
habits, to the poorest budgeting habits. Suggestions are made on how to improve personal
budgeting.

Apply Your Skills: Small Group Breakout

Create a Group Control System

Students are asked to form groups and assume one member has been assigned to write a major
paper for which each person in the group must do his or her part. Then, they develop a list of
rules and identify statistics by which to control the behavior of group members, as well as
consequences for breaking the rules. The students then discuss the importance of rules and the
advantages and disadvantages of having many rules versus few rules for a student group.

Apply Your Skills: Ethical Dilemma

The Wages of Sin?

1. Continue Westwind’s zero-tolerance policy toward shoplifting. It’s the right thing to do—and
it will pay off in the end in higher profitability because the chain’s reputation for being tough
on crime will reduce overall losses from theft.

Although this option upholds Ross’s father’s lofty moral ideals, it isn’t particularly realistic
given the competition Westwind faces, and the company’s tough reputation will probably not
actually increase profitability in the long run anyway.

2. Adopt Chris Dykstra’s proposed changes and show more leniency to first-time offenders. It
is a more cost-effective approach to the problem than the current policy, plus it stays close to
your father’s original intent.

This is probably the best approach. As Chris noted, by adopting this policy Westwind can
reduce its costs of prosecuting shoplifters, which will help them keep costs lower for
customers and compete more effectively with their competitors. Moral ideals aside, it
doesn’t make good business sense to spend more money on prosecution of shoplifters than
the cost of the items being stolen. The $20 minimum is relatively low, so the policy does
stay somewhat close to the founder’s intent.

3. Adopt Chris Dykstra’s proposed changes with an even higher limit than the proposed $20
amount (say, $50 or $100), but which is still less than the cost of prosecution. In addition,
make sure the policy isn’t publicized. That way you’ll reduce costs even more and still
benefit from your reputation for prosecuting all shoplifters.

This may be an option to consider if the $20 minimum doesn’t achieve the desired cost
savings from prosecutions.
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145  Chapter 19

Apply Your Skills: Case for Critical Analysis

Five Stars

1. What do you see as the major strengths and flaws in the feedback control system used in the
schools in this scenario? What changes do you recommend to overcome the flaws?

There are major strengths and flaws in the feedback control system used in the schools. The
major strengths being the fact that performance goal was set for each school district and for
each teacher. Intensive training sessions were conducted for principals and designated master
teachers who would conduct the evaluations based on four class observations per teacher.
Also, officials used standardized achievement tests to derive value-added scores that measure
student learning over the year.

The major flaw being the fact that criteria varied by state even though the system was under
the guidance of the National Council of Teacher Quality. The observations made by the
principal and master teacher would be subjective because there are personal factors that
affect a true outcome. In the upper-income district, the schools are overflowing with children
from wealthy families, who will be applying to Ivy League schools. As no principal will
indicate that their students are receiving an education that is less than perfect, the rankings
are crammed with 5s. So, the principal being under pressure claims a higher level of
motivation for students and thus the selection of an elite team of educators. While on the
other hand, principals in the rural district schools know everyone and have longstanding
relationships with everyone in the country. Therefore, the scores are based on personal
history. So, the high or low scores are predictable even before the observation happens. In
most situations, principals feel pressure to align scores with state expectation.

The flaws in the system can be overcome by a well-designed control system which consists
of the following four key steps:
 Establish standards of performance.
 Measure actual performance.
 Compare performance to standards.
 Feedback.

2. Is 1-5 grading system by principals and master teachers a valuable part of a feedback
control system for teachers? Why?

The 1-5 grading system by principals and master teachers does not seem to be a valuable part
of a feedback control system for teachers as it is not an objective tool. Students’ responses
may differ.

3. How might the state control the accuracy of principals who are conducting teacher
evaluations? Explain.

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Managing Quality and Performance  146

The state can monitor and make it a strict rule for principals to make the number of
mandatory school visits that is required. The principals’ area of expertise should also be taken
into consideration when evaluating performance for a teacher from a certain course area.

On the Job Video Case Answers


Barcelona Restaurant Group: Managing Quality and Performance

1. How do managers at Barcelona control the company’s financial performance?

In the video, Barcelona uses multiple methods of controlling financial performance. First,
managers hold weekly meetings during which chefs and general managers review financials.
The exchanges get heated at times as everyone reviews P&L numbers, and owner Andy
Pforzheimer puts managers on the spot if they don’t know the costs of a suckling pig or are
letting food costs rise above 25 percent. Second, each of Barcelona’s seven restaurants
generates monthly financial statements, and managers of each restaurant track their own
financial progress against the financials of the other restaurants. This friendly competition
between Barcelona restaurants motivates managers to improve food and service while
maintaining low overhead costs. Third, to incentivize managers to grow the business,
Barcelona offers a 12 percent bonus on annual restaurant sales earned above the company’s
base operating profit. The bonus money is significant and can be adjusted upward or
downward slightly to reflect the scores from the Secret Shopper reports.

2. What is the “balanced scorecard” approach to measuring corporate performance, and in what
ways does Barcelona utilize this approach?

Traditionally, most businesses have measured and controlled their financial performance by
analyzing sales, revenue, and profit. The balanced scorecard approach expands the bases
around which a company’s progress is measured, adding components such as customer
service, business process, and learning and growth. These aspects of the business are then
quantified and analyzed to measure growth and achievement. Barcelona Restaurant Group
measures financial performance using traditional accounting methods, but the company also
measures its customer service performance with the aid of five “feedback loops” that gather
and assess customer feedback data. Quantifying customer service is especially important for
businesses in the restaurant industry, where customer satisfaction depends on intangible
qualities such as pleasant servers, food preparation, and short wait times.

3. List the four steps of the feedback control model and describe an instance where Barcelona
followed this process to improve its performance.

The feedback control model consists of four key steps: establish standards, measure
performance, compare performance to standards, and make corrections if performance fails to
meet standards. Student answers will vary regarding situations where Barcelona followed this
process to measure and control business performance.

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