Fundamentals Of Management

650 Part 6 Controlling

F U T U R E V I S I O N Real-time Feedback

Keeping track of feedback on employee performance app also allows management to track and document
patterns of performance by keeping a timeline of the
is challenging for managers. While face-to-face feed- feedback. The use of such an app can help eliminate
back is usually best, managers must provide it in a the bias that can sometimes arise in the traditional em-
timely manner and also make sure to document it as ployee review process because the app captures feed-
well, especially if corrective action is needed. Could a back from peers, subordinates, and managers, giving
mobile app solve this problem? a more complete view of an employee’s performance.

Some companies are abandoning formal annual re- If your professor has chosen to assign this, go to
views of performance in favor of immediate, real-time www.mymanagementlab.com to discuss the follow-
feedback delivered via a mobile device or an app.59 ing questions.
Real-time feedback can be delivered to employees by
managers or coworkers quickly and efficiently via this TALK ABOUT IT 1: Would you like getting feed-
technology. Experts claim that instant feedback apps back through an app? Could the use of such an app
can boost productivity by letting employees know what create any problems?
they are doing well on the job and what they need to
improve. Today’s younger workforce, raised on instant TALK ABOUT IT 2:  Should real-time feedback be
communication via technology, particularly appreciates delivered anonymously? Why or why not?
the fast feedback from colleagues. A real-time feedback

Most organizational theft is committed Employee Theft
by employees such as Bill Davis, former
CEO of Community Action of Minneapolis, At the Saks flagship store in Manhattan, a 23-year-old sales
a nonprofit organization that provides job clerk was caught ringing up $130,000 in false merchandise
search assistance and home heating aid to returns and putting the money onto a gift card.60 And such
low-income people. Davis pleaded guilty to practices have occurred at other retailers as well.
16 counts of theft and fraud for stealing more
than $800,000 of taxpayer money on trips, cars, Would you be surprised to find that up to 85 percent of
golf, and other personal expenses. all organizational theft and fraud is committed by employees,
Source: Leila Navidi /AP Photo/The Star not outsiders?61 And it’s a costly problem—estimated to be
Tribune around $4,500 per worker per year.62 In retail settings alone,
employee theft accounts for a staggering 43 percent of lost
employee theft revenue.63
Any unauthorized taking of company
property by employees for their personal Employee theft is defined as any unauthorized taking
use of company property by employees for their personal use.64 It
can range from embezzlement to fraudulent filing of expense
reports to removing equipment, parts, software, or office supplies from company prem-
ises. Although retail businesses have long faced serious potential losses from employee
theft, loose financial controls at start-ups and small companies and the ready availabil-
ity of information technology have made employee stealing an escalating problem in
all kinds and sizes of organizations. Managers need to educate themselves about this
control issue and be prepared to deal with it.65
Why do employees steal? The answer depends on whom you ask.66 Experts in
various fields—industrial security, criminology, clinical psychology—have different
perspectives. The industrial security people propose that people steal because the
opportunity presents itself through lax controls and favorable circumstances. Crimi-
nologists say it’s because people have financial-based pressures (such as personal
financial problems) or vice-based pressures (such as gambling debts). And the clinical
psychologists suggest that people steal because they can rationalize whatever they’re
doing as being correct and appropriate behavior (“everyone does it,” “they had it com-
ing,” “this company makes enough money and they’ll never miss anything this small,”
“I deserve this for all that I put up with,” and so forth).67 Although each approach pro-
vides compelling insights into employee theft and has been instrumental in attempts to
deter it, unfortunately, employees continue to steal. What can managers do?

Chapter 18  Controlling Activities and Operations 651

FEEDFORWARD CONCURRENT FEEDBACK Exhibit 18-12
Use careful prehiring Treat employees with Make sure employees
screening. respect and dignity. know when theft or fraud has Controlling Employee Theft
occurred—not naming names
Establish speci c Openly communicate but letting people know this Sources: Based on A. H. Bell and
policies de ning theft the costs of stealing. is not acceptable. D. M. Smith, “Protecting the Company
and fraud and discipline AgainstTheft and Fraud,” Workforce
procedures. Use the services of Management Online, December 3,
professional investigators. 2000; J. D. Hansen, “To Catch aThief,”
Journal of Accountancy, March 2000, pp.
Involve employees Let employees know on Redesign control measures. 43–46; and J. Greenberg, “The Cognitive
in writing policies. a regular basis about their Geometry of EmployeeTheft,” in
successes in preventing Dysfunctional Behavior in Organizations:
theft and fraud. Nonviolent and Deviant Behavior, ed.
S. B. Bacharach, A. O’Leary-Kelly, J. M.
Educate and train Use video surveillance Evaluate your organ- Collins, and R. W. Griffin (Stamford, CT:
employees about the equipment if conditions ization’s culture and the JAI Press, 1998), pp. 147–193.
policies. warrant. relationships of managers
Have a professional and employees. FYI
review of your internal
security controls. Install “lock-out” options on computers, The following statistics describe
telephones, and e-mail. theft in small businesses:
Use corporate hotlines for reporting incidences. • 40 percent of thefts were cash.
Set a good example. • $20,000 is the average amount

The concept of feedforward, concurrent, and feedback control is useful for iden- stolen over time.
tifying measures to deter or reduce employee theft.69 Exhibit 18-12 summarizes several • 64 percent of businesses
possible managerial actions.
experienced employee theft.
• 16 percent of firms reported

theft.68

If your professor has assigned this, go to www.mymanagementlab.com to watch a video Watch It 2!
titled: Sticky Fingers in the Workplace and to respond to questions.

Workplace Violence

In Sagamihara, Japan, a man killed 19 residents and wounded 25 others in a knife at-
tack at a care center for disabled people, where he had previously worked. In Scotland,
a chef died after being punched multiple times by the restaurant manager during an ar-
gument about a customer’s order. In a wood processing factory near Lucerne, Switzer-
land, a former employee brought a firearm to the company cafeteria and opened fire,
killing three workers and injuring seven. In India, nurses at SSKM Hospital staged a
protest after a nurse and a trainee were attacked by the agitated relatives of a patient.70

The above are just some of the violent workplace attacks in recent years. But is
workplace violence really an issue for managers? Yes. Despite these examples, thankfully
the number of workplace shootings has decreased.71 However, the U.S. National Insti-
tute for Occupational Safety and Health still says that each year, some 2 million Ameri-
can workers are victims of some form of workplace violence. In an average week, one
employee is killed and at least 25 are seriously injured in violent assaults by current or
former coworkers. And according to a Department of Labor survey, 58 percent of firms
reported that managers received verbal threats from workers.72 Anger, rage, and violence
in the workplace are intimidating to coworkers and adversely affect their productivity.
The annual cost to U.S. businesses is estimated to be $121 billion.73 And office rage isn’t
a uniquely American problem. A survey of aggressive behavior in Britain’s workplaces
found that 18 percent of managers say they have personally experienced harassment or
verbal bullying, and 9 percent claim to have experienced physical attacks.74

652 Part 6 Controlling

What factors are believed to contribute to workplace violence? Undoubtedly,
employee stress caused by an uncertain economic environment, job uncertainties,
declining value of retirement accounts, long hours, information overload, other daily
interruptions, unrealistic deadlines, and uncaring managers play a role. Even office
layout designs with small cubicles where employees work amid the noise and commo-
tion from those around them have been cited as contributing to the problem.75 Other
experts have described dangerously dysfunctional work environments characterized by
the following as primary contributors to the problem:76
• Employee work driven by TNC (time, numbers, and crises).
• Rapid and unpredictable change where instability and uncertainty plague

employees.
• Destructive communication style where managers communicate in an excessively

aggressive, condescending, explosive, or passive-aggressive style; excessive
workplace teasing or scapegoating.
• Authoritarian leadership with a rigid, militaristic mindset of managers versus
employees; employees aren’t allowed to challenge ideas, participate in decision
making, or engage in team-building efforts.
• Defensive attitude where little or no performance feedback is given; only numbers
count; and yelling, intimidation, or avoidance is the preferred way of handling conflict.
• Double standards in terms of policies, procedures, and training opportunities for
managers and employees.
• Unresolved grievances because the organization provides no mechanisms or only
adversarial ones for resolving them; dysfunctional individuals may be protected or
ignored because of long-standing rules, union contract provisions, or reluctance to
take care of problems.
• Emotionally troubled employees and no attempt by managers to get help for these
people.
• Repetitive, boring work with no chance for doing something else or for new people
coming in.
• Faulty or unsafe equipment or deficient training, which keeps employees from
being able to work efficiently or effectively.
• Hazardous work environment in terms of temperature, air quality, repetitive
motions, overcrowded spaces, noise levels, excessive overtime, and so forth. To
minimize costs, no additional employees are hired when workload becomes
excessive, leading to potentially dangerous work expectations and conditions.
• Culture of violence that has a history of individual violence or abuse; violent or
explosive role models; or tolerance of on-the-job alcohol or drug abuse.

Reading through this list, you surely hope that workplaces where you’ll spend your
professional life won’t be like this. However, the competitive demands of succeeding
in a 24/7 global economy put pressure on organizations and employees in many ways.

What can managers do to deter or reduce possible workplace violence? Once
again, the concept of feedforward, concurrent, and feedback control can help identify
actions that managers can take.77 Exhibit 18-13 summarizes several suggestions.

Controlling Customer Interactions

Every month, every local branch of Enterprise Rent-a-Car conducts telephone surveys
with customers.78 Each branch earns a ranking based on the percentage of its custom-
ers who say they were “completely satisfied” with their last Enterprise experience—a
level of satisfaction referred to as “top box.” Top box performance is important to
Enterprise because completely satisfied customers are far more likely to be repeat cus-
tomers. By using this service quality index measure, employees’ careers and financial
aspirations are linked with the organizational goal of providing consistently superior
service to each and every customer. Managers at Enterprise Rent-a-Car understand
the connection between employees and customers and the importance of controlling
these customer interactions.

Chapter 18  Controlling Activities and Operations 653

Feedforward Concurrent Feedback Exhibit 18-13

Use MBWA (managing Ensure management Communicate openly Controlling Workplace Violence 
by walking around) to commitment to func- about incidences and
identify potential prob- tional, not dysfunctional, what’s being done. Sources: Based on M. Gorkin, “Five
lems; observe how em- work environments. Strategies and Structures for Reducing
ployees treat and interact Investigate incidents and Workplace Violence,” Workforce
with each other. Allow employees or work take appropriate action. Management Online, December 3, 2000;
groups to “grieve” during “Investigating Workplace Violence: Where
Provide employee periods of major organi- Review company policies DoYou Start? Workforce Management
assistance programs zational change. and change, if necessary. Online, December 3, 2000; “TenTips on
(EAPs) to help employees Be a good role model in Recognizing and Minimizing Violence,”
with behavioral problems. how you treat others. Workforce Management Online, December
3, 2000; and “Points to Cover in a
Enforce organizational Use corporate hotlines or Workplace Violence Policy,” Workforce
policy that any workplace some other mechanism Management Online, December 3, 2000.
rage, aggression, or for reporting and investi-
violence will not be gating incidents.
tolerated. Use quick and decisive
intervention.
Use careful prehiring Get expert professional
screening. assistance if violence
erupts.
Never ignore threats. Provide necessary
equipment or procedures
Train employees about for dealing with violent
how to avoid danger if situations (cell phones,
situation arises. alarm system, code
names or phrases, and so
Clearly communicate forth).
policies to employees.

There’s probably no better area to see the link between planning and controlling service profit chain
than in customer service. If a company proclaims customer service as one of its goals, The service sequence from employees
it quickly and clearly becomes apparent whether that goal is being achieved by seeing to customers to profit
how satisfied customers are with their service! How can managers control the interac-
tions between the goal and the outcome when it comes to customers? The concept of
a service profit chain can help.79

A service profit chain is the service sequence from employees to customers to
profit. According to this concept, the company’s strategy and service delivery system
influence how employees deal with customers; that is, how productive they are in
providing service and the quality of that service. The level of employee service pro-
ductivity and service quality influences customer perceptions of service value. When
service value is high, it has a positive impact on customer satisfaction, which leads to
customer loyalty. And customer loyalty improves organizational revenue growth and
profitability.

What does this concept mean for managers? Managers who want to control cus-
tomer interactions should work to create long-term and mutually beneficial relation-
ships among the company, employees, and customers. How? By creating a work envi-
ronment that enables employees to deliver high levels of quality service and which
makes them feel they’re capable of delivering top-quality service. In such a service
climate, employees are motivated to deliver superior service. Employee efforts to sat-
isfy customers, coupled with the service value provided by the organization, improve
customer satisfaction. And when customers receive high service value, they’re loyal

654 Part 6 Controlling

Portland International Jetport employee and return, which ultimately improves the company’s growth
Ryan Tenny serves doughnuts to customers and profitability. One study showed that the payoffs can be
in celebration of the company being named substantial. Customers who had the best past service experi-
the best small airport for customer service ences spent 140 percent more than those who had the poorest
by Airports Council International.  Courteous, experiences.80
cheerful, knowledgeable, and helpful employees
are important to Jetport’s service profit chain as There’s no better example of this concept in action than
they provide the high-quality service that leads Southwest Airlines, which is the most consistently profitable
to high customer satisfaction and loyalty and U.S. airline (the year 2015 marked 43 straight years of profit-
results in revenue growth and profitability. ability). Its customers are fiercely loyal because the company’s
Source: Derek Davis/Portland Press Herald/ operating strategy (hiring, training, rewards and recognition,
Getty Images teamwork, and so forth) is built around customer service.
Employees consistently deliver outstanding service value
corporate governance to customers. And Southwest’s customers reward the com-
The system used to govern a corporation pany by coming back. It’s through efficiently and effectively
so that the interests of corporate owners controlling these customer interactions that companies like
are protected Southwest and Enterprise have succeeded.

FYI Corporate Governance

A survey of corporate directors Although Andrew Fastow—Enron’s former chief financial officer who pled guilty to
revealed the following about their wire and securities fraud—had an engaging and persuasive personality, that still didn’t
understanding of company issues: explain why Enron’s board of directors failed to raise even minimal concerns about
management’s questionable accounting practices. The board even allowed Fastow
• 47 percent have a complete to set up off-balance-sheet partnerships for his own profit at the expense of Enron’s
understanding of the company’s shareholders.
financial position.
Corporate governance, the system used to govern a corporation so that the
• 34 percent have a complete interests of corporate owners are protected, failed abysmally at Enron, as it has at
understanding of current many companies caught in financial scandals. In the aftermath of these scandals, cor-
strategy. porate governance has been reformed. Two areas where reform has taken place are the
role of boards of directors and financial reporting. Such reforms aren’t limited to U.S.
• 22 percent have a complete corporations; corporate governance problems are global.81 Some 75 percent of senior
understanding of value creation. executives at U.S. and Western European corporations expect their boards of directors
to take a more active role.82
• 16 percent have a complete
understanding of industry THE ROLE OF BOARDS OF DIRECTORS  The original purpose of a board of
dynamics. directors was to have a group, independent from management, looking out for the
interests of shareholders who were not involved in the day-to-day management of the
• 15 percent have a complete organization. However, it didn’t always work that way. Board members often enjoyed
understanding of the risks the a cozy relationship with managers in which each took care of the other.
company faces.83
This type of “quid pro quo” arrangement has changed. The Sarbanes-Oxley Act
puts greater demands on board members of publicly traded companies in the United
States to do what they were empowered and expected to do.84 To help boards do this
better, the Business Roundtable developed a document outlining principles of corpo-
rate governance. (See http://businessroundtable.org/, section Principles of Corporate
Governance 2012, for a list and discussion of these principles.)

FINANCIAL REPORTING AND THE AUDIT COMMITTEE  In addition to expand-
ing the role of boards of directors, the Sarbanes-Oxley Act of 2002 also called for
more disclosure and transparency of corporate financial information. In fact, senior
managers in the United States are now required to certify their companies’ financial
results. Such changes have led to better information—that is, information that is more
accurate and reflective of a company’s financial condition.

Chapter 18  Controlling Activities and Operations 655

Chapter 18 PREPARING FOR: Exams/Quizzes

CHAPTER SUMMARY by Learning Objectives

LO18.1 EXPLAIN the nature and importance of control.
LO18.2
LO18.3 Controlling is the process of monitoring, comparing, and correcting work perfor-
LO18.4 mance. As the final step in the management process, controlling provides the link back
to planning. If managers didn’t control, they’d have no way of knowing whether goals
were being met.

Control is important because (1) it’s the only way to know if goals are being met,
and if not, why; (2) it provides information and feedback so managers feel comfortable
empowering employees; and (3) it helps protect an organization and its assets.

DESCRIBE the three steps in the control process.

The three steps in the control process are measuring, comparing, and taking ac-
tion. Measuring involves deciding how to measure actual performance and what to
measure. Comparing involves looking at the variation between actual performance
and the standard (goal). Deviations outside an acceptable range of variation need
attention.

Taking action can involve doing nothing, correcting the actual performance, or
revising the standards. Doing nothing is self-explanatory. Correcting the actual perfor-
mance can involve different corrective actions, which can either be immediate or basic.
Standards can be revised by either raising or lowering them.

EXPLAIN how organizational and employee performance are
measured.

Organizational performance is the accumulated results of all the organization’s work
activities. Three frequently used organizational performance measures include (1) pro-
ductivity, the output of goods or services produced divided by the inputs needed to
generate that output; (2) effectiveness, a measure of how appropriate organizational
goals are and how well those goals are being met; and (3) industry and company rank-
ings compiled by various business publications.

Employee performance is controlled through effective performance feedback and
through disciplinary actions, when needed.

DESCRIBE tools used to measure organizational performance.

Feedforward controls take place before a work activity is done. Concurrent controls
take place while a work activity is being done. Feedback controls take place after a
work activity is done.

Financial controls that managers can use include financial ratios (liquidity, lever-
age, activity, and profitability) and budgets. One information control managers can
use is an MIS, which provides managers with needed information on a regular basis.
Others include comprehensive and secure controls such as data encryption, system
firewalls, data back-ups, and so forth that protect the organization’s information.

Managers approach information controls in two ways. Information control can be
used as a tool to help them control other organizational activities and as an organiza-
tional area they need to control.

Balanced scorecards provide a way to evaluate an organization’s performance in
four different areas rather than just from the financial perspective. Benchmarking pro-
vides control by finding the best practices among competitors or noncompetitors and
from inside the organization itself.

656 Part 6 Controlling

LO18.5 DISCUSS contemporary issues in control.

Six management control issues are cross-cultural differences, workplace privacy,
employee theft, workplace violence, customer interactions, and corporate governance.
For each of these issues, managers need to have policies in place to control inappropri-
ate actions and ensure that work is getting done efficiently and effectively.

Adjusting controls for cross-cultural differences may be needed primarily in the
areas of measuring and taking corrective actions. Organizations should clearly com-
municate to managers and employees how to approach and respond to routine and
nonroutine situations within and outside the home country.

Employees who use the Internet and social media for personal use are not entitled to
privacy. Organizations need to establish clear policies that outline the differences between
proper and improper use and the consequences for using technology inappropriately.

Employee theft is costly to organizations. Procedures for monitoring theft and the
consequences for committing a theft should be clearly explained to employees.

Workplace violence is a prevalent problem. Organizations need to develop emer-
gency plans for responding to incidents of violence that include protecting the safety
of employees and customers.

Control is important to customer interactions because employee service productivity
and service quality influences customer perceptions of service value. Organizations want
long-term and mutually beneficial relationships among their employees and customers.

Corporate governance is the system used to govern a corporation so that the inter-
ests of corporate owners are protected. A board of directors looks out for the interests
of shareholders. The Sarbanes-Oxley Act called for more disclosure and transparency
of corporate financial information.

Pearson MyLab Management

Go to mymanagementlab.com to complete the problems marked with
this icon .

REVIEW AND DISCUSSION QUESTIONS

18-1. Why is control an essential managerial function in all 18-7. In Chapter 6 we discussed the white-water rapids
types of organizations? view of change, which refers to situations in which
unpredictable change is normal and expected, and
18-2. State the information sources for measuring managing it is a continual process. Do you think it’s
performance. possible to establish and maintain effective standards
and controls in this type of environment? Discuss.
18-3. Discuss the four main workplace discipline problems. 18-8. “Every individual employee in an organization
18-4. What do the two liquidity ratios—current and acid— plays a role in controlling work activities.” Do you
agree with this statement, or do you think control is
actually measure and reveal? something that only managers are responsible for?
18-5. Explain the balanced scorecard approach to

evaluating organizational performance.

18-6. Why is control important to customer interactions? Explain.

Pearson MyLab Management

If your professor has assigned these, go to mymanagementlab.com for the
following Assisted-graded writing questions:

18-9.  Why is control important to customer interactions?

18-10.  W hat are some work activities in which the acceptable range of variation
might be higher than average? What about lower than average? (Hint: Think
in terms of the output from the work activities, whom it might affect, and
how it might affect them.)

Chapter 18  Controlling Activities and Operations 657

PREPARING FOR: My Career

PERSONAL INVENTORY ASSESSMENTS P I A PERSONAL
INVENTORY
ASSESSMENT

Workplace Discipline Indicator

Disciplining. It’s usually not a manager’s favorite thing to do. But it is important. Take this PIA and discover
how you prefer to discipline employees.

ETHICS DILEMMA

Cyber Monday falls on the first Monday following the 18-11. Other than the obvious, what problems do you see
Thanksgiving holiday. During Cyber Monday, employers here, especially as it relates to control?
find that a significant number of employees are surfing
the Web for holiday deals. A recent survey revealed that 18-12. How would you handle this? How could
among 24 percent of the employees who admitted to being organizations make sure they’re addressing work
caught shopping online during work hours, only 15 percent controls ethically?
were reprimanded.85 And 31 percent said that being caught
resulted in a discussion of shopping tips with the boss.

SKILLS EXERCISE  Managing Challenging Employees

About the Skill • Attempt to limit contact. If possible, try to limit your
In Chapter 12, we provided some advice on handling difficult day-to-day interactions with the difficult employee. When
coworkers. Difficult people can be even more challenging to appropriate, use communication channels—like e-mail
manage. In this section, we expand on the ideas provided in and text messaging—that minimize face-to-face contact
Chapter 12 to provide further guidance in honing your skill and verbal intonations.
as a manager in working with difficult people. • Try polite confrontation. As a manager it is your
Almost all managers will, at one time or another, have to
responsibility to address the behavior. Let them know
manage employees who are difficult. There is no shortage that you’re aware of their behavior, that you find it
of characteristics that can make someone difficult to work unacceptable, and that you won’t tolerate it. For people
with. Some examples include people being short-tempered, who are unaware of the effect their actions have on
demanding, abusive, angry, defensive, complaining, you, confrontation might awaken them to altering their
intimidating, aggressive, narcissistic, arrogant, and rigid. behavior. For those who are acting purposefully, taking
Successful managers have learned how to manage difficult a clear stand might make them think twice about the
people and minimize their negative impact on fellow consequences of their actions.
employees.
Steps in Practicing the Skill • Practice positive reinforcement. We know that positive
No single approach is always effective in dealing with difficult
people.86 However, we can offer several suggestions that are reinforcement is a powerful tool for changing behavior.
likely to lessen the angst caused by a difficult employee and Rather than criticizing undesirable behavior, try
may have some influence in reducing their difficult behavior. reinforcing desirable behaviors with compliments or other
positive comments. This focus will tend to weaken and
• Don’t let your emotions rule. Our first response to a reduce the exhibiting of the undesirable behaviors.
Sources: Based on N. Pelusi, “Dealing with Difficult
difficult person is often emotional. We get angry. We People,” Psychology Today, September–October 2006, pp.
show frustration. We want to lash out at them or “get 68–69; and R. I. Sutton, The No Asshole Rule: Building
even” when we think they’ve insulted or demeaned us. a Civilized Workplace and Surviving One That Isn’t (New
This response is not likely to reduce your angst and may York: Business Plus, 2007).
escalate the other person’s negative behavior. So fight
your natural tendencies and keep your cool. Stay rational Practicing the Skill
and thoughtful. At worst, while this approach may not Consider a difficult person you have had to deal with in the
improve the situation, it is also unlikely to encourage and past. Someone you’ve worked with? Another student? Write
escalate the undesirable behavior. down the person’s behaviors that you found challenging or

658 Part 6 Controlling

difficult. Consider the strategies that you used to deal with would do if you are a manager and this person is your direct
this person. What worked? What didn’t work? Using the report. Write down the steps you could take to effectively
steps above, what could you do differently to work more manage this person and also limit the negative impact of
effectively with this person? Now, think about what you this person’s behavior on other employees.

WORKING TOGETHER  Team Exercise

According to research, workplace violence is all too occurrences of workplace violence in your own country.
common across the globe.87 Employees do not just face Suggest some ideas of how the government and other
violence from outsiders but also from one another. Create organizations could prevent this. Share your findings
small groups of three to four students. Research the with the rest of the class.

MY TURN TO BE A MANAGER

• You have a major class project due in a month. Identify • Pretend you’re the manager of a customer call center
some performance measures you could use to help for timeshare vacations. What types of control measures
determine whether the project is going as planned and would you use to see how efficient and effective an
will be completed efficiently (on time) and effectively employee is? How about measures for evaluating the
(with high quality). entire call center?
• How could you use the concept of control in your • Disciplining employees is one of the least favorite tasks
personal life? Be specific. (Think in terms of feedforward, of managers, but it is something that all managers have to
concurrent, and feedback controls as well as specific do. Survey three managers about their experiences with
controls for the different aspects of your life—school, employee discipline. What types of employee actions have
work, family relationships, friends, hobbies, etc.) caused the need for disciplinary action? What disciplinary
• Survey 30 people as to whether they have experienced actions have they used? What do they think is the most
difficult thing to do when disciplining employees? What
office rage. Ask them specifically whether they have suggestions do they have for disciplining employees?
experienced any of the following: yelling or other verbal
abuse from a coworker, yelling at coworkers themselves, • Figure 18-7 lists several industry and company ranking
crying over work-related issues, seeing someone purposely lists. Find the Web site for each list and identify the
damaging machines or furniture, seeing physical violence performance measures that are used to determine the
in the workplace, or striking a coworker. Compile your rankings on each. Are there any similar measures? Any
findings in a table. Are you surprised at the results? Be unique measures? Summarize your findings in a brief
prepared to present these in class. report.

1CASE APPLICATION The Challenge of “Healthy”
Fast-Food

Non-GMO, organic, locally sourced . . . these terms are now a common part of our
food vocabulary, although not typically associated with the fast-food industry. Chipo-
tle entered the fast-food scene in the early 1990s with a seemingly impossible goal of
creating a healthy fast-food alternative.88 Chipotle’s promise of “food with integrity”
includes fresh, locally sourced ingredients and naturally raised meats. They effectively
met this promise for many years, but as the popular fast-food chain has grown to more
than 1,500 locations, the restaurant’s ability to promise such quality while meeting food
safety standards has become a challenge. Attempting to deliver on this promise on a
national scale has created a complex and risky supply chain challenge for the company.

Chipotle’s food contamination problems started with an E. coli outbreak in July
of 2015 in Seattle. Next was a norovirus outbreak in California, followed by salmonella

Chapter 18  Controlling Activities and Operations 659

in Minnesota. Other foodborne illnesses emerged among Chipotle customers in nine
more states. Over the course of a few months, more than 500 customers were sick from
contaminated food in Chipotle stores across the country. Sales dropped 30 percent
during the outbreak, and several stores closed for an extended period of time. The
company’s stock value dropped, and the company faced several lawsuits from custom-
ers who were sickened at one of the stores.

Most national fast-food restaurant chains control food quality by using a central
source for ingredients, exposing the supply chain to fewer outside elements. Simply put,
the more basic the food chain, the easier it is to control. To keep their fresh food prom-
ise, Chipotle sought to prepare as many foods as possible at the local stores. They also
sourced ingredients locally wherever possible, creating relationships with hundreds of
vendors. The complexity of their food sourcing, coupled with in-store food preparation,
is most likely what caused the food contamination problem. There were no known spe-
cific negligent acts on the part of Chipotle; the problems occurred because offering fresh
food on such a large scale creates a situation where quality control is difficult.

In most cases Chipotle did not know which foods were contaminated, making
the fix even more challenging. In response to the crisis, they have implemented new
controls to test for meat contamination and also changed some food-handling and
preparation procedures. They’ve shifted much of their food preparation to central-
ized kitchens and started sourcing ingredients from fewer vendors, much like their
fast-food competitors have done for years. To kick off their new standards, Chipotle
closed all of their stores for an afternoon to train employees consistently on the new
food-handling standards. While it seems the company is moving in the right direction,
critics suggest that a company that claims to focus so much on food quality should
have done a better job focusing on food safety.

DISCUSSION QUESTIONS
18-13. Why is it important for Chipotle to revise the company’s food-handling

standards?
18-14. Which controls would be more important to Chipotle: feedforward,

concurrent, or feedback? Explain.
18-15. How can Chipotle make sure that employees are following the new food-

handling standards?
18-16. What are some measures of organizational performance that Chipotle

management should use?

2CASE APPLICATION Bring Your Own Device

When Saman Rajaee resigned from his sales position at Design Tech Homes in Texas,
he wasn’t prepared for the next move the company made.89 He used his personal iPhone
to conduct business on behalf of the company, and as part of the standard separation
process, the company’s IT department remotely wiped his phone and restored it to
factory settings. He lost all of his contacts, data stored, and also irreplaceable family
photos. He then sued the company under Texas privacy laws. The courts ultimately
ruled in the employer’s favor, but the story creates a cautionary tale for employers.

Complicating the typical privacy and security concerns created by technology in
the workplace is the “Bring Your Own Device” (BYOD) trend emerging in many com-
panies. BYOD programs allow employees to use their own personal mobile devices
such as smartphones, tablets, or laptops in the workplace. While companies often
reimburse employees for expenses related to BYOD programs, the company ultimately
saves money by not purchasing the technology. The practice is also appealing to those

660 Part 6 Controlling

employees who prefer to use their own devices. Given that the boundaries between
work and personal lives are becoming increasingly blurred, many employees want to
have access to both on one piece of technology.

From a privacy perspective, some employees fear BYOD programs give the com-
pany too much access to their own personal business. A BYOD program typically has
guidelines that state that the employer has the right to access the device. When you
consider control and security issues, employers should want to access any device that
contains work-related information and data. Management must be extra cautious to
assure that the technology is secure and does not make company secrets vulnerable.
Also if employees are using their device to log in to company systems, the log-in in-
formation is typically stored on the device, putting the company at risk if it is lost or
stolen.

Many companies have established BYOD policies or asked employees to sign
agreements that make the security concerns clear and provide the company permission
to access the device. Policies or agreements help establish privacy expectations as well.
When it comes to wiping phones, it is best for companies to take more of a “surgical”
approach and remove only work-related information from an employee’s phone. A
more cautious approach can help keep company information secure, while reducing
the risk of employees losing precious pictures of Grandma.

DISCUSSION QUESTIONS
18-17. Would you want to use your personal device for work purposes?
18-18. Can you think of any other privacy or security concerns for companies that

have a BYOD program?
18-19. Given the privacy and security concerns, are BYOD programs really a good

idea for companies?
18-20. Are there any productivity concerns with allowing employees to use their

personal devices at work?

ENDNOTES

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Planning and Control
Techniques Module

Managers at the Disney World Magic Kingdom and Disneyland theme parks decided

to charge higher ticket prices during peak visiting times and lower prices during less
busy times. The higher prices minimized excessive crowds and provided a better
customer experience. By lowering prices at other times, management sought to attract
price-sensitive consumers to the parks. Disney spokesperson Jacquee Wahler said,
“We continue to evolve the way we think about managing demand—particularly during
our busiest seasons—in order to deliver a world-class experience for our guests.”1 This
approach by Disney is an example of demand pricing. If it works, Disney expects to
increase revenue and improve customer satisfaction.

As this example shows, managers use planning tools and techniques to help
their organizations be more efficient and effective. In this module, we discuss
three categories of basic planning tools and techniques: techniques for assessing
the environment, techniques for allocating resources, and contemporary planning
techniques.

TECHNIQUES for assessing the environment

Leigh Knopf, former senior manager for strategic planning at the AICPA, says that
many larger accounting firms have set up external analysis departments to “study the
wider environment in which they, and their clients, operate.” These organizations have
recognized that “What happens in India in today’s environment may have an impact
on an American accounting firm in North Dakota.”2 In our description of the plan-
ning and strategic management processes in Chapters 8 and 9, we discussed the impor-
tance of assessing the organization’s environment. Three techniques help managers do
that: environmental scanning, forecasting, and benchmarking.

Environmental Scanning

How important is environmental scanning? While looking around on competitor
Google’s company website, Bill Gates found a help-wanted page with descriptions of
all the open jobs. What piqued his interest, however, was that many of these posted job
qualifications were identical to Microsoft’s job requirements. He began to wonder why
Google—a Web search company—would be posting job openings for software engi-
neers with backgrounds that “had nothing to do with Web searches and everything to
do with Microsoft’s core business of operating-system design, compiler optimization,
and distributed-systems architecture.” Gates e-mailed an urgent message to some of
his top executives saying that Microsoft had better be on its toes because it sure looked
like Google was preparing to move into being more of a software company.3

Planning and Control Techniques Module 665
How can managers become aware of significant environmental changes, such as a

new law in Germany permitting shopping for “tourist items” on Sunday; the increased
trend of counterfeit consumer products in South Africa; the precipitous decline in
the working-age populations in Japan, Germany, Italy, and Russia; or the decrease in
family size in Mexico? Managers in both small and large organizations use environ-
mental scanning. As we discussed in Chapter 8, environmental scanning is an impor-
tant element of the strategic planning process. The goal is to detect emerging trends,
the screening of large amounts of information to anticipate and interpret changes in
the environment. Research has shown that companies that use environmental scan-
ning have higher performance.4 Organizations that don’t keep on top of environmental
changes are likely to experience the opposite!

There are two fast-growing areas of environmental scanning: competitor intel-
ligence and global scanning.5 As we discussed in Chapter 8, competitor intelligence
is a process by which organizations gather information about their competitors and
get answers to questions such as: Who are they? What are they doing? How will what
they’re doing affect us? Let’s look at an example of how one organization used com-
petitor intelligence in its planning. Dun & Bradstreet (D&B), a leading provider of
business information, has an active business intelligence division. The division man-
ager received a call from an assistant vice president for sales in one of the company’s
geographic territories. This person had been on a sales call with a major customer
and the customer happened to mention in passing that another company had visited
and made a major presentation about its services. It was interesting because, although
D&B had plenty of competitors, this particular company wasn’t one of them. The
manager gathered together a team that sifted through dozens of sources (research
services, Internet, personal contacts, and other external sources) and quickly became
convinced that there was something to this; that this company was “aiming its guns
right at us.” Managers at D&B jumped into action to develop plans to counteract
this competitive attack.6 However, jumping into action is not always a prudent choice.
Competitive intelligence may also suggest that disengagement from a course of action
is most appropriate. For instance, in a survey of managers, one respondent stated that
competitive intelligence “identified only a single competitor, while determining others
did not have the business case to continue a pursuit.”7

Competitor intelligence experts suggest that 80 percent of what managers need to
know about competitors can be found out from their own employees, suppliers, cus-
tomers, and online searches.8 Competitor intelligence doesn’t have to involve spying.
Advertisements, promotional materials, press releases, reports filed with government
agencies, annual reports, want ads, newspaper reports, and industry studies are examples
of readily accessible sources of information. Attending trade shows and debriefing the
company’s sales force can be other good sources of competitor information. Many firms
regularly buy competitors’ products and have their own engineers study them (through a
process called reverse engineering) to learn about new technical innovations. In addition,
the Internet has opened up vast sources of competitor intelligence as many corporate
Web pages include new product information and other press releases.9

Managers need to be careful about the way competitor information is gathered
to prevent any concerns about whether it’s legal or ethical. For instance, at Procter &
Gamble, executives hired competitive intelligence firms to spy on its competitors in the
hair-care business. At least one of these firms misrepresented themselves to competitor
Unilever’s employees, trespassed at Unilever’s hair-care headquarters in Chicago, and
went through trash dumpsters to gain information. When P&G’s CEO found out, he
immediately fired the individuals responsible and apologized to Unilever.10 Competi-
tor intelligence becomes illegal corporate spying when it involves the theft of propri-
etary materials or trade secrets by any means. The Economic Espionage Act makes it a
crime in the United States to engage in economic espionage or to steal a trade secret.11
Espionage is a global problem. For example, U.S. Steel claims that Chinese govern-
ment hackers broke into its servers and stole proprietary plans for developing new steel

666 Part 6 Controlling

forecasts technology.12 The difficult decisions about competitive intelligence arise because often
Predictions of outcome there’s a fine line between what’s considered legal and ethical and what’s considered legal
but unethical. Although the top manager at one competitive intelligence firm contends
that 99.9 percent of intelligence gathering is legal, there’s no question that some people
or companies will go to any lengths—some unethical—to get information about com-
petitors.13 Certainly, hacking into a competitor’s computer system is an unethical act.

Global scanning is another type of environmental scanning that’s particularly
important. Because world markets are complex and dynamic, managers have expanded
the scope of their scanning efforts to gain vital information on global forces that might
affect their organizations.14 The value of global scanning to managers, of course,
largely depends on the extent of the organization’s global activities. For a company
with significant global interests, global scanning can be quite valuable. For instance,
Carnival Cruise Lines actively strives to expand the number of itineraries to more
regions of the world. Their efforts have paid off. A Carnival cruise ship sailed from the
United States to Cuba, making it the first passenger excursion by a U.S.-based cruise
operator in more than 50 years.15 All the while, other U.S. cruise lines were still nego-
tiating access with the Cuban government.16

Because the sources that managers use for scanning the domestic environment
are too limited for global scanning, managers must globalize their perspectives. For
instance, they can subscribe to information-clipping services that review world news-
papers and business periodicals and provide summaries of desired information. Also,
numerous electronic services will provide topic searches and automatic updates in
global areas of special interest to managers.

Forecasting

The second technique managers can use to assess the environment is forecasting. Fore-
casting is an important part of planning, and managers need forecasts that will allow
them to predict future events effectively and in a timely manner. Environmental scan-
ning establishes the basis for forecasts, which are predictions of outcomes. Virtually
any component in an organization’s environment can be forecasted. Let’s look at how
managers forecast and the effectiveness of those forecasts.

quantitative forecasting FORECASTING TECHNIQUES  Forecasting techniques fall into two categories:
Forecasting that applies a set of
mathematical rules to a series of past quantitative and qualitative. Quantitative forecasting applies a set of mathemati-
data to predict outcomes cal rules to a series of past data to predict outcomes. These techniques are preferred
when managers have sufficient hard data that can be used. Qualitative forecasting,
qualitative forecasting in contrast, uses the judgment and opinions of knowledgeable individuals to predict
Forecasting that uses the judgment and outcomes. Qualitative techniques typically are used when precise data are limited or
opinions of knowledgeable individuals to hard to obtain. Exhibit PC-1 describes some popular forecasting techniques.
predict outcomes
Today, many organizations collaborate on forecasts using an approach known
as CPFR, which stands for collaborative planning, forecasting, and replenishment.17
CPFR provides a framework for the flow of information, goods, and services between
retailers and manufacturers. Each organization relies on its own data to calculate a
demand forecast for a particular product. If their respective forecasts differ by a cer-
tain amount (say 10 percent), the retailer and manufacturer exchange data and written
comments until they arrive at a more accurate forecast. Such collaborative forecasting
helps both organizations do a better job of planning.

FORECASTING EFFECTIVENESS  The goal of forecasting is to provide manag-

ers with information that will facilitate decision-making. Despite its importance to
planning, managers have had mixed success with it.18 For instance, prior to a holiday
weekend at the Procter & Gamble factory in Lima, Ohio, managers were preparing to
shut down the facility early so as not to have to pay employees for just sitting around
and to give them some extra time off. The move seemed to make sense since an analysis
of purchase orders and historical sales trends indicated that the factory had already

Planning and Control Techniques Module 667

Technique Description Application Exhibit PC-1

Forecasting Techniques 

Quantitative    
Time series analysis
Regression models Fits a trend line to a Predicting next quarter’s
Econometric models mathematical equation and sales on the basis of four
Economic indicators projects into the future by years of previous sales
Substitution effect means of this equation data

Qualitative Predicts one variable on the Seeking factors that
Jury of opinion basis of known or assumed will predict a certain
Sales force composition other variables level of sales (e.g., price,
Customer evaluation advertising expenditures)
Uses a set of regression
equations to simulate Predicting change in car
segments of the economy sales as a result of changes
in tax laws
Uses one or more
economic indicators to Using change in GNP
predict a future state of the to predict discretionary
economy income

Uses a mathematical for- Predicting the effect of
mula to predict how, when, streaming video services
and under what circum- on the sale of Blu-ray play-
stances a new product or ers
technology will replace an
existing one  

  Polling the company’s
human resource managers
Combines and averages the to predict next year’s
opinions of experts college recruitment needs

Combines estimates from Predicting next year’s sales
field sales personnel of of industrial lasers
customers’ expected
purchases Surveying major
car dealers by a car
Combines estimates from manufacturer to determine
established customers’ types and quantities of
purchases products desired

produced enough cases of Liquid Tide detergent to meet laundry demand over the
holiday. However, managers got a real surprise. One of the company’s largest retail
customers placed a sizable—and unforeseen—order. They had to reopen the plant,
pay the workers overtime, and schedule emergency shipments to meet the retailer’s
request.19 As this example shows, managers’ forecasts aren’t always accurate. In a
survey of inventory managers of multinational corporations, 70 percent of the respon-
dents said their understanding of inventory management strategies was good; fore-
casting accuracy ranged between 56 and 75. However, efforts to improve accuracy did
not always pay off.20 Forty percent of the respondents reported improvements to the
accuracy of forecasting after adopting inventory management software. Results of a
survey on financial forecasting accuracy showed that 39 percent of financial executives
said they could reliably forecast revenues only one quarter out. Even more disturbing
is that 16 percent of those executives said they were “in the dark” about revenue fore-
casts.21 But it is important to try to make forecasting as effective as possible because
research shows that a company’s forecasting ability can be a distinctive competence.22
Here are some suggestions for making forecasting more effective.23

668 Part 6 Controlling

benchmarking First, it’s important to understand that forecasting techniques are most accurate
The search for the best practices among when the environment is not rapidly changing. The more dynamic the environment,
competitors or noncompetitors that lead the more likely managers are to forecast ineffectively. Also, forecasting is relatively
to their superior performance ineffective in predicting nonseasonal events such as recessions, unusual occurrences,
discontinued operations, and the actions or reactions of competitors. Next, use sim-
ple forecasting methods. They tend to do as well as, and often better than, complex
methods that may mistakenly confuse random data for meaningful information. For
instance, at St. Louis–based Emerson Electric, chairman emeritus Chuck Knight
found that forecasts developed as part of the company’s planning process indicated
that the competition wasn’t just domestic anymore, but global. He didn’t use any com-
plex mathematical techniques to come to this conclusion but instead relied on the
information already collected as part of his company’s planning process. Next, look
at involving more people in the process. At Fortune 100 companies, it’s not unusual
to have 1,000 to 5,000 managers providing forecasting input. These businesses are
finding that as more people are involved in the process, the more the reliability of the
outcomes improves.24 Next, compare every forecast with “no change.” A no change
forecast is accurate approximately half the time. Next, use rolling forecasts that look 12
to 18 months ahead, instead of using a single, static forecast. These types of forecasts
can help managers spot trends better and help their organizations be more adaptive in
changing environments.25 It’s also important to not rely on a single forecasting method.
Make forecasts with several models and average them, especially when making longer-
range forecasts. Next, don’t assume you can accurately identify turning points in a
trend. What is typically perceived as a significant turning point often turns out to be
simply a random event. And, finally, remember that forecasting is a managerial skill
and as such can be practiced and improved. Forecasting software has made the task
somewhat less mathematically challenging, although the “number crunching” is only a
small part of the activity. Interpreting the forecast and incorporating that information
into planning decisions is the challenge facing managers.

Benchmarking

Suppose you’re a talented pianist or gymnast. To make yourself better, you want
to learn from the best, so you watch outstanding musicians or athletes for motions
and techniques they use as they perform. That same approach is involved in the final
technique for assessing the environment we’re going to discuss—benchmarking, the
search for the best practices among competitors or noncompetitors that lead to their
superior performance.26

Organizations rely on benchmarking for a number of purposes, including recruit-
ment and retaining top talent. For instance, compensation managers benchmark pay
rates against companies that compete for the same talent.27 Most large law firms pay
top law school graduates an entry-level salary of $160,000. But in 2016, New York
law firm Cravath, Swaine & Moore LLP raised the starting pay for new lawyers from
$160,000 to $180,000. Shortly after the announcement, other law firms announced
that they would do the same. John Quinn, cofounder of firm Quinn, Emanuel, Urqu-
hart & Sullivan LLP, stated, “No doubt we will be raising as will other firms.”28

Does benchmarking work? It is too soon to tell whether raising pay will make
a difference in recruitment and retention. However, overall studies have shown that
benchmarking helped companies achieve 69 percent faster growth and 45 percent
greater productivity.29

The basic idea behind benchmarking is that managers can improve performance
by analyzing and then copying the methods of the leaders in various fields. Organiza-
tions such as Nissan, Payless Shoe Source, the U.S. military, General Mills, United
Airlines, and Volvo Construction Equipment have used benchmarking as a tool in
improving performance. In fact, some companies have chosen some pretty unusual
benchmarking partners! IBM studied Las Vegas casinos for ways to discourage
employee theft. Many hospitals have benchmarked their admissions processes against
Marriott Hotels. And Giordano Holdings Ltd., a Hong Kong–based manufacturer

Planning and Control Techniques Module 669

1 Identify: Exhibit PC-2
Form a benchmarking • What is to be benchmarked
• Comparative organizations Steps in Benchmarking
planning team. • Data collection methods
Source: Based on “Aiming High:
Competitive Benchmarking for Superior
Performance,” byY. K. Shetty, from Long
Range Planning, vol. 26, no. 1, 1993,
pp. 39–44.

4 Prepare and implement BEST Gather internal and 2
action plan. PRACTICES external data.

Analyze data to identify
performance gaps.
3

and retailer of mass-market casual wear, borrowed its “good quality, good value” con-
cept from Marks & Spencer, used Limited Brands to benchmark its point-of-sales
computerized information system, and modeled its simplified product offerings on
McDonald’s menu.30

What does benchmarking involve? Exhibit PC-2 illustrates the four steps typically
used in benchmarking.

TECHNIQUES for allocating resources resources
An organization’s assets—including
Once an organization’s goals have been established, it’s important to determine how financial, physical, human, intangible,
those goals are going to be accomplished. Before managers can organize and lead and structural/cultural—that are used
as goals are implemented, they must have resources, the assets of the organiza- to develop, manufacture, and deliver
tion (financial, physical, human, and intangible). How can managers allocate these products to its customers
resources effectively and efficiently so that organizational goals are met? Although
managers can choose from a number of techniques for allocating resources (many of budget
which are covered in courses on accounting, finance, and operations management), A numerical plan for allocating resources
we’ll discuss four techniques here: budgeting, scheduling, breakeven analysis, and lin- to specific activities
ear programming.

Budgeting

Most of us have had some experience, as limited as it might be, with budgets. We
probably learned at an early age that unless we allocated our “revenues” carefully, our
weekly allowance was spent on “expenses” before the week was half over.

A budget is a numerical plan for allocating resources to specific activities. Man-
agers typically prepare budgets for revenues, expenses, and large capital expenditures
such as equipment. It’s not unusual, though, for budgets to be used for improving
time, space, and use of material resources. These types of budgets substitute nondollar
numbers for dollar amounts. Such items as person-hours, capacity utilization, or units
of production can be budgeted for daily, weekly, or monthly activities. Exhibit PC-3
describes the different types of budgets that managers might use.

Why are budgets so popular? Probably because they’re applicable to a wide vari-
ety of organizations and work activities within organizations. We live in a world in
which almost everything is expressed in monetary units. Dollars, rupees, pesos, euros,
yuan, yen, and the like are used as a common measuring unit within a country. That’s
why monetary budgets are a useful tool for allocating resources and guiding work in
such diverse departments as manufacturing and information systems or at various
levels in an organization. Budgets are one planning technique that most managers
use—regardless of organizational level. It’s an important managerial activity because
it forces financial discipline and structure throughout the organization. However,
many managers don’t like preparing budgets because they feel the process is time-

670 Part 6 Controlling Cash Budget Revenue Budget
Forecasts cash on hand Projects future sales
Exhibit PC-3
and how much will
Types of Budgets be needed

Source: Based on Production and Variable Budget Fixed Budget
Operations Management, by R. S. Russell Takes into account Assumes fixed
and B. W.Taylor III. Upper Saddle River, the costs that vary level of sales
NJ: Prentice-Hall, Inc., 1966. or production
with volume
OR

Profit Budget Expense Budget
Combines revenue and expense Lists primary activities
budgets of various units to determine
and allocates dollar
each unit’s profit contribution amount to each

budgeting consuming, inflexible, inefficient, and ineffective.31 How can the budgeting process
The process of allocating resources to be improved? Exhibit PC-4 provides some suggestions. Organizations such as Texas
pay for designated future costs Instruments, IKEA, Volvo, and Svenska Handelsbanken have incorporated several
incremental budgeting of these suggestions as they revamped their budgeting processes. Now that we under-
Process starting with the current budget stand the importance and types of budgets, how do organizations set them?
from which managers decide whether
they need additional resources and the Budgeting is the process of allocating resources to pay for designated future
justification for requesting it costs. There are two common approaches to setting budgets: incremental budgeting
and zero-base budgeting.
zero-base budgeting (ZBB)
Process starting with an established Incremental budgeting starts with the current budget from which managers decide
point of zero rather than using the whether additional resources are needed and the justification for requesting them. This
current budget as the basis for adding, approach is appropriate for adjusting budgets that contain all of the necessary expendi-
modifying, or subtracting resources tures. For example, manufacturing managers may have underestimated the cost of ongo-
ing equipment maintenance. Based on previous experience and expected higher future
costs, managers justify requests for additional money. A possible drawback of incremen-
tal budgeting is wasteful spending. If managers do not spend the allotted money, they
will probably receive less in the future. Most managers find ways to avoid this situation.
For instance, an office manager may decide to purchase an excess of printer toner car-
tridges before the end of the budget period. The decision to purchase too many car-
tridges ultimately may not be cost effective. As printers are replaced, newer models will
use different cartridges, rendering the supply of cartridges a wasteful expense.

An alternative approach is zero-base budgeting that helps minimize wasteful spend-
ing. Zero-base budgeting (ZBB) starts with an established point of zero rather than
using the current budget as the basis for adding, modifying, or subtracting resources.
Anecdotal information suggests that zero-base budgeting has become more popular
after the economic recession of 2007–2009. According to one financial expert, “The
attraction of ZBB, for many, is that the ‘zero’ in ZBB sends a powerful message to
all stakeholders that the line will be held on spending and that nothing will be taken
for granted.”32 When set in a culture of cost management, ZBB helps managers more
carefully scrutinize the value of different practices.33 For instance, do office renovations
increase productivity? Do expenditures for advertising products in traditional out-
lets such as newspapers increase sales? Do onboarding activities promote employee

Exhibit PC-4 •  Collaborate and communicate.
•  Be flexible.
How to Improve Budgeting  •  Goals should drive budgets—budgets should not determine goals.
•  Coordinate budgeting throughout the organization.
•  Use budgeting/planning software when appropriate.
•  Remember that budgets are tools.
•  Remember that profits result from smart management, not because you

budgeted for them.

Planning and Control Techniques Module 671

retention? ZBB creates a platform for considering the value of alternative expenditures scheduling
and helps managers redirect resources to areas that will raise productivity and profits. Detailing what activities have to be
done, the order in which they are to be
Scheduling completed, who is to do each, and when
they are to be completed
Jackie is a manager at a Chico’s store in San Francisco. Every week, she determines
employees’ work hours and the store area where each employee will be working. If Gantt chart
you observed any group of supervisors or department managers for a few days, you A scheduling chart developed by Henry
would see them doing much the same—allocating resources by detailing what activi- Gantt that shows actual and planned
ties have to be done, the order in which they are to be completed, who is to do each, output over a period of time
and when they are to be completed. These managers are scheduling. In this section,
we’ll review some useful scheduling devices, including Gantt charts, load charts, and
PERT network analysis.

GANTT CHARTS  The Gantt chart was developed during the early 1900s by Henry

Gantt, an associate of Frederick Taylor, the scientific management expert. The idea
behind a Gantt chart is simple. It’s essentially a bar graph with time on the horizontal
axis and the activities to be scheduled on the vertical axis. The bars show output, both
planned and actual, over a period of time. The Gantt chart visually shows when tasks
are supposed to be done and compares those projections with the actual progress on
each task. It’s a simple but important device that lets managers detail easily what has
yet to be done to complete a job or project and to assess whether an activity is ahead
of, behind, or on schedule.

Exhibit PC-5 depicts a simplified Gantt chart for book production developed by
a manager in a publishing company. Time is expressed in months across the top of the
chart. The major work activities are listed down the left side. Planning involves decid-
ing what activities need to be done to get the book finished, the order in which those
activities need to be completed, and the time that should be allocated to each activity.
Where a box sits within a time frame reflects its planned sequence. The shading rep-
resents actual progress. The chart also serves as a control tool because the manager
can see deviations from the plan. In this example, both the design of the cover and the
review of first pages are running behind schedule. Cover design is about three weeks
behind (note that there has been no actual progress—shown by blue color line—as of
the reporting date), and first pages review is about two weeks behind schedule (note
that as of the report date, actual progress—shown by blue color line—is about six
weeks, out of a goal of completing in two months). Given this information, the man-
ager might need to take some action to either make up for the two lost weeks or to
ensure that no further delays will occur. At this point, the manager can expect that
the book will be published at least two weeks later than planned if no action is taken.

LOAD CHARTS  A load chart is a modified Gantt chart. Instead of listing activities load chart
A modified Gantt chart that schedules
on the vertical axis, load charts list either entire departments or specific resources. This capacity by entire departments or
arrangement allows managers to plan and control capacity utilization. In other words, specific resources
load charts schedule capacity by work areas.

Activity 1 Month 4 Exhibit PC-5
23
Copyedit manuscript Actual progress A Gantt Chart
Design sample pages Goals
Draw artwork
Review first pages
Print final pages
Design cover

Reporting Date

672 Part 6 Controlling

Exhibit PC-6 Editors Month
123456
A Load Chart
Annie
Antonio
Kim
Maurice
Dave
Penny

Work scheduled

For example, Exhibit PC-6 shows a load chart for six production editors at the
same publishing company. Each editor supervises the production and design of several
books. By reviewing a load chart, the executive editor, who supervises the six produc-
tion editors, can see who is free to take on a new book. If everyone is fully scheduled,
the executive editor might decide not to accept any new projects, to accept new projects
and delay others, to make the editors work overtime, or to employ more production
editors. As this exhibit shows, only Antonio and Maurice are completely scheduled for
the next six months. The other editors have some unassigned time and might be able to
accept new projects or be available to help other editors who get behind.

PERT network PERT NETWORK ANALYSIS  Gantt and load charts are useful as long as the
A flowchart diagram showing the
sequence of activities needed to activities scheduled are few in number and independent of each other. But what if a
complete a project and the time or cost manager had to plan a large project such as a departmental reorganization, the imple-
associated with each mentation of a cost-reduction program, or the development of a new product that
required coordinating inputs from marketing, manufacturing, and product design?
events Such projects require coordinating hundreds and even thousands of activities, some
End points that represent the completion of which must be done simultaneously and some of which can’t begin until preced-
of major activities in a PERT network ing activities have been completed. If you’re constructing a building, you obviously
can’t start putting up the walls until the foundation is laid. How can managers sched-
activities ule such a complex project? The program evaluation and review technique (PERT) is
The time or resources needed to highly appropriate for such projects.
progress from one event to another in a
PERT network A PERT network is a flowchart diagram that depicts the sequence of activities
needed to complete a project and the time or costs associated with each activity. With a
slack time PERT network, a manager must think through what has to be done, determine which
The amount of time an individual activity events depend on one another, and identify potential trouble spots. PERT also makes
can be delayed without delaying the it easy to compare the effects alternative actions might have on scheduling and costs.
whole project Thus, PERT allows managers to monitor a project’s progress, identify possible bottle-
necks, and shift resources as necessary to keep the project on schedule.
critical path
The longest sequence of activities in a To understand how to construct a PERT network, you need to know four terms.
PERT network Events are end points that represent the completion of major activities. Activities
represent the time or resources required to progress from one event to another. Slack
time is the amount of time an individual activity can be delayed without delaying the
whole project. The critical path is the longest or most time-consuming sequence of
events and activities in a PERT network. Any delay in completing events on this path
would delay completion of the entire project. In other words, activities on the critical
path have zero slack time.

Developing a PERT network requires that a manager identify all key activities
needed to complete a project, rank them in order of occurrence, and estimate each
activity’s completion time. Exhibit PC-7 explains the steps in this process.

Most PERT projects are complicated and include numerous activities. Such com-
plicated computations can be done with specialized PERT software. However, let’s
work through a simple example. Assume you’re the superintendent at a construction
company and have been assigned to oversee the construction of an office building.
Because time really is money in your business, you must determine how long it will
take to get the building completed. You’ve determined the specific activities and events.

Planning and Control Techniques Module 673

  1.  Identify every significant activity that must be achieved for a project to be Exhibit PC-7
completed.The accomplishment of each activity results in a set of events or
outcomes. Steps in Developing a PERT
Network 
  2.  D etermine the order in which these events must be completed.

  3.  Diagram the flow of activities from start to finish, identifying each activity and
its relationship to all other activities. Use circles to indicate events and arrows to
represent activities.This results in a flowchart diagram called a PERT network.

  4.  Compute a time estimate for completing each activity.This is done with a
tawthhceeetiigvtaiihcmtyttieevwdittohyauavntledoarrantmagakeacelttlhiyuvanisttdhyueossruheildsodeuatalandlkocetaop, kntaiednmiudtiinsoatdnipcesert,istamhsimeemwoeisssotttiricmlsikteaepstltoeyims(estasoi)bttieolmef(tachpto)oentwh(dtamiltot)ionroengfpsttr.hheTeesheteinmtse
formula for calculating the expected time (te) is then

te = to + 4tm + tp
6

  5. U sing the network diagram that contains time estimates for each activity,
determine a schedule for the start and finish dates of each activity and for the
entire project. Any delays that occur along the critical path require the most
attention because they can delay the whole project.

Exhibit PC-8 outlines the major events in the construction project and your estimate
of the expected time to complete each. Exhibit PC-9 shows the actual PERT network
based on the data in Exhibit PC-8. You’ve also calculated the length of time that each
path of activities will take:

A-B-C-D-I-J-K (44 weeks)
A-B-C-D-G-H-J-K (50 weeks)
A-B-C-E-G-H-J-K (47 weeks)
A-B-C-F-G-H-J-K (47 weeks)

Your PERT network shows that if everything goes as planned, the total project com-
pletion time will be 50 weeks. This is calculated by tracing the project’s critical path (the

Event Description Expected Time Preceding Event Exhibit PC-8
(in weeks)
A Events and Activities in
B Constructing an Office Building 
C
D Approve design and get permits 10 None
E 6 A
F Dig subterranean garage B
G 14 C
H Erect frame and siding 6 C
I 3 C
Construct floor 3
J 5 D, E, F
Install windows 5 G
K 4 D
Put on roof
3 I, H
Install internal wiring
1 J
Install elevator

Put in floor covering and
paneling

Put in doors and interior
decorative trim

Turn over to building
management group

674 Part 6 Controlling 6 D 4 I 3
Exhibit PC-9 5 H J1
PERT Network for Constructing K
an Office Building Start 10 A 6 B 14 C 3 E 5 G5 3

breakeven analysis 3F5
A technique for identifying the point at
which total revenue is just sufficient to longest sequence of activities), A-B-C-D-G-H-J-K, and adding up the times. You know
cover total costs that any delay in completing the events on this path would delay the completion of the
entire project. Taking six weeks instead of four to put in the floor covering and paneling
linear programming (Event I) would have no effect on the final completion date. Why? Because that event isn’t
A mathematical technique that solves on the critical path. However, taking seven weeks instead of six to dig the subterranean
resource allocation problems garage (Event B) would likely delay the total project. A manager who needed to get back
on schedule or to cut the 50-week completion time would want to concentrate on those
activities along the critical path that could be completed faster. How might the manager do
this? He or she could look to see if any of the other activities not on the critical path had
slack time in which resources could be transferred to activities that were on the critical path.

Breakeven Analysis

Managers at Glory Foods want to know how many units of their new sensibly seasoned
canned vegetables must be sold in order to break even—that is, the point at which total
revenue is just sufficient to cover total costs. Breakeven analysis is a widely used
resource allocation technique to help managers determine breakeven point.34

Breakeven analysis is a simple calculation, yet it’s valuable to managers because it
points out the relationship between revenues, costs, and profits. To compute breakeven
point (BE), a manager needs to know the unit price of the product being sold (P), the
variable cost per unit (VC), and total fixed costs (TFC). An organization breaks even
when its total revenue is just enough to equal its total costs. But total cost has two parts:
fixed and variable. Fixed costs are expenses that do not change regardless of volume.
Examples include insurance premiums, rent, and property taxes. Variable costs change
in proportion to output and include raw materials, labor costs, and energy costs.

Breakeven point can be computed graphically or by using the following formula:

BE = TFC
P - VC

This formula tells us that (1) total revenue will equal total cost when we sell enough
units at a price that covers all variable unit costs, and (2) the difference between price
and variable costs, when multiplied by the number of units sold, equals the fixed costs.
Let’s work through an example.

Assume that Randy’s Photocopying Service charges $0.10 per photocopy. If fixed
costs are $27,000 a year and variable costs are $0.04 per copy, Randy can compute
his breakeven point as follows: $27,000 , ($0.10 - $0.04) = 450,000 copies, or when
annual revenues are $45,000 (450,000 copies * $0.10). This same relationship is shown
graphically in Exhibit PC-10.

As a planning tool, breakeven analysis could help Randy set his sales goal. For
example, he could determine his profit goal and then calculate what sales level is needed
to reach that goal. Breakeven analysis could also tell Randy how much volume has to
increase to break even if he’s currently operating at a loss or how much volume he can
afford to lose and still break even.

Linear Programming

Maria Sanchez manages a manufacturing plant that produces two kinds of cinnamon-
scented home fragrance products: wax candles and a woodchip potpourri sold in bags.
Business is good, and she can sell all of the products she can produce. Her dilemma:
Given that the bags of potpourri and the wax candles are manufactured in the same
facility, how many of each product should she produce to maximize profits? Maria can
use linear programming to solve her resource allocation problem.

Planning and Control Techniques Module 675

70,000 Total Profit Exhibit PC-10
60,000 Revenue Area
50,000 Breakeven Analysis
40,000 Variable Costs
Revenue/Cost ($) 30,000 Loss
20,000 Area Total
10,000 Costs
Breakeven
Point Fixed Costs

100 200 300 400 500 600
Output (in thousands)

Although linear programming can be used here, it can’t be applied to all resource
allocation problems because it requires that resources be limited, that the goal be out-
come optimization, that resources can be combined in alternative ways to produce
a number of output mixes, and that a linear relationship exist between variables (a
change in one variable must be accompanied by an exactly proportional change in
the other).35 For Maria’s business, that last condition would be met if it took exactly
twice the amount of raw materials and hours of labor to produce two of a given home
fragrance product as it took to produce one.

What kinds of problems can be solved with linear programming? Some applica-
tions include selecting transportation routes that minimize shipping costs, allocating a
limited advertising budget among various product brands, making the optimal assign-
ment of people among projects, and determining how much of each product to make
with a limited number of resources. Let’s return to Maria’s problem and see how linear
programming could help her solve it. Fortunately, her problem is relatively simple, so we
can solve it rather quickly. For complex linear programming problems, managers can use
computer software programs designed specifically to help develop optimizing solutions.

First, we need to establish some facts about Maria’s business. She has computed the
profit margins on her home fragrance products at $10 for a bag of potpourri and $18
for a scented candle. These numbers establish the basis for Maria to be able to express
her objective function as maximum profit = 10P + $18S, where P is the number
of bags of potpourri produced and S is the number of scented candles produced. The
objective function is simply a mathematical equation that can predict the outcome of
all proposed alternatives. In addition, Maria knows how much time each fragrance
product must spend in production and the monthly production capacity (1,200 hours
in manufacturing and 900 hours in assembly) for manufacturing and assembly. (See
Exhibit PC-11.) The production capacity numbers act as constraints on her overall
capacity. Now Maria can establish her constraint equations:

2P + 4S … 1,200
2P + 2S … 900
Of course, Maria can also state that P Ú 0 and S Ú 0 because neither fragrance
product can be produced in a volume less than zero.

Department Number of Hours Required (per unit) Monthly Production Exhibit PC-11
Capacity (in hours)
Manufacturing Potpourri Bags Scented Candles Production Data for
Assembly 1,200 Cinnamon-Scented Products
Profit per unit 24 900
22
$10 $18

676 Part 6 Controlling Quantity of Scented Candles 700

Exhibit PC-12 600

Graphical Solution to Linear
Programming Problem

500
F

400

300 B

200 Feasibility C
Region
100

A DE
100 200 300 400 500 600

Quantity of Potpourri Bags

project Maria has graphed her solution in Exhibit PC-12. The shaded area represents the
A one-time-only set of activities that has options that don’t exceed the capacity of either department. What does this mean? Well,
a definite beginning and ending point in let’s look first at the manufacturing constraint line BE. We know that total manufac-
time turing capacity is 1,200 hours, so if Maria decides to produce all potpourri bags, the
maximum she can produce is 600 (1,200 hours , 2 hours required to produce a bag of
project management potpourri). If she decides to produce all scented candles, the maximum she can produce
The task of getting a project’s activities is 300 (1,200 hours , 4 hours required to produce a scented candle). The other con-
done on time, within budget, and straint Maria faces is that of assembly, shown by line DF. If Maria decides to produce all
according to specifications potpourri bags, the maximum she can assemble is 450 (900 hours production capacity ,
2 hours required to assemble). Likewise, if Maria decides to produce all scented candles,
the maximum she can assemble is also 450 because the scented candles also take 2 hours
to assemble. The constraints imposed by these capacity limits establish Maria’s feasibil-
ity region. Her optimal resource allocation will be defined at one of the corners within
this feasibility region. Point C provides the maximum profits within the constraints
stated. How do we know? At point A, profits would be 0 (no production of either pot-
pourri bags or scented candles). At point B, profits would be $5,400 (300 scented candles
* $18 profit and 0 potpourri bags produced = $5,400). At point D, profits would be
$4,500 (450 potpourri bags produced * $10 profit and 0 scented candles produced
= $4,500). At point C, however, profits would be $5,700 (150 scented candles produced
* $18 profit and 300 potpourri bags produced * $10 profit = $5,700).

CONTEMPORARY planning and control

techniques

Lowest home mortgage rates since 1950s. MERS and other fast-moving viruses.
Global warming. Chemical/biological attacks. Recession/inflation/deflation worries.
Category 4 or 5 hurricanes. Changing competition. Today’s managers face the chal-
lenges of planning in an environment that’s both dynamic and complex. Two planning
techniques appropriate for this type of environment are project management and sce-
narios. Both techniques emphasize flexibility, something that’s important to making
planning more effective and efficient in this type of organizational environment.

Project Management

Different types of organizations, from manufacturers such as Coleman and Boeing
to software design firms such as SAS and Microsoft, use projects. A project is a one-
time-only set of activities that has a definite beginning and ending point in time.36
Projects vary in size and scope—from Boston’s “big dig” downtown traffic tunnel to
a sorority’s holiday formal. Project management is the task of getting a project’s
activities done on time, within budget, and according to specifications.37

Planning and Control Techniques Module 677

Exhibit PC-13

Project Planning Process

Define Identify Establish Estimate Determine Compare Determine
objectives. activities sequences. time for project with additional
activities. resource
and completion objectives. requirements.
resources. date.

Source: Based on Production and Operations Management, by R. S. Russell and B. W.Taylor III. Upper Saddle River, NJ: Prentice-Hall, 1996.

More and more organizations are using project management because the approach
fits well with the need for flexibility and rapid response to perceived market opportuni-
ties. For instance, India’s Tata Motors relied on project management to develop and
manufacture a subcompact car to be competitive with similar models from Hyun-
dai and Toyota. Girish Wagh, senior vice president for program planning and project
management for passenger vehicles, said that Tata’s Tiago (new car model) is “one of
the important launches from Tata Motors’ passenger car business and the first step
towards our transformation.”38

When organizations undertake projects that are unique, have specific deadlines,
contain complex interrelated tasks requiring specialized skills, and are temporary in
nature, these projects often do not fit into the standardized planning procedures that
guide an organization’s other routine work activities. Instead, managers use project
management techniques to effectively and efficiently accomplish the project’s goals.
What does the project management process involve?

PROJECT MANAGEMENT PROCESS  In the typical project, work is done by a

project team whose members are assigned from their respective work areas to the proj-
ect and who report to a project manager. The project manager coordinates the proj-
ect’s activities with other departments. When the project team accomplishes its goals,
it disbands, and members move on to other projects or back to their permanent work
area.

The essential features of the project planning process are shown in Exhibit PC-13.
The process begins by clearly defining the project’s goals. This step is necessary because
the manager and the team members need to know what’s expected. All activities in the
project and the resources needed to do them must then be identified. What materials
and labor are needed to complete the project? This step may be time-consuming and
complex, particularly if the project is unique and the managers have no history or
experience with similar projects. Once the activities have been identified, the sequence
of completion needs to be determined. What activities must be completed before oth-
ers can begin? Which can be done simultaneously? This step often uses flowchart dia-
grams such as a Gantt chart, a load chart, or a PERT network. Next, the project
activities need to be scheduled. Time estimates for each activity are done, and these
estimates are used to develop an overall project schedule and completion date. Then
the project schedule is compared to the goals, and any necessary adjustments are made.
If the project completion time is too long, the manager might assign more resources to
critical activities so they can be completed faster.

Today, the project management process can take place online, as a number of
Web-based software packages are available. These packages cover aspects from project
accounting and estimating to project scheduling and bug and defect tracking.39

THE ROLE OF THE PROJECT MANAGER  The temporary nature of projects

makes managing them different from, say, overseeing a production line or preparing
a weekly tally of costs on an ongoing basis. The one-shot nature of the work makes
project managers the organizational equivalent of a hired gunman. There’s a job to be
done. It has to be defined—in detail. And the project manager is responsible for how

678 Part 6 Controlling it’s done. At J.B. Hunt Transport Services, the head of project management trains proj-
ect managers on both technical and interpersonal skills so that they know how to “. . .
scenario run a project effectively.”40 The complexity of some projects warrant hiring project
A consistent view of what the future management firms. For instance, a Canadian mining company and a Chinese invest-
is likely to be ment firm are considering whether to open a molybdenum mine near Boise, Idaho.
Both companies have contracted with MCC8 Group Company, a firm that specializes
in the management of overseas mineral and exploration development, to conduct a
feasibility study.41 MCC8 will undoubtedly assign several project managers to oversee
this feasibility study including geologists and environmental impact experts.

Even with the availability of sophisticated computerized and online scheduling
programs and other project management tools, the role of project manager remains
difficult because he or she is managing people who typically are still assigned to their
permanent work areas. The only real influence project managers have is their commu-
nication skills and their power of persuasion. To make matters worse, team members
seldom work on just one project. They’re usually assigned to two or three at any given
time. So project managers end up competing with each other to focus a worker’s atten-
tion on his or her particular project.

Scenario Planning

During the 1990s, business was so good at Colgate-Palmolive that then-chairman
Reuben Mark worried about what “might go wrong.” He installed an “early warn-
ing system to flag problems before they blew up into company-wrecking crises.” For
instance, a red-flag report alerted Mark “that officials in Baddi, India, had questions
about how a plant treated wastewater.” Mark’s response was to quickly assign an engi-
neering team to check it out and prevent potential problems.42

We already know how important it is that today’s managers do what Reuben Mark
was doing—monitor and assess the external environment for trends and changes. As
they assess the environment, issues and concerns that could affect their organization’s
current or planned operations are likely to be revealed. All of these issues won’t be
equally important, so it’s usually necessary to focus on a limited set that are most
important and to develop scenarios based on each.

A scenario is a consistent view of what the future is likely to be. Developing
scenarios also can be described as contingency planning; that is, if this event happens,
then we need to take these actions. If, for instance, environmental scanning reveals
increasing interest by U.S. Congress for raising the national minimum wage, managers
at Subway could create multiple scenarios to assess the possible consequences of such
an action. What would be the implications for its labor costs if the minimum wage was
raised to $12 an hour? How about $14 an hour? What effect would these changes have
on the chain’s bottom line? How might competitors respond? Different assumptions
lead to different outcomes. The intent of scenario planning is not to try to predict the
future but to reduce uncertainty by playing out potential situations under different
specified conditions.43 Subway could, for example, develop a set of scenarios ranging
from optimistic to pessimistic in terms of the minimum wage issue. It would then be
prepared to implement new strategies to get and keep a competitive advantage. An
expert in scenario planning said, “Just the process of doing scenarios causes executives
to rethink and clarify the essence of the business environment in ways they almost
certainly have never done before.”44

Although scenario planning is useful in anticipating events that can be anticipated,
it’s difficult to forecast random events—the major surprises and aberrations that can’t
be foreseen. For instance, an outbreak of deadly and devastating tornadoes in Kansas
and Oklahoma in May 2016 was a scenario that could not be anticipated. The disas-
ter recovery planning that took place after the storms was effective because this type
of scenario had been experienced before. A response had already been planned and
people knew what to do. But the planning challenge comes from those totally unex-
pected events. For instance, the shooting of a doctor by a patient’s family member in
a Boston hospital was unexpected and a total shock to many organizations already

Planning and Control Techniques Module 679

concerned about workplace safety. Scenario planning was of little use because no one
could have envisioned this scenario. As difficult as it may be for managers to anticipate
and deal with these random events, they’re not totally vulnerable to the consequences.
One suggestion identified by risk experts as particularly important is to have an early
warning system in place. (A similar idea is the tsunami warning systems in the Pacific
and in Alaska, which alert officials to potentially dangerous tsunamis and give them
time to take action.) Early warning indicators for organizations can give managers
advance notice of potential risks and changes so they can take action. Then, managers
need to have appropriate responses (plans) in place if these unexpected events occur.
For instance, five large banks, including Bank of America and Capital One, own Early
Warning Services (EWS).45 EWS enables banks to easily exchange information about
a customer’s potential risk in an effort to fight fraud.

Planning tools and techniques can help managers prepare confidently for the
future. But they should remember that all the tools we’ve described in this module are
just that—tools. They will never replace the manager’s skills and capabilities in using
the information gained to develop effective and efficient plans.

Pearson MyLab Management

Go to mymanagementlab.com to complete the problems marked with
this icon .

REVIEW AND DISCUSSION QUESTIONS

PC-1. Describe the different approaches to assessing the   PC-8. The Wall Street Journal and other business
environment. periodicals often carry reports of companies that
have not met their sales or profit forecasts. What
PC-2. Describe the four techniques for allocating resources. are some reasons a company might not meet its
PC-3. How does PERT network analysis work? forecast? What suggestions could you make for
PC-4. Why is flexibility so important to today’s planning improving the effectiveness of forecasting?
PC-9. I n what ways is managing a project different from
techniques? managing a department or other structured work
PC-5. What is project management, and what are the steps area? In what ways are they the same?

managers use in planning projects?

PC-6. “It’s a waste of time and other resources to develop PC-10. W hat might be some early warning signs of (a) a
a set of sophisticated scenarios for situations that new competitor coming into your market, (b) an
may never occur.” Do you agree or disagree? Support employee work stoppage, or (c) a new technology
your position. that could change demand for your product?

PC-7. Do intuition and creativity have any relevance in
quantitative planning tools and techniques? Explain.

680 Part 6 Controlling

ENDNOTES

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Planning and Control Techniques Module 681

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31. E. Krell, “The Case Against Budgeting,” Business Finance, Companies: Secret 05, Bad News Folders,” Business 2.0, April
July 2003, pp. 20–25; J. Hope and R. Fraser, “Who Needs 2006, p. 84.
Budgets?” Harvard Business Review, February 2003, 43. R. King, “Companies Need to Apply Disaster Response
pp. 108–115; T. Leahy, “The Top 10 Traps of Budgeting,” Planning to Cybersecurity,” The Wall Street Journal online,
Business Finance, November 2001, pp. 20–26; T. Leahy, www.wsj.com, March 3, 2016; G. Colvin, “An Executive Risk
“Necessary Evil,” Business Finance, November 1999, pp. Handbook,” Fortune, October 3, 2005, pp. 69–70; A. Long
41–45; J. Fanning, “Businesses Languishing in a Budget and A. Weiss, “Using Scenario Planning to Manage Short-
Comfort Zone?” Management Accounting, July/August 1999, Term Uncertainty,” Outward Insights, www.outwardinsights.
p. 8; “Budgeting Processes: Inefficiency or Inadequate?” com, 2005; B. Fiora, “Use Early Warning to Strengthen
Management Accounting, February 1999, p. 5; A. Kennedy Scenario Planning,” Outward Insights, www.outwardinsights.
and D. Dugdale, “Getting the Most from Budgeting,” com, 2003; L. Fahey, “Scenario Learning,” Management
Management Accounting, February 1999, pp. 22–24; G. J. Review, March 2000, pp. 29–34; S. Caudron, “Frontview
Nolan, “The End of Traditional Budgeting,” Bank Accounting Mirror,” Business Finance, December 1999, pp. 24–30; and
& Finance, Summer 1998, pp. 29–36; and J. Mariotti, J. R. Garber, “What if . . .?,” Forbes, November 2, 1998,
“Surviving the Dreaded Budget Process,” IW, August 17, pp. 76–79.
1998, p. 150. 44. S. Caudron, “Frontview Mirror,” p. 30.
32. S. C. Kavanagh, “Zero-Base Budgeting,” The Government 45. L. Phillips, “EWS Can Stop You From Opening a
Finance Officers Association and the City of Calgary,” http:// Bank Account,” RebuildCreditScores.com, http://
www.gfoa.org/sites/default/files/GFOAZeroBasedBudgeting. rebuildcreditscores.com/early-warning-services, April 9, 2015.
pdf2011, 2011.

Managing Operations Module

Using millions of parts as small as rivets and as large as five-story buildings,

employees at Hyundai Heavy Industries Inc. build as many as 30 ships at one time.1
And the “factory” stretches for miles over land and sea. “It’s an environment that is
too large and complex to be able to keep track of the movement in parts and inventory
in real time.” Hwang See-young, chief information officer at Hyundai Heavy, knew that
production efficiency was limited without real-time data. The solution? High-speed
wireless networks that employees can access at any time and anywhere with notebook
computers.

With the new technology, data fly around the shipyard complex at 4 megabits per
second. Radio sensors track the movements of parts from fabrication shops to the
dry dock and onto a ship being constructed. Also, workers on a ship can access plans
using notebook computers or handheld phones. They’re also able to hold two-way
video conversations with ship designers in the office over a mile away. Eventually,
they hope to establish communication capabilities with workers inside a ship that is
below ground or at sea level. Now, however, Hyundai Heavy wants to implement the
technology in its other construction divisions. Suppose you were in charge of doing
this. What would you do?

As the world’s largest maker of ships, Hyundai hopes its new technology helps
it reduce expenses and streamline production, an important consideration in today’s
environment. You’ve probably never given much thought to how organizations
“produce” the goods and services that you buy or use. But it’s an important process.
Without it, you wouldn’t have a car to drive or McDonald’s fries to snack on, or even
a hiking trail in a local park to enjoy. Organizations need to have well-thought-out and
well-designed operating systems, organizational control systems, and quality programs
to survive in today’s increasingly competitive global environment. And it’s the manager’s
job to manage those systems and programs.

Managing Operations Module 683

THE role of operations management operations management
The transformation process that
What is operations management? The term refers to the transformation process converts resources into finished goods
that converts resources into finished goods and services. Exhibit MO-1 portrays this and services
process in a simplified fashion. The system takes in inputs—people, technology, capi-
tal, equipment, materials, and information—and transforms them through various manufacturing organizations
processes, procedures, work activities, and so forth into finished goods and services. Organizations that produce physical
Because every unit in an organization produces something, managers need to be famil- goods
iar with operations management concepts in order to achieve goals efficiently and service organizations
effectively. Organizations that produce nonphysical
products in the form of services
Operations management is important to organizations and managers for three
reasons: (1) it encompasses both services and manufacturing; (2) it’s important in
effectively and efficiently managing productivity; and (3) it plays a strategic role in an
organization’s competitive success.

Services and Manufacturing

With a menu that offers more than 200 items, The Cheesecake Factory restaurants
rely on a finely tuned production system. One food-service consultant says, “They’ve
evolved with this highly complex menu combined with a highly efficient kitchen.”2

Every organization produces something. Unfortunately, this fact is often over-
looked except in obvious cases such as in the manufacturing of cars, cell phones, or
lawnmowers. After all, manufacturing organizations produce physical goods. It’s
easy to see the operations management (transformation) process at work in these types
of organizations because raw materials are turned into recognizable physical products.
But the transformation process isn’t as readily evident in service organizations that
produce nonphysical outputs in the form of services. For instance, hospitals provide
medical and health care services that help people manage their personal health, air-
lines provide transportation services that move people from one location to another,
a cruise line provides a vacation and entertainment service, military forces provide
defense capabilities, and the list goes on. These service organizations also transform
inputs into outputs, although the transformation process isn’t as easily recognizable
as that in manufacturing organizations. Take a university, for example. University
administrators bring together inputs—professors, books, academic journals, technol-
ogy materials, computers, classrooms, and similar resources—to transform “unen-
lightened” students into educated and skilled individuals who are capable of making
contributions to society.

The reason we’re making this point is that the U.S. economy, and to a large extent
the global economy, is dominated by the creation and sale of services. Most of the
world’s developed countries are predominantly service economies. In the United
States, for instance, almost 80 percent of all economic activity is services, and in the
European Union it’s over 71 percent. In lesser-developed countries, the services sec-
tor is less important. For instance, in Chad, it accounts for only 30 percent of eco-
nomic activity; in the Republic of the Congo, 26 percent; and in Timor-Leste, about
17 percent.3

Inputs Outputs Exhibit MO-1

• People • Goods The Operations System
• Technology • Services
• Capital Transformation
• Equipment Process
• Materials
• Information

684 Part 6 Controlling

Managing Productivity

One jetliner has roughly 4 million parts. Efficiently assembling such a finely engineered
product requires intense focus. Boeing and Airbus, the two major global manufactur-
ers, have copied techniques from Toyota. However, not every technique can be copied
because airlines demand more customization than do car buyers and significantly more
rigid safety regulations apply to jetliners than to cars.4 Yet, advances in manufacturing
technology are enabling Boeing to significantly increase its ability to turn out custom
jetliners. The company plans to increase the production of its 737 model aircraft from
42 planes per month to 57 per month in 2019.5 At the Evans Findings Company in
East Providence, Rhode Island, which makes the tiny cutting devices on dental-floss
containers, one production shift each day is run without people.6 The company’s goal
is to do as much as possible with no labor. And it’s not because they don’t care about
their employees. Instead, like many U.S. and foreign manufacturers, Evans needed to
raise productivity and lower labor costs in order to survive, especially against low-cost
competitors. And, some organizations, like Adidas, are planning manufacturing plants
that will replace workers with robots altogether.7 One study estimates that manufactur-
ing facilities that rely on robots will cut labor costs by 33 percent in South Korea and
25 percent in the United States and Taiwan.8

Although most organizations don’t make products that have 4 million parts and
most organizations can’t function without people, improving productivity has become
a major goal in virtually every organization. For countries, high productivity can
lead to economic growth and development. Employees can receive higher wages and
company profits can increase without causing inflation. For individual organizations,
increased productivity gives them a more competitive cost structure and the ability to
offer more competitive prices.

Over the past decade, businesses have made dramatic improvements to increase
their efficiency. For example, at Changying Precision Technology Company in China,
technology has enabled the company to lower its manufacturing defect rate from
25 percent to 5 percent and increase production capacity from 8,000 units per month
to more than 21,000 units.9 And it’s not just in manufacturing that companies are pur-
suing productivity gains. Les Clos, a French restaurant located in San Francisco, uses
a smartphone app called Allset, which enables patrons to book their table, pre-order
food, and pay for it. Shortly after adopting Allset, Les Clos saw a 30 percent increase
in lunch orders and a 25 percent increase in sales.10

Organizations that hope to succeed globally are looking for ways to improve
productivity. For example, the Canadian Imperial Bank of Commerce, based in
Toronto, automated its purchasing function, saving several million dollars annually.11
And Skoda, the Czech car company that’s a subsidiary of Germany’s Volkswagen AG,
improved its productivity through an intensive restructuring of its manufacturing
process.12

Productivity is a composite of people and operations variables. To improve pro-
ductivity, managers must focus on both. The late W. Edwards Deming, a renowned
quality expert, believed that managers, not workers, were the primary source of
increased productivity. Some of his suggestions for managers included planning for
the long-term future, never being complacent about product quality, understand-
ing whether problems were confined to particular parts of the production process
or stemmed from the overall process itself, training workers for the job they’re being
asked to perform, raising the quality of line supervisors, requiring workers to do qual-
ity work, and so forth.13 As you can see, Deming understood the interplay between
people and operations. High productivity can’t come solely from good “people man-
agement.” The truly effective organization will maximize productivity by successfully
integrating people into the overall operations system. For instance, at Simplex Nails
Manufacturing in Americus, Georgia, employees were an integral part of the compa-
ny’s much-needed turnaround effort.14 Some production workers were redeployed on a
plant-wide cleanup and organization effort, which freed up floor space. The company’s

Managing Operations Module 685

sales force was retrained and refocused to sell what customers wanted rather than what
was in inventory. The results were dramatic. Inventory was reduced by more than 50
percent, the plant had 20 percent more floor space, orders were more consistent, and
employee morale improved. Here’s a company that recognized the important interplay
between people and the operations system.

Strategic Role of Operations Management

Modern manufacturing originated over 100 years ago in the United States, primarily
in Detroit’s automobile factories. The success that U.S. manufacturers experienced
during World War II led manufacturing executives to believe that troublesome pro-
duction problems had been conquered. These executives focused, instead, on improv-
ing other functional areas, such as finance and marketing, and paid little attention to
manufacturing.

However, as U.S. executives neglected production, managers in Japan, Germany,
and other countries took the opportunity to develop modern, computer-based, and
technologically advanced facilities that fully integrated manufacturing operations into
strategic planning decisions. The competition’s success realigned world manufactur-
ing leadership. U.S. manufacturers soon discovered that foreign goods were made not
only less expensively but also with better quality. Finally, by the late 1970s, U.S. execu-
tives recognized they were facing a true crisis and responded. They invested heavily in
improving manufacturing technology, increased the corporate authority and visibility
of manufacturing executives, and began incorporating existing and future production
requirements into the organization’s overall strategic plan. Today, successful organiza-
tions recognize the crucial role that operations management plays as part of the overall
organizational strategy to establish and maintain global leadership.15

The strategic role that operations management plays in successful organizational
performance can be seen clearly as more organizations move toward managing their
operations from a value chain perspective, which we’re going to discuss next.

WHAT is value chain management and why

is it important?

It’s 11 P.M., and you’re reading a text message from your parents saying they want to
buy you a laptop for your birthday this year and that you should order it. You log on
to Dell’s website and configure your dream machine. You hit the order button and, not
long after, your dream computer is delivered to your front door, built to your exact
specifications, ready to set up and use immediately to type that management assign-
ment due tomorrow. Or consider Siemens AG’s computed tomography manufacturing
plant in Forchheim, Germany, which has established partnerships with about 30 sup-
pliers. These suppliers are partners in the truest sense, as they share responsibility with
the plant for overall process performance. This arrangement has allowed Siemens to
eliminate all inventory warehousing and has streamlined the number of times paper
changes hands to order parts from 18 to 1. At the Timken’s plant in Canton, Ohio,
electronic purchase orders are sent across the street to an adjacent “Supplier City,”
where many of its key suppliers have set up shop. The process takes milliseconds and
costs less than 50 cents per purchase order. And when Black & Decker extended its
line of handheld tools to include a glue gun, it totally outsourced the entire design and
production to the leading glue gun manufacturer. Why? Because they understood that
glue guns don’t require motors, which was what Black & Decker did best.16

As these examples show, closely integrated work activities among many different
players are possible. How? The answer lies in value chain management. The concepts
of value chain management have transformed operations management strategies and
turned organizations around the world into finely tuned models of efficiency and effec-
tiveness, strategically positioned to exploit competitive opportunities.

686 Part 6 Controlling

value WHAT is value chain management?
The performance characteristics,
features, and attributes, and any other Every organization needs customers if it’s going to survive and prosper. Even a not-for-
aspects of goods and services for profit organization must have “customers” who use its services or purchase its prod-
which customers are willing to give up ucts. Customers want some type of value from the goods and services they purchase or
resources use, and these customers decide what has value. Organizations must provide that value
to attract and keep customers. Value is defined as the performance characteristics,
value chain features, and attributes and any other aspects of goods and services for which custom-
The entire series of organizational work ers are willing to give up resources (usually money). For example, when you purchase
activities that add value at each step Rihanna’s new CD at Best Buy, a new pair of Australian sheepskin Ugg boots online
from raw materials to finished product at Zappos, a Wendy’s bacon cheeseburger at the drive-through location on campus, or
a haircut from your local hair salon, you’re exchanging (giving up) money in return for
value chain management the value you need or desire from these products—providing music during your eve-
The process of managing the sequence ning study time, keeping your feet warm and fashionable during winter’s cold weather,
of activities and information along the alleviating the lunchtime hunger pangs quickly since your next class starts in 15 min-
entire value chain utes, or looking professionally groomed for the job interview you’ve got next week.

How is value provided to customers? Through transforming raw materials and
other resources into some product or service that end users need or desire when, where,
and how they want it. However, that seemingly simple act of turning varied resources
into something that customers value and are willing to pay for involves a vast array
of interrelated work activities performed by different participants (suppliers, manu-
facturers, and even customers)—that is, it involves the value chain. The value chain
is the entire series of organizational work activities that add value at each step from
raw materials to finished product. In its entirety, the value chain can encompass the
supplier’s suppliers to the customer’s customer.17 For instance, consider the value chain
from growing macadamia nuts to selling macadamia nut cookies in a grocery store.
The chain begins with a farmer who grows the macadamia nuts, picks them from trees,
and sells them to a processing plant. The added value is the increase in the farmer’s
income for selling macadamia nuts and the material and labor costs for growing and
picking them. The processing plant removes the shells, discards rotten nuts, and sells
the rest to a bakery. The added value created by the processing plant is the difference
between the cost of buying the macadamia nuts and the price at which these are sold
to the bakery. The bakery adds value by blending the nuts with the cookie dough,
baking the cookies, and selling them to the grocery store for a profit. The grocer adds
value by buying the cookies from the bakery, transporting them to the store, stocking
the shelves, and selling them for a profit.

Value chain management is the process of managing the sequence of activi-
ties and information along the entire value chain. In contrast to supply chain manage-
ment, which is internally oriented and focuses on efficient flow of incoming materials
(resources) to the organization, value chain management is externally oriented and
focuses on both incoming materials and outgoing products and services. Although sup-
ply chain management is efficiency oriented (its goal is to reduce costs and make the
organization more productive), value chain management is effectiveness oriented and
aims to create the highest value for customers.18 The relationship between Magna Inter-
national and General Motors illustrates the benefits of improving value chain man-
agement. Magna manufactures front and rear bumper covers for GM vehicles. After
Magna moved from Ohio to a facility near the GM assembly plant in Michigan, GM
saved millions of dollars in purchase costs.19 By moving closer to GM, Magna no lon-
ger needs to maintain a costly storage facility and incur high fuel costs for transport.
In turn, the cost savings enables Magna to sell bumper covers to GM at a lower price.

Goal of Value Chain Management

Who has the power in the value chain? Is it the suppliers providing needed resources
and materials? After all, they have the ability to dictate prices and quality. Is it the
manufacturer who assembles those resources into a valuable product or service? Their
contribution in creating a product or service is quite obvious. Is it the distributor that
makes sure the product or service is available where and when the customer needs it?

Managing Operations Module 687

Actually, it’s none of these! In value chain management, ultimately customers are the
ones with power.20 They’re the ones who define what value is and how it’s created and
provided. Using value chain management, managers hope to find that unique combi-
nation that offers customers solutions to truly meet their unique needs incredibly fast
and at a price that can’t be matched by competitors.

With these factors in mind then, the goal of value chain management is to cre-
ate a value chain strategy that meets and exceeds customers’ needs and desires and
allows for full and seamless integration among all members of the chain. A good value
chain involves a sequence of participants working together as a team, each adding
some component of value—such as faster assembly, more accurate information, better
customer response and service, and so forth—to the overall process.21 The better the
collaboration among the various chain participants, the better the customer solutions.
When value is created for customers and their needs and desires are satisfied, everyone
along the chain benefits. For example, at Johnson Controls Inc., managing the value
chain started first with improved relationships with internal suppliers, then expanded
out to external suppliers and customers. As the company’s experience with value chain
management improved, so did its connection with its customers, which ultimately paid
off for all its value chain partners.22

Benefits of Value Chain Management

Collaborating with external and internal partners in creating and managing a suc-
cessful value chain strategy requires significant investments in time, energy, and other
resources, and a serious commitment by all chain partners. Given these demands,
why would managers ever choose to implement value chain management? A survey
of manufacturers noted four primary benefits of value chain management: improved
procurement, improved logistics, improved product development, and enhanced cus-
tomer order management.23

MANAGING operations using value

chain management

Even though it’s the world’s largest retailer, Walmart still looks for ways to more effec-
tively and efficiently manage its value chain. Its current efforts involve taking over U.S.
transportation services from suppliers in an effort to reduce the cost of transporting
goods. The goal is “to handle suppliers’ deliveries in instances where Walmart can
do the same job for less, then use those savings to reduce prices in stores.” Walmart
believes it has the size and scale to allow it to ship most products more efficiently than
the companies that produce the goods.24

Even if you’re Walmart, managing an organization from a value chain perspective
isn’t easy. Approaches to giving customers what they want that may have worked in
the past are likely no longer efficient or effective. Today’s dynamic competitive envi-
ronment demands new solutions from global organizations. Understanding how and
why value is determined by the marketplace has led some organizations to experiment
with a new business model, a concept we introduced in Chapter 9. For example, IKEA
transformed itself from a small Swedish mail-order furniture operation into one of
the world’s largest furniture retailers by reinventing the value chain in that industry.
The company offers customers well-designed products at substantially lower prices in
return for their willingness to take on certain key tasks traditionally done by manufac-
turers and retailers—assembling furniture and getting it home.25 The company’s cre-
ation of a new business model and willingness to abandon old methods and processes
has worked well.

Value Chain Strategy

Exhibit MO-2 shows the six main requirements of a successful value chain strategy:
coordination and collaboration, technology investment, organizational processes,
leadership, employees, and organizational culture and attitudes.

688 Part 6 Controlling Organizational Coordination
Culture and and
Exhibit MO-2 Attitudes
Collaboration
Value Chain Strategy Requirement

Employees Value Technology
Chain Investment
Strategy

Leadership Organizational
Processes

organizational processes COORDINATION AND COLLABORATION  For the value chain to achieve its goal
The ways that organizational work is
done of meeting and exceeding customers’ needs and desires, collaborative relationships
among all chain participants must exist.26 Each partner must identify things he or she
may not value but that customers do. Sharing information and being flexible as far as
who in the value chain does what are important steps in building coordination and
collaboration. This sharing of information and analysis requires more open commu-
nication among the various value chain partners. For example, Kraft Foods believes
that better communication with customers and with suppliers has facilitated timely
delivery of goods and services.27

TECHNOLOGY INVESTMENT  Successful value chain management isn’t possible

without a significant investment in information technology. The payoff from this
investment, however, is that information technology can be used to restructure the
value chain to better serve end users. For example, each year the Houston-based food
distributor Sysco ships 21.5 million tons of produce, meats, prepared meals, and other
food-related products to restaurants, cafeterias, and sports stadiums. To get all that
food safely to the right place at the right time, Sysco relies on a complex web of soft-
ware, databases, scanning systems, and robotics.28

ORGANIZATIONAL PROCESSES  At Pactiv Corporation, which manufactures

consumer and food-service packaging, the company relied on a planning process
that included three-year breakthrough goals, which were then translated into one-
year goals, annual improvement priorities, and measurable targets. This disciplined
approach to planning has helped the company grow and achieve its goals.29

Value chain management radically changes organizational processes—that
is, the ways that organizational work is done. When managers decide to manage
operations using value chain management, old processes are no longer appropri-
ate. All organizational processes must be critically evaluated from beginning to end
to see where value is being added. Non-value-adding activities should be eliminated.
Questions such as “Where can internal knowledge be leveraged to improve the flow
of material and information?” “How can we better configure our product to satisfy
both customers and suppliers?” “How can the flow of material and information be
improved?” and “How can we improve customer service?” should be asked for each
and every process. For example, when managers at Deere and Company implemented
value chain management, a thorough process evaluation revealed that work activities
needed to be better synchronized and interrelationships between multiple links in the
value chain better managed. They changed numerous work processes division-wide in
order to realize greater value.30

Three important conclusions can be made about organizational processes.
First, better demand forecasting is necessary and possible because of closer ties with

Managing Operations Module 689
customers and suppliers. For example, in an effort to make sure that Listerine was on
the store shelves when customers wanted it (known in the retail industry as product
replenishment rates), Walmart and Pfizer’s Consumer Healthcare Group collaborated
on improving product demand forecast information. Through their mutual efforts, the
partners boosted Walmart’s sales of Listerine, an excellent outcome for both supplier
and retailer. Customers also benefited because they were able to purchase the product
when and where they wanted it.

Second, selected functions may need to be done collaboratively with other part-
ners in the value chain. This collaboration may even extend to sharing employees. For
instance, Coca-Cola Hellenic Bottling Company places employees in grocery stores
where they work with store employees to prepare the merchandising and placement of
Coca-Cola products on the shelves.

Finally, new measures are needed for evaluating performance of various activi-
ties along the value chain. Because the goal in value chain management is meeting
and exceeding customers’ needs and desires, managers need a better picture of how
well this value is being created and delivered to customers. For example, when Nestlé
USA implemented value chain management, it redesigned its metrics system to focus
on one consistent set of measurements—including, for instance, accuracy of demand
forecasts and production plans, on-time delivery, and customer-service levels—that
allowed them to more quickly identify problem areas and take actions to resolve
them.31

LEADERSHIP  Successful value chain management isn’t possible without strong and

committed leadership. From top organizational levels to lower levels, managers must
support, facilitate, and promote the implementation and ongoing practice of value
chain management. Managers must seriously commit to identifying what value is, how
that value can best be provided, and how successful those efforts have been. A culture
where all efforts are focused on delivering superb customer value isn’t possible without
a serious commitment on the part of the organization’s leaders.

Also, it’s important that managers outline expectations for what’s involved in
the organization’s pursuit of value chain management. Ideally, managers start with a
vision or mission statement that expresses the organization’s commitment to identify-
ing, capturing, and providing the highest possible value to customers. For instance,
when American Standard began using value chain management, the CEO held dozens
of meetings across the United States to explain the new competitive environment and
why the company needed to create better working relationships with its value chain
partners in order to better serve the needs of its customers.32

Then, managers should clarify expectations regarding each employee’s role in the
value chain. But clear expectations aren’t just important for internal partners. Being
clear about expectations also extends to external partners. For example, managers at
American Standard identified clear requirements for suppliers and were prepared to
drop any that couldn’t meet them, and did so. The upside, though, was that those sup-
pliers who met the expectations benefited from more business, and American Standard
had partners willing to work with them in delivering better value to customers.

EMPLOYEES/HUMAN RESOURCES  When new employees at the Thermo Fisher

Scientific plant in Marietta, Ohio, have work-related questions, they can consult with
a member of the facility’s “Tree of Knowledge.” The “tree” is actually a bulletin board
with pictures of employees who have worked at the plant for decades.33

We know from our discussions of management theories throughout this text that
employees are an organization’s most important resource. Without employees, no
products are produced and no services are delivered—in fact, no organized efforts in
the pursuit of common goals would be possible. So not surprisingly, employees play an
important role in value chain management. The three main human resource require-
ments for value chain management are flexible approaches to job design, an effective
hiring process, and ongoing training.

690 Part 6 Controlling Flexibility is the key to job design in value chain management. Traditional func-
tional job roles—such as marketing, sales, accounts payable, customer service, and
Exhibit MO-3 so forth—won’t work. Instead, jobs must be designed around work processes that
create and provide value to customers. It takes flexible jobs and flexible employees.
Obstacles to Value Chain For instance, at Nordson Corporation’s facility in Swainsboro, Georgia, workers are
Management trained to do several different tasks, which isn’t all that uncommon in many manu-
facturing plants. What’s unique about this facility is that even salaried employees are
expected to spend four hours every month building products on the shop floor.34

In a value chain organization, employees may be assigned to work teams that
tackle a given process and may be asked to do different things on different days
depending on need. In such an environment, where customer value is best delivered
through collaborative relationships that may change as customer needs change and
where processes or job descriptions are not standardized, an employee’s ability to be
flexible is critical. Therefore, the organization’s hiring process must be designed to
identify those employees who have the ability to learn and adapt.

Finally, the need for flexibility also requires a significant investment in continual
and ongoing employee training. Whether that training involves learning how to use
information technology software, how to improve the flow of materials throughout the
chain, how to identify activities that add value, how to make better decisions faster, or
how to improve any other number of potential work activities, managers must see to
it that employees have the knowledge and tools they need to do their jobs efficiently
and effectively.

ORGANIZATIONAL CULTURE AND ATTITUDES  The last requirement for value

chain management is having a supportive organizational culture and attitudes. From
our extensive description of value chain management, you could probably guess the
type of organizational culture that’s going to support its successful implementation!
Those cultural attitudes include sharing, collaborating, openness, flexibility, mutual
respect, and trust. These attitudes encompass not only the internal partners in the
value chain, but extend to external partners as well.

Obstacles to Value Chain Management

As desirable as these benefits may be, managers must tackle several obstacles in man-
aging the value chain, including organizational barriers, cultural attitudes, required
capabilities, and people (see Exhibit MO-3).

ORGANIZATIONAL BARRIERS  At General Cable’s manufacturing facility in

Manchester, New Hampshire, one of the most interesting challenges faced by manag-
ers and employees in maintaining its world-class competitiveness is the 23 different
nationalities that speak 12 languages besides English. Multiple languages make getting
new messages out about anything that comes up especially tricky. But they’ve made it
work using visual cues throughout the plant.35

Organizational Cultural
Barriers Attitudes
Obstacles to
Value Chain
Management

People Required
Capabilities

Managing Operations Module 691

Organizational barriers are among the most difficult obstacles to handle. These
barriers include refusal or reluctance to share information, reluctance to shake up the
status quo, and security issues. Without shared information, close coordination and
collaboration is impossible. And the reluctance or refusal of employees to shake up the
status quo can impede efforts toward value chain management and prevent its success-
ful implementation. Finally, because value chain management relies heavily on a sub-
stantial information technology infrastructure, system security and Internet security
breaches are issues that need to be addressed.

CULTURAL ATTITUDES  Unsupportive cultural attitudes—especially trust and intellectual property
Proprietary information that’s critical to
control—also can be obstacles to value chain management. The trust issue is a critical an organization’s efficient and effective
one, both lack of trust and too much trust. To be effective, partners in a value chain functioning and competitiveness
must trust each other. A mutual respect for, and honesty about, each partner’s activities
all along the chain is essential. When that trust doesn’t exist, the partners will be reluc-
tant to share information, capabilities, and processes. But too much trust also can be a
problem. Just about any organization is vulnerable to theft of intellectual property—
that is, proprietary information that’s critical to an organization’s efficient and effective
functioning and competitiveness. You need to be able to trust your value chain partners
so your organization’s valuable assets aren’t compromised.36 Another cultural attitude
that can be an obstacle is the belief that when an organization collaborates with exter-
nal and internal partners, it no longer controls its own destiny. However, this lack of
control just isn’t the case. Even with the intense collaboration that’s important to value
chain management, organizations still control critical decisions such as what custom-
ers value, how much value they desire, and what distribution channels are important.37

REQUIRED CAPABILITIES  We know from our earlier discussion of requirements

for the successful implementation of value chain management that value chain part-
ners need numerous capabilities. Several of these capabilities—coordination and col-
laboration, the ability to configure products to satisfy customers and suppliers, and
the ability to educate internal and external partners—aren’t easy, but they’re essential
to capturing and exploiting the value chain. Many of the companies we’ve described
throughout this section endured critical, and oftentimes difficult, self-evaluations of
their capabilities and processes in order to become more effective and efficient at man-
aging their value chains.

PEOPLE  The final obstacles to successful value chain management can be an orga-

nization’s people. Without their unwavering commitment to do whatever it takes,
value chain management won’t be successful. If employees refuse to be flexible in their
work—how and with whom they work—collaboration and cooperation throughout
the value chain will be hard to achieve.

In addition, value chain management takes an incredible amount of time and
energy on the part of an organization’s employees. Managers must motivate those high
levels of effort from employees, which is not an easy thing to do.

Finally, a major human resource problem is the lack of experienced managers who
can lead value chain management initiatives. It’s not that widespread, so there aren’t
a lot of managers who’ve done it successfully. However, progressive organizations see
the benefits to be gained from value chain management and pursue it despite obstacles.

CURRENT issues in managing operations

Rowe Furniture had an audacious goal: make a sofa in 10 days. It wanted to “become as
efficient at making furniture as Toyota is at making cars.” Reaching that goal, however,
required revamping its operations management process to exploit technology and main-
tain quality.38 Rowe’s actions illustrate three of today’s most important operations man-
agement issues: technology, quality, and mass customization and lean organizations.

692 Part 6 Controlling

Technology’s Role in Operations Management

Global positioning systems (GPS) are changing a number of enterprises from ship-
ping to shopping, from health care to law enforcement, and even farming.39 Like many
other technologies, GPS was invented for military use to track weapons and personnel
as they moved. Now GPS is being used to track shipping fleets, revitalize consumer
products such as watches or photos, and monitor parolees or sex offenders.

As we know from our previous discussion of value chain management, today’s
competitive marketplace has put tremendous pressure on organizations to deliver
products and services that customers value in a timely manner. Smart companies are
looking at ways to harness technology to improve operations management. Many
fast-food companies are competing to see who can provide faster and better service
to drive-through customers. With drive-through now representing a huge portion of
sales, faster and better delivery can be a significant competitive edge. For instance,
Wendy’s has added awnings to some of its menu boards and replaced some of the text
with pictures. Others use confirmation screens, a technology that helped McDonald’s
boost accuracy by more than 11 percent. Technology used by two national chains
tells managers how much food they need to prepare by counting vehicles in the drive-
through line and factoring in demand for current promotional and popular staple
items. Even Domino’s is using a new point-of-sale system to attract customers and
streamline online orders.40

Although an organization’s production activities are driven by the recognition
that the customer is king, managers still need to be more responsive. For instance,
operations managers need systems that can reveal available capacity, status of orders,
and product quality while products are in the process of being manufactured, not just
after the fact. To connect more closely with customers, production must be synchro-
nized across the enterprise. To avoid bottlenecks and slowdowns, the production func-
tion must be a full partner in the entire business system.

What’s making such extensive collaboration possible is technology. Technology
is also allowing organizations to control costs, particularly in the areas of predictive
maintenance, remote diagnostics, and utility cost savings. For instance, new Internet-
compatible equipment contains embedded Web servers that can communicate pro-
actively—that is, if a piece of equipment breaks or reaches certain preset parameters
indicating that it’s about to break, it asks for help. But technology can do more than
sound an alarm or light up an indicator button. For instance, some devices have the
ability to initiate e-mail or signal a pager at a supplier, the maintenance department,
or contractor describing the specific problem and requesting parts and service. How
much is such e-enabled maintenance control worth? It can be worth quite a lot if it
prevents equipment breakdowns and subsequent production downtime.

Managers who understand the power of technology to contribute to more effec-
tive and efficient performance know that managing operations is more than the tra-
ditional view of simply producing the product. Instead, the emphasis is on working
together with all the organization’s business functions to find solutions to customers’
business problems. Even service providers understand the power of technology for
these tasks. For example, Southwest Airlines upgraded its cockpit software, enabling
its pilots (who have been extensively trained) to fly precise satellite-based navigation
approaches to airports, thus saving fuel, reducing delays, and cutting noise.41

Quality Initiatives

Quality problems are expensive. For example, even though Apple has had phenomenal
success with its iPod, the batteries in the first three versions died after 4 hours instead
of lasting the up-to-12 hours that buyers expected. Apple’s settlement with consum-
ers cost close to $100 million. At Schering-Plough, problems with inhalers and other
pharmaceuticals were traced to chronic quality control shortcomings, for which the
company eventually paid a $500 million fine. And the auto industry paid $14.5 billion
to cover the cost of warranty and repair work in one year.42

Managing Operations Module 693

Many experts believe that organizations unable to produce high-quality products quality
won’t be able to compete successfully in the global marketplace. What is quality? When The ability of a product or service to
you consider a product or service to have quality, what does that mean? Does it mean reliably do what it’s supposed to do and
that the product doesn’t break or quit working—that is, that it’s reliable? Does it mean to satisfy customer expectations
that the service is delivered in a way that you intended? Does it mean that the product
does what it’s supposed to do? Or does quality mean something else? We’re going to
define quality as the ability of a product or service to reliably do what it’s supposed to
do and to satisfy customer expectations.

How is quality achieved? That’s an issue managers must address. A good way to
look at quality initiatives is with the management functions—planning, organizing,
leading, and controlling—that need to take place.

PLANNING FOR QUALITY  Managers must have quality improvement goals and

strategies and plans to achieve those goals. Goals can help focus everyone’s attention
toward some objective quality standard. For instance, the Forbes Travel Guide rates
hotels on a star system with five stars representing the highest quality. Hotels must
earn high ratings on 800 standards to earn the five stars highest rating. Bruce Wallin,
editorial director of luxury lifestyle magazine Robb Report, believes that top service
and surprise distinguish five-star hotels from the others. Wallin said, “In Milan there’s
a hotel where, every afternoon, you get a knock on your door, and instead of house-
cleaning it’s a cocktail cart. . . . [T]hey’ll make whatever drink you want, right in your
room.”43 Goals may be specific and challenging, thus managers and employees are
partnering together to pursue well-designed strategies to achieve the goals and are
confident they can do so.

ORGANIZING AND LEADING FOR QUALITY  Because quality improvement ini-

tiatives are carried out by organizational employees, it’s important for managers to
look at how they can best organize and lead them. For instance, at the Moosejaw,
Saskatchewan, plant of General Cable Corporation, every employee participates in
continual quality assurance training. In addition, the plant manager believes whole-
heartedly in giving employees the information they need to do their jobs better. He
says, “Giving people who are running the machines the information is just paramount.
You can set up your cellular structure, you can cross-train your people, you can use
lean tools, but if you don’t give people information to drive improvement, there’s no
enthusiasm.” Needless to say, this company shares production data and financial per-
formance measures with all employees.44

Organizations with extensive and successful quality improvement programs tend
to rely on two important people approaches: cross-functional work teams and self-
directed or empowered work teams. Because achieving product quality is something
that all employees from upper to lower levels must participate in, it’s not surprising that
quality-driven organizations rely on well-trained, flexible, and empowered employees.

CONTROLLING FOR QUALITY  Quality improvement initiatives aren’t possible

without having some way to monitor and evaluate their progress. Whether it involves
standards for inventory control, defect rate, raw materials procurement, or other oper-
ations management areas, controlling for quality is important. For instance, at the
Northrup Grumman Corporation plant in Rolling Meadows, Illinois, several quality
controls have been implemented, such as automated testing and IT that integrates
product design and manufacturing and tracks process quality improvements. Also,
employees are empowered to make accept/reject decisions about products through-
out the manufacturing process. The plant manager explains, “This approach helps
build quality into the product rather than trying to inspect quality into the product.”
But one of the most important things they do is “go to war” with their customers—
soldiers preparing for war or in live combat situations. Again, the plant manager says,
“What discriminates us is that we believe if we can understand our customer’s mission

694 Part 6 Controlling

ISO 9000 as well as they do, we can help them be more effective. We don’t wait for our customer
A series of international quality to ask us to do something. We find out what our customer is trying to do and then we
management standards that set develop solutions.”45
uniform guidelines for processes to
ensure products conform to customer These types of quality improvement success stories aren’t just limited to U.S. oper-
requirements ations. For example, at a Delphi assembly plant in Matamoros, Mexico, employees
worked hard to improve quality and made significant strides. Their customer rejec-
tion rate on shipped products is now 10 ppm (parts per million), down from 3,000
ppm—an improvement of almost 300 percent.46 Quality initiatives at several Austra-
lian companies, including Alcoa of Australia, Wormald Security, and Carlton and
United Breweries, have led to significant quality improvements.47 And at Valeo Klima-
systemme GmbH of Bad Rodach, Germany, assembly teams build different climate-
control systems for high-end German cars, including Mercedes and BMW. Quality
initiatives by Valeo’s employee teams have led to significant improvements in various
quality standards.48

Quality Goals

To publicly demonstrate their quality commitment, many organizations worldwide
have pursued challenging quality goals—the two best-known being ISO 9000 and Six
Sigma.

ISO 9000  ISO 9000 is a series of international quality management standards

established by the International Organization for Standardization (www.iso.org),
which set uniform guidelines for processes to ensure that products conform to
customer requirements. These standards cover everything from contract review to
product design to product delivery. The ISO 9000 standards have become the interna-
tionally recognized standard for evaluating and comparing companies in the global
marketplace. In fact, this type of certification can be a prerequisite for doing business
globally. Achieving ISO 9000 certification provides proof that a quality operations
system is in place.

Almost 40,000 U.S. businesses are ISO 9000 certified. In China, over 200,000 firms
have received certification.49 And those numbers are rising. In 2014 alone, more than
1.6 million certifications were awarded to organizations worldwide.50

Six Sigma SIX SIGMA  Motorola popularized the use of stringent quality standards more
A quality program designed to reduce
defects and help lower costs, save time, than 30 years ago through a trademarked quality improvement program called Six
and improve customer satisfaction Sigma.51 Very simply, Six Sigma is a quality program designed to reduce defects to
help lower costs, save time, and improve customer satisfaction. It’s based on the sta-
tistical standard that establishes a goal of no more than 3.4 defects per million units
or procedures. What does the name mean? Sigma is the Greek letter that statisticians
use to define a standard deviation from a bell curve. The higher the sigma, the fewer
the deviations from the norm—that is, the fewer the defects. At One Sigma, two-
thirds of whatever is being measured falls within the curve. Two Sigma covers about
95 percent. At Six Sigma, you’re about as close to defect-free as you can get.52 It’s an
ambitious quality goal! Although it is an extremely high standard to achieve, many
quality-driven businesses are using it and benefiting from it. For instance, General
Electric estimates that it has saved $12 billion in costs over a five-year period.53 Other
well-known companies pursuing Six Sigma include ITT Industries, Dow Chemi-
cal, 3M Company, American Express, Sony Corporation, Nokia Corporation, and
Johnson & Johnson. Although manufacturers seem to make up the bulk of Six Sigma
users, service companies such as financial institutions, retailers, and health care orga-
nizations are beginning to apply it. What impact can Six Sigma have? Let’s look at
two examples.

It used to take Wellmark Blue Cross & Blue Shield, a managed-care health care
company, 65 days or more to add a new doctor to its medical plans. Now, thanks to

Managing Operations Module 695

Six Sigma, the company discovered that half the processes they used were redundant. mass customization
With those unnecessary steps gone, the job now gets done in 30 days or less and with Providing customers with a product
reduced staff. The company also has been able to reduce its administrative expenses when, where, and how they want it
by $3 million per year, an amount passed on to consumers through lower health care
premiums.54 McKesson, a health care information technology company, saved $150 lean organization
million and achieved 99.98 percent order accuracy through operations management An organization that understands what
improvements.55 customers want, identifies customer
value by analyzing all activities required
Although it’s important for managers to recognize that many positive benefits to produce products, and then optimizes
come from reaching Six Sigma or obtaining ISO 9000 certification, the key benefit the entire process from the customer’s
comes from the quality improvement journey itself. In other words, the goal of quality perspective
certification should be having work processes and an operations system in place that
enable organizations to meet customers’ needs and employees to perform their jobs in
a consistently high-quality way.

Mass Customization and Lean Organization

The term mass customization seems an oxymoron. However, the design-to-order con-
cept is becoming an important operations management issue for today’s managers.
Mass customization provides consumers with a product when, where, and how they
want it.56 Companies as diverse as BMW, Ford, Levi Strauss, Wells Fargo, Mattel,
and Dell are adopting mass customization to maintain or attain a competitive advan-
tage. Mass customization requires flexible manufacturing techniques and continual
customer dialogue.57 Technology plays an important role in both.

With flexible manufacturing, companies have the ability to quickly readjust assem-
bly lines to make products to order. Using technology such as computer-controlled
factory equipment, intranets, industrial robots, barcode scanners, digital printers, and
logistics software, companies can manufacture, assemble, and ship customized prod-
ucts with customized packaging to customers in incredibly short timeframes. Dell is a
good example of a company that uses flexible manufacturing techniques and technol-
ogy to custom-build computers to customers’ specifications.

Technology also is important in the continual dialogue with customers. Using
extensive databases, companies can keep track of customers’ likes and dislikes. And the
Internet has made it possible for companies to have ongoing dialogues with custom-
ers to learn about and respond to their exact preferences. For instance, on Amazon’s
website, customers are greeted by name and can get personalized recommendations of
books and other products. The ability to customize products to a customer’s desires
and specifications starts an important relationship between the organization and the
customer. If the customer likes the product and it provides value, he or she is more
likely to be a repeat customer.

An intense focus on customers is also important in order to be a lean organi-
zation, which is an organization that understands what customers want, identifies
customer value by analyzing all activities required to produce products, and then
optimizes the entire process from the customer’s perspective.58 Lean organizations
drive out all activities that do not add value in customers’ eyes. For instance, compa-
nies like United Parcel Service, LVMH Moet Hennessy Louis Vuitton, and Harley-
Davidson have pursued lean operations. “Lean operations adopt a philosophy of
minimizing waste by striving for perfection through continuous learning, creativ-
ity, and teamwork.”59 As more manufacturers and service organizations adopt lean
principles, they must realize that it’s a never-ending journey toward being efficient
and effective.

696 Part 6 Controlling

Pearson MyLab Management

Go to mymanagementlab.com to complete the problems marked with
this icon .

REVIEW AND DISCUSSION QUESTIONS

M O-1.  What is operations management? MO-6.  How does technology play a role in
manufacturing?
M O-2.  Do you think that manufacturing or service
organizations have the greater need for operations MO-7.  What are ISO 9000 and Six Sigma?
management? Explain.
MO-8.  Describe lean management and explain why it’s
M O-3.  What is a value chain, and what is value chain manage­ important.
ment? What is the goal of value chain managem­ ent?
What are the benefits of value chain management? MO-9.  How might operations management apply to other
managerial functions besides control?
M O-4.  What is required for successful value chain
management? What obstacles exist to successful MO-10.  Which is more critical to success in organizations:
value chain management? continuous improvement or quality control?
Support your position.
M O-5.  How could you use value chain management in
your everyday life?

ENDNOTES

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“High-Speed Wireless Transforms a Shipyard,” Wall Street FINAL.pdf, July 8, 2008; and T. Mudd, “The Last Laugh,”
Journal, March 16, 2010, p. B6; and Datamonitor, “Company Industry Week, September 18, 2000, pp. 38–44.
Profile: Hyundai Heavy Industries Co., Ltd.,” www. 13. W. E. Deming, “Improvement of Quality and Productivity
datamonitor.com, November 27, 2009. Through Action by Management,” National Productivity
2. D. McGinn, “Faster Food,” Newsweek, April 19, 2004, Review, Winter 1981–1982, pp. 12–22.
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cia.gov/library/publications/the-world-factbook/, 2016. 15. J. Hagel III, J. Seely Brown, D. Kulasooriya, C. Giffi, and
4. D. Michaels and J. L. Lunsford, “Streamlined Plane Making,” M. Chen, “The Future of Manufacturing: Making Things
Wall Street Journal, April 1, 2005, pp. B1+. in a Changing World,” Deloitte Development, LLC, http://
5. J. Dwyer-Lindgren, “Boeing Will Boost 737 Production, Slow dupress.com/articles/future-of-manufacturing-industry/,
777 Rates,” USA Today online, www.usatoday.com, January March 31, 2015; “The Future of Manufacturing 2009,”
28, 2016. Industry Week, November 2009, pp. 25–31; T. D. Kuczmarski,
6. T. Aeppel, “Workers Not Included,” Wall Street Journal, “Remanufacturing America’s Factory Sector,” BusinessWeek
November 19, 2002, pp. B1+. online, September 9, 2009.
7. M. Sheahan, “Adidas Aims to Open Automated Shoe Factory 16. T. Laseter, K. Ramdas, and D. Swerdlow, “The Supply Side of
in Germany in 2016,” Reuters online, www.reuters.com, Design and Development,” Strategy+Business, Summer 2003,
October 20, 2015. p. 23; J. Jusko, “Not All Dollars and Cents,” Industry Week,
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Workers at Faster Place,” The Los Angeles Times online, www. Industry Week, March 2002, pp. 47–49.
latimes.com, February 10, 2015. 17. J. H. Sheridan, “Managing the Value Chain,” Industry Week,
9. PTI, “China Sets Up First Unmanned Factory; All Processes www.industryweek.com, September 6, 1999, pp. 1–4.
Are Operated by Robots,” The Economic Times online, www. 18. Ibid., p. 3.
economictimes.indiatimes.com, July 27, 2015. 19. D. Sedgwick, “Suppliers Start Moving Closer to GM Plants,”
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to Effectively Market Their Business,” Forbes online, www. 20. J. Teresko, “Forward, March!” Industry Week, July 2004,
forbes.com, December 30, 2015. pp. 43–48; D. Sharma, C. Lucier, and R. Molloy, “From
11. C. Fredman, “The Devil in the Details,” Executive Edge, Solutions to Symbiosis: Blending with Your Customers,”
April–May 1999, pp. 36–39. Strategy+Business, second quarter 2002, pp. 38–48; and

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S. Leibs, “Getting Ready: Your Suppliers,” Industry Week, S. Anderson, The Associated Press, “Restaurants Gear Up for
www.industryweek.com, September 6, 1999. Window Wars,” Springfield, Missouri, News-Leader, January
21. D. Bartholomew, “The Infrastructure,” Industry Week, www. 27, 2006, p. 5B.
industryweek.com, September 6, 1999, p. 1. 41. S. McCartney, “A Radical Cockpit Upgrade Southwest Fliers
22. T. Stevens, “Integrated Product Development,” Industry Will Feel,” Wall Street Journal, April 1, 2010, p. D1.
Week, June 2002, pp. 21–28. 42. D. Bartholomew, “Quality Takes a Beating,” Industry Week,
23. T. Vinas, “A Map of the World: IW Value-Chain Survey,” March 2006, pp. 46–54; J. Carey and M. Arndt, “Making Pills
Industry Week, September 2005, pp. 27–34. the Smart Way,” BusinessWeek, May 3, 2004, pp. 102–103;
24. C. Burritt, C. Wolf, and M. Boyle, “Why Wal-Mart Wants to and A. Barrett, “Schering’s Dr. Feelbetter?” BusinessWeek,
Take the Driver’s Seat,” Bloomberg BusinessWeek, May 31– June 23, 2003, pp. 55–56.
June 6, 2010, pp. 17–18. 43. S. Herships, “How a Hotel Earns Five Stars: The Checklist,”
25. R. Normann and R. Ramirez, “From Value Chain to Value Marketplace online, www.marketplace.org, July 2, 2014.
Constellation,” Harvard Business Review on Managing the 44. J. S. McClenahen, “Prairie Home Companion,” Industry
Value Chain (Boston, MA: Harvard Business School Press, Week, October 2005, pp. 45–46.
2000), pp. 185–219. 45. T. Vinas, “Zeroing In on the Customer,” Industry Week,
26. “Collaboration Is the Key to Reducing Costs,” Industry Week, October 2004, pp. 61–62.
October 2009, p. 35; J. Teresko, “The Tough Get Going,” 46. W. Royal, “Spotlight Shines on Maquiladora,” Industry Week,
Industry Week, March 2005, pp. 25–32; D. M. Lambert and October 16, 2000, pp. 91–92.
A. M. Knemeyer, “We’re in This Together,” Harvard Business 47. See B. Whitford and R. Andrew, eds., The Pursuit of Quality
Review, December 2004, pp. 114–122; and V. G. Narayanan (Perth: Beaumont Publishing, 1994).
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Harvard Business Review, November 2004, pp. 94–102. 16, 2000, pp. 117–118.
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December 2002, pp. 41–43. (Upper Saddle River, NJ: Prentice Hall, 2011), p. 193.
28. J. L. Yang, “Veggie Tales,” Fortune, June 8, 2009, pp. 25–30. 50. International Organization for Standardization,
29. J. Jusko, “Focus. Discipline. Results,” Industry Week, June “The ISO Survey of Management System Standard
2010, pp. 16–17. Certifications—2014,” http://www.iso.org/iso/iso-survey,
30. J. H. Sheridan, “Managing the Value Chain,” p. 3. accessed June 12, 2016.
31. G. Taninecz, “Forging the Chain,” Industry Week, May 15, 51. G. Hasek, “Merger Marries Quality Efforts,” Industry Week,
2000, pp. 40–46. August 21, 2000, pp. 89–92.
32. S. Leibs, “Getting Ready: Your Customers,” Industry Week, 52. M. Arndt, “Quality Isn’t Just for Widgets,” BusinessWeek,
www.industryweek.com, September 6, 1999, p. 1. July 22, 2002, pp. 72–73.
33. J. Katz, “Empowering the Workforce,” Industry Week, 53. “Six Sigma Costs and Savings,” iSixSigma online, https://
January 2009, p. 43. www.isixsigma.com/implementation/financial-analysis/six-
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2009, p. 42. 54. M. Arndt, “Quality Isn’t Just for Widgets.”
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January 2009, p. 38. www.gartner.com, November 18, 2015.
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Corporate America: 2003 Survey of Fortune 1000 2.0, March 2004, pp. 53–55; “Made-to-Fit Clothes Are on the
Companies,” ASIS International and Pinkerton, www. Way,” USA Today, July 2002, pp. 8–9; and L. Elliott, “Mass
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System,” Wall Street Journal, November 24, 2009, p. B5; and

698 Part 6 Controlling

PART 6 Management Practice

A Manager’s Dilemma professional job that can be done outside the organization
is up for grabs. There’s nothing political or philosophical
Vancouver, Canada–based Lululemon Athletica Inc. is about the reason for shipping jobs elsewhere. The bottom
a well-known manufacturer of yoga and athletic apparel, line is that it can save companies money. But there’s a price
which is sold in over 250 stores, mostly in North America to be paid in terms of angry and anxious employees. So are
but also in Australia and New Zealand. Lululemon has offshoring and outsourcing bad?
built a loyal, almost obsessive/cult-like, customer base.
(One customer commented that, “Once you go Lululemon, Critics say “yes.” It’s affecting jobs once considered
you never go back.”). Others have credited the company’s “safe” across a wider range of professional work activities.
apparel as the reason they started—or continued to—exer- And the offshoring and outsourcing have taken place at a
cise. Retail experts portray the brand positioning to be as breathtaking pace. What this means is that the careers col-
much about selling a way of life as selling cute and colorful lege students are preparing for probably won’t sustain them
yoga pants. Customers can take a free yoga class at the stores in the long run. This structural change in the U.S. economy
and be assisted by cheery, knowledgeable employees. All also means that the workforce is likely to face frequent ca-
seemed to be well and good, even fantastic, in Lululemon’s reer changes and downward pressures on wages.
world. Then, a batch of too-sheer stretchy pants—one of
the company’s core products—happened. This problem was Proponents say “no.” Their argument is based on view-
the company’s fourth quality control issue in the span of a ing economic development as a ladder with every country
year. And for a company that built a billion-dollar busi- trying to climb to the next rung. And it’s foolish to think
ness selling premium yoga gear at high prices, this particu- that in the United States we’ve reached the top of the lad-
lar problem was a costly stumble. The company responded der and there’s nowhere else to go. Although people fear
by recalling the batch of sheer, too-revealing black yoga that educated U.S. workers will face the same fate as blue-
pants and commenting that, “This event is not the result collar workers whose jobs shifted to lower-cost countries,
of changing manufacturers or quality of ingredients.” The the truth is that the United States currently still has a com-
recall of its top-selling pants proved to be expensive and petitive advantage in innovation; although, as discussed
embarrassing to the company, which had long hyped itself earlier, that may be in jeopardy. The biggest danger to U.S.
as a premium brand. workers isn’t overseas competition; it’s worrying too much
about other countries climbing up the economic ladder and
Pretend you’re part of the management team. Using what not worrying enough about finding that next higher rung.
you’ve learned in this Part on monitoring and controlling,
what five things would you suggest the team focus on? Finally, economic forces at work in the latest global reces-
Think carefully about your suggestions to the team. sion that led to rapidly rising labor rates in those geographic
areas where costs had been low, coupled with higher mate-
Global Sense rials and shipping costs and attractive tax incentives from
various U.S. states, may combine to lure back U.S. firms.
This is a story about the global economy. It’s about mar-
kets, politics, and public opinion. And as jobs—especially Who’s right? We probably can’t answer that question just
white-collar and professional jobs—continue to be out- yet. Only time will tell. However, we do know that what
sourced and offshored, the story hits closer and closer to we’re seeing with offshoring and outsourcing is another
home. Although the terms offshoring and outsourcing are example of why decision makers need to be aware of the
often used interchangeably, they do mean different things. context within which their organizations are doing business.
Offshoring is relocating business processes (production and
services) from one country to another. Outsourcing is mov- Discuss the following questions in light of what you
ing noncore activities from being done internally to being learned in Part 6:
done externally by an entity that specializes in that activity.
•  How are offshoring and outsourcing similar? How are
One of the realities of a global economy is that to be they different?
competitive, strategic decision makers must look for the best
places to do business. If a car can be made more cheaply in •  What arguments do critics use to say offshoring and
Mexico, maybe it should be. If a telephone inquiry can be outsourcing are bad?
processed more cheaply in India or the Philippines, maybe
it should be. And if programming code can be written more •  What arguments do proponents use to say offshoring
cheaply in China or Russia, maybe it should be. Almost any and outsourcing are not bad?

•  How does the decision to offshore and outsource affect
monitoring and controlling activities?

•  Is it just manufacturers that deal with these decisions/
issues? Discuss.

Part 6  Management Practice 699

Sources: H. Malcom, “Lulu’s No Downward Dog,” USA Today, March 20, 2013, p.
1B+; (“Black Luon Pants Shortage Expected,” Lululemon Athletica, Press Release

March 18, 2003; D. Searcey, “Judges Turn to Outsourcing as Cases Get More Complex,”
Wall Street Journal, September 30, 2013; A. Fisher, “Got a Back-Office Job? It May Be
Headed Overseas,” management.fortune.cnn.com, September 12, 2013; S. Cendrowski,
“Can Outsourcing Be Improved?” Fortune, June 10, 2013, pp. 14–17; A. Fox, “America
Inc.,” HR Magazine, May 2013, pp. 44–48; K. O’Sullivan, “Practiced, But Not Perfect,”
CFO, March 2013, pp. 52–53; J. Bussey, “Will Costs Drive Firms Home?” Wall Street
Journal, May 5, 2011, pp. B1+; D. Wessel, “Big U.S. Firms Shift Hiring Abroad,” Wall
Street Journal, April 19, 2011, pp. B1+; P. Engardio, M. Arndt, and D. Foust, “The Fu-
ture of Outsourcing,” BusinessWeek, January 30, 2006, pp. 50–58; J. Thottam, “Is Your
Job Going Abroad?,” Time, March 1, 2004, pp. 26–36; L. D. Tyson, “Outsourcing: Who’s
Safe Anymore?” BusinessWeek, February 23, 2004, p. 26; A. Fisher, “Think Globally,
Save Your Job Locally,” Fortune, February 23, 2004, p. 60; “The New Job Migration,”
The Economist, February 21, 2004, p. 11; O. Thomas, “The Outsourcing Solution,” Busi-
ness 2.0, September 2003, pp. 159–160; and K. Madigan and M. J. Mandel, “Outsourcing
Jobs: Is It Bad?” BusinessWeek, August 25, 2003, pp. 36–38.

Continuing Case These young men and women just completed a Starbucks apprenticeship, a
12-month Barista Mastery and Customer Service training program launched in
Starbucks—Controlling the United Kingdom. The apprentice program is an employee control that ensures
Once managers have established goals and plans and orga- partners learn and follow proper procedures relating to the storage, handling,
nized and structured to pursue those goals, the manager’s preparation, and service of Starbucks’ products and provide customers with
job isn’t done. Quite the opposite! Managers must now exemplary service and treat them with respect.
monitor work activities to make sure they’re being done Source: Nick Ansell/PA Wire/Press Association via AP Images
as planned and correct any significant deviations. At Star-
bucks, managers control various functions, activities, pro- and customers at drive-through windows is important. As
cesses, and procedures to ensure that desired performance Starbucks has been doing walk-in transactions for a number
standards are achieved at all organizational levels. of years, numerous procedures and processes are in place to
make those transactions go smoothly. However, as Starbucks
Controlling the Coffee Experience adds more drive-through windows, the focus of the transac-
tion is on being fast as well as on quality—a different metric
Why has Starbucks been so successful? Although many fac- than for walk-in transactions. When a customer walks into
tors have contributed to its success, one significant factor is a store and orders, he can step aside while the order is being
its ability to provide customers with a unique product of the prepared; that’s not possible in a drive-through line. Recog-
highest quality delivered with exceptional service. Everything nizing these limitations, the company is taking steps to im-
that each Starbucks partner does, from top level to bottom prove its drive-through service. For instance, digital timers
level, contributes to the company’s ability to do that effi- are placed where employees can easily see them to measure
ciently and effectively. And managers need controls in place service times; order confirmation screens are used to help
to help monitor and evaluate what’s being done and how keep accuracy rates high; and additional pastry racks have
it’s being done. Starbucks’ managers use different types of been conveniently located by the drive-through windows.
controls to ensure that the company meets its goals. These
controls include transactions controls, security controls, Security is also an important issue for Starbucks. Keep-
employee controls, and organizational performance controls. ing company assets (such as people, equipment, products,
financial information, and so forth) safe and secure requires
A legal recruiter stops by Starbucks on her way to her office security controls. The company is committed to providing all
in downtown Chicago and orders her daily Caffè Mocha tall. partners with a clean, safe, and healthy work environment. All
A construction site supervisor pulls into the drive-through line partners share the responsibility to follow all safety rules and
at the Starbucks store in Rancho Cucamonga, California, for practices; to cooperate with officials who enforce those rules
a cinnamon chip scone and Tazo tea. It’s 11 p.m. and, needing and practices; to take necessary steps to protect themselves
a break from studying for her next-day’s management exam, a and other partners; to attend required safety training; and to
student heads to the local Starbucks for a tasty treat—a Rasp- report immediately all accidents, injuries, and unsafe practices
berry Pomegranate Starbucks Refresher. Now she’s ready or conditions. When hired, each partner is provided with a
again to tackle that chapter material on managerial controls. manual that covers safety, security, and health standards and
is trained on the requirements outlined in the manual. In addi-
Every month, an average 75 million customers make tion, managers receive ongoing training about these issues and
purchases at a Starbucks store. The average dollar sale per are expected to keep employees trained and up-to-date on any
transaction differs by city, ranging from $6.87 in New York changes. And at any time, any partner can contact the Partner
City to $8.76 in Boston. These transactions between part- & Asset Protection Department for information and advice.
ners (employees) and customers—the exchange of prod-
ucts for money—are the major source of sales revenue for
Starbucks. Measuring and evaluating the efficiency and ef-
fectiveness of these transactions for both walk-in customers