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

Make sure to complete the Chapter 15 Reading, prior to beginningyour participation in the Unit 5 Discussion.Understand what ismeant by organizational control.

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

This chapter helps you to understand the key elements oforganizational control, often seen in the form of internal systemsand processes, as they relate to theplanning-organizing-leading-controlling (P-O-L-C) framework. Whilethere are many possible forms and formats, organizational controlsshould serve two basic functions. First, they should help managersdetermine whether and why their strategy is achieving the desiredresults. Second, they should be an early warning system in caseswhere the organization is getting a little (or a lot) offtrack.

Figure 15.2 The P-O-L-C Framework

15.1 Case in Point: Newell Rubbermaid Leverages Cost Controls toGrow

Newell Company grew to be a diversified manufacturer andmarketer of simple household items, cookware, and hardware. In theearly 1950s, Newell Company’s business consisted solely ofmanufactured curtain rods that were sold through hardware storesand retailers like Sears. Since the 1960s, however, the company hasdiversified extensively through acquisitions of businesses forpaintbrushes, writing pens, pots and pans, hairbrushes, and thelike. Over 90% of its growth can be attributed to these many smallacquisitions, whose performance Newell improved tremendouslythrough aggressive restructuring and its corporate emphasis on costcutting and cost controls. Usually within a year of theacquisition, Newell would bring in new leadership and install itsown financial controller in the acquired unit. Then, three standardsets of controls were introduced: an integrated financialaccounting system, a sales and order processing and trackingsystem, and a flexible manufacturing system. Once these systemswere in place, managers were able to control costs by limitingexpenses to those previously budgeted. Administration, accounting,and customer-related financial accounting aspects of the acquiredbusiness were also consolidated into Newell’s corporateheadquarters to further reduce and control costs.

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

In 1999, Newell acquired Rubbermaid, a U.S.-based manufacturerof flexible plastic products like trash cans, reheatable andfreezable food containers, and a broad range of other plasticstorage containers designed for home and office use. WhileRubbermaid was highly innovative (over 80% of its growth has comefrom internal new product development), it had difficultycontrolling costs and was losing ground against powerful customerslike Wal-Mart. Newell believed that the market power it wieldedwith retailers like Wal-Mart would help it turn Rubbermaid’sprospects around. The acquisition deal between these two companiesresulted in a single company that was twice as big and became knownas Newell Rubbermaid Inc. (NYSE: NWL). In 2010, Fortunenamed Newell Rubbermaid the number 7 “Most Admired Company” in thehome equipment and furnishings category.

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

DISCUSSION QUESTIONS

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

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

What Is Organizational Control?

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

We tend to think about controls only in the for-profitorganization context. However, controls are relevant to a broadspectrum of organizations, including governments, schools, andcharities. Jack Siegel, author of A Desktop Guide for NonprofitDirectors, Officers, and Advisors: Avoiding Trouble While DoingGood, outlines this top 10 list of financial controls thatevery charity should put in place:

Control 1—Require two signatures for checks written on bank andinvestment accounts. This prevents unapproved withdrawals andpayments.

Control 2—The organization’s bank statements should bereconciled on a monthly basis by someone who does not havesignature authority over the accounts. This is a further checkagainst unapproved withdrawals and payments.

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

Control 4—Organizations should only purchase goods from anapproved list of vendors. This provides protection from phonyinvoices submitted by insiders.

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

Control 6—Organizations should require all otherwisereimbursable expenses to be preauthorized. Travel and entertainmentexpenses should be governed by a clearly articulated written policythat is provided to all employees.

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

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

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

Control 10—Organizations that regularly received grants withspecific requirements should have someone who is thoroughly versedin grant administration.

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

The Costs and Benefits of Organizational Controls

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

Costs

First, good controls help the organization to be efficient andeffective by helping managers to control costs and productivitylevels. Cost can be controlled using budgets, where managerscompare actual expenses to forecasted ones. Similarly, productivitycan be controlled by comparing how much each person can produce, interms of service or products. For instance, you can imagine thatthe productivity of a fast-food restaurant like McDonald’s dependson the speed of its order takers and meal preparers. McDonald’s canlook across all its restaurants to identify the target speed fortaking an order or wrapping a burger, then measure each store’sperformance on these dimensions.

Quality control is a second benefit of controls. Increasingly,quality can be quantified in terms of response time (i.e., How longdid it take you to get that burger?) or accuracy (Did the burgerweigh one-quarter pound?). Similarly, Toyota tracks the quality ofits cars according to hundreds of quantified dimensions, includingthe number of defects per car. Some measures of quality arequalitative, however. For instance, Toyota also tries to gauge how“delighted” each customer is with its vehicles and dealer service.You also may be familiar with quality control through the MalcolmBaldrige National Quality Program Award. The Baldrige award isgiven by the president of the United States tobusinesses—manufacturing and service, small and large—and toeducation, health care, and nonprofit organizations that apply andare judged to be outstanding in seven areas: leadership; strategicplanning; customer and market focus; measurement, analysis, andknowledge management; human resource focus; process management; andresults.Retrieved January 30, 2009, fromhttp://www.nist.gov/public_affairs/factsheet/baldfaqs.htmControlling—how well the organization measures and analyzes itsprocesses—is a key criterion for winning the award. The Baldrigeaward is given to organizations in a wide range of categories andindustries, from education to ethics to manufacturing.

The third area by which organizations can benefit from controlsis opportunity recognition. Opportunities can come from outside ofthe organization and typically are the result of a surprise. Forinstance, when Nestlé purchased the Carnation Company for its icecream business, it had also planned to sell off Carnation’s petfood line of products. However, through its financial controls,Nestlé found that the pet food business was even more profitablethan the ice cream, and kept both. Opportunities can come frominside the organization too, as would be the case if McDonald’sfinds that one of its restaurants is exceptionally good at managingcosts or productivity. It can then take this learned ability andtransfer it to other restaurants through training and othermeans.

Controls also help organizations manage uncertainty andcomplexity. This is a fourth area of benefit from well-designed andimplemented controls. Perhaps the most easily understood example ofthis type of benefit is how financial controls help an organizationnavigate economic downturns. Without budgets and productivitycontrols in place, the organization might not know it has lostsales or expenses are out of control until it is too late.

KEY TAKEAWAY

This chapter introduced the basics of controls, the process bywhich an organization influences its subunits and members to behavein ways that lead to attaining organizational goals and objectives.When properly designed, controls lead to better performance byenabling the organization to execute its strategy better. Managersmust weigh the costs and benefits of control, but some minimumlevel of control is essential for organizational survival andsuccess.