Control Process

Setting Objectives and Standards

A company’s standards define its practices, while its objectives define what actions the company needs to take.

Learning Objectives

Illustrate how objectives and standards define business practices and determine what actions an organization will take

Key Takeaways

Key Points

  • When creating standards, it is important to consider a company’s values, vision, and mission. Standards must reflect these perspectives internally and externally.
  • When creating a set of objectives, it is important for the organization to complete a self-evaluation. A SWOT analysis is one example of this.
  • One model of organizing objectives uses hierarchies; Top Rank Objective (TRO), Second Rank Objective, Third Rank Objective, etc. These emphasize critical success factors.
  • Managers must ensure goal congruency, or the compatibility of different goals with each other. Does goal A appear compatible with goal B? Do they fit together to form a unified strategy ?

Key Terms

  • SWOT Analysis: A SWOT analysis (strengths, weaknesses, opportunities, threats) is an exercise undertaken by organizations to understand their current status and assess how to improve.
  • standards: Any norm, convention, or requirement.
  • objectives: The goals of an organization.

Organizational standards and objectives are important elements in any business plan because they guide managerial decision-making. To create reachable objectives, an organization needs to understand where it is, where it wants to go, and who it is competing against. A company’s standards define how it should act, while its objectives determine what actions it will take. Combining standards and objectives allows management to create a business strategy.

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Business Objectives: A company’s objectives help determine what inputs and outputs are needed to achieve company goals.

Standards

Organizations are like individuals: they have values, beliefs, and goals. They want to promote a particular image to stakeholders, otherwise known as a brand. Before a company can create standards, it is important for management to clarify the mission, values, and vision. If any of these are not complete or correlative, management must redefine and re-think what the company stands for.

Once mission, values, and vision are established, the organization must set down standards (both operational and value-driven). These standards need to be enforceable and teachable and must be communicated with clarity and simplicity. It is important that employees understand the standards they are required to meet and the consequences of failing to live up to these expectations. Without employee buy-in the standards will be devoid of meaning and applicability, so management should focus a great deal of time and effort instilling standards through communication and observation.

Once standards are outlined and met by management and their subordinates, the organization can begin to apply this operational paradigm to a series of short-term and long-term objectives.

Objectives

A goal (or objective) is the desired result that an organization envisions, plans, and makes a commitment to achieve. This can be a personal or organizational end-point of development. Organizationally, goal management consists of recognizing or inferring goals for individual team members, abandoning outdated goals, identifying and resolving conflicting goals, and prioritizing goals for optimal team-collaboration and effective operations.

Self-evaluation

When creating a set of objectives, it is important for the organization to complete a self-evaluation, usually through tools like SWOT analysis (strength, weaknesses, opportunities, threats). A SWOT analysis helps the company understand where it can achieve competitive advantage by pinpointing what it does well (strengths) and where the opportunities lie with those actions. Organizations must also be aware of what they have sacrificed to achieve their goals (i.e., weaknesses), and where threats in the marketplace may reduce their ability to create profitability (threats). Objectives must take competitive advantage into account; otherwise, the organization lacks a value-added proposition.

Timeline

Once the company has a good understanding of its strengths and weaknesses, management is able to create a timeline of reachable objectives. It is important to create milestones for these objectives and identify which departments within the organization will be responsible for each one. Accountability and time-sensitivity should be explicitly stated and rigorously followed. The next question is how to set these and how to identify and delineate the importance of one objective relative to another.

Objective Setting Approaches and Considerations

One model of organizing objectives uses hierarchies. The items listed may be organized in a hierarchy of means and ends and numbered as follows: Top Rank Objective (TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, the objective in a lower rank answers the question “How? ” and the objective in a higher rank answers the question “Why?” The exception is the Top Rank Objective (TRO): there is no answer to the “Why?” question. That is how the TRO is defined.

People typically pursue several goals at once. Goal congruency refers to how well the goals complement each other. Does goal A appear compatible with goal B? Do they fit together to form a unified strategy? Goal hierarchy consists of the nesting of one or more goals within other, compatible goals.

Another useful approach recommends having short-term goals, medium-term goals, and long-term goals. In this model, one can expect to attain short-term goals fairly easily: they stand just slightly out of reach. At the other extreme, long-term goals appear very difficult–almost impossible to attain. Using one goal as a stepping stone to another involves goal sequencing: achieve the easy short-term goals, then step up to the medium-term and then the long-term goals. Goal sequencing can create a goal stairway.

Measuring Organizational Performance

Managers must consistently update performance reports to monitor progress and measure operational success.

Learning Objectives

Apply performance measurement tools and evaluation processes to optimize operations

Key Takeaways

Key Points

  • Measuring performance is a vital part of assessing the value of employee and management activities.
  • Performance should be measured based on an employee’s overall impact, cost efficiency, effectiveness, and ability to implement best practices.
  • Organizational performance based on internal objectives and external competition should be measured using the metrics of margins, growth, market share, and customer satisfaction.

Key Terms

  • performance: The act of carrying into execution or action; achievement; accomplishment.
  • benchmark: A standard by which something is evaluated or measured.
  • best practices: A method or technique that has consistently shown results superior to those achieved with other means and so therefore is used as a benchmark.

Managers must do more than simply set objectives. They must consistently monitor operations to ensure feasibility and provide guidance to get failing operations back on track. Tools for this kind of management include budgeting, determining effective management strategies, finding areas that need improvement, and determining potential areas for collaboration.

Measuring performance is a vital part of assessing the value of employee and management activities. Performance measurement provides useful insights for conducting annual reviews of managers and employees and is also important for understanding how a company is performing compared with its competitors. This requires two types of measurement: individual (employee) evaluations and organization evaluations.

Employee Evaluations

Employee performance evaluations should be done on a quarterly, semi-annual, or annual basis. This ensures that everyone in the organization understands when the next evaluation will take place, gives the company regular measures of performance, and provides opportunities to take corrective action in a timely manner (if necessary).

Measurement Tools

There are many different performance measurement tools available, such as organizational and employee performance evaluations. Some are included as part of enterprise systems and some are standalone programs. Developing performance metrics usually follows a process of:

  1. Establishing critical processes/customer requirements
  2. Identifying specific, quantifiable outputs of work
  3. Establishing targets against which results can be scored

Some useful attributes to consider for assessing employee and management quality include:

  • Effectiveness: Determined by outcomes: did the organization produce the required results?
  • Cost-effective: When outcomes are divided by input, how efficient was the organization’s performance?
  • Impact: What value did the organization provide?
  • Best practices: In the context of evaluating internal operations (comparing core processes to effectiveness and efficiency standards), how does current performance compare to benchmarks of past performance, performance in the industry, and political expectations?

Organizational Evaluations

For organizational information, the focus is on the outcomes of the agency’s performance, but input, output, process, and benchmark factors are important as well in creating a comparative framework for analysis. Outcomes should be directly related to the public purpose of the organization.

Measurement Tools

While there are a wide variety of perspectives on controlling performance, each more or less appropriate depending on the objectives and industry of the organization, a few key metrics exist.

  • Margins – Organizations setting objectives must carefully consider expected margins and ensure that they stay in the black (i.e., do not incur losses). Measuring profitability margins indicates the cents-per-dollar the organization makes by investing in operations.
  • Growth – Raw revenue growth is also important, as it indicates expansion and potential economies of scale and scope.
  • Market share – Generally described as a percentage, this indicates success relative to the competition. Higher market share means a deeper brand awareness.
  • Customer satisfaction and/or retention – It is much cheaper to keep existing customers than to find new ones. Customer retention rates underline brand loyalty and product quality.

Analyzing Organizational Performance

When comparing results it is important for an organization to look inward against historical trends and outward against competitive trends.

Learning Objectives

Employ benchmarks and extensive research initiatives to effectively derive standards and expected results in the control process

Key Takeaways

Key Points

  • Compare results against a history of similar trends to establish a basis for the analysis.
  • If the performance measurement is for a new initiative, management should conduct research to determine if there is an industry standard already in place for the process.
  • If the results far exceeded expectations, than the goals or standards may be set too low (and vice versa). Both process and strategy must be considered in charting a new course and future objectives.

Key Terms

  • problem solving: Using generic or ad hoc methods, in an orderly manner, to resolve issues.

When comparing results, it is important for an organization to look inward against historical trends and outward against competitive trends. When comparing standards, it is important to make sure that the people charged with implementation understand them and consider them achievable. Measuring the long-term success or failure of objectives is in part the process of evaluating the set of standards governing the operation. Using this benchmark, management can reconsider objectives in the context of standards set, ensuring that they are both parallel and effective.

Historical Trends

Internal Data

Compare results against a history of similar trends to establish a basis for the analysis. Accountants are tasked with tracking organizational accounts for legal and/or shareholder purposes and tracking spending for operational assessment. Accountants’ records can provide a historical backdrop to outline what the organization has accomplished in the past. This applies the benefits of hindsight to current results and future projections.

External Data

It is also important to conduct competitive research to determine who else in the market is performing the same processes. If the performance measurement is for a new initiative, management should conduct research to determine if there is an industry standard already in place for the process. If this is a new technology or research area, however, then results should be compared with financial objectives or quality standards instituted by the organization.

There are many metrics and methods for identifying industry standards, particularly for companies operating in the public sector (i.e., publicly traded). Public companies must release annual and quarterly reports, which serve as useful benchmarks for incumbents in the same industry (or new entrants). Overall industry metrics and averages are also available, though for specific applications of research the organization may want to hire or contract analysts for external data collection.

Results

If results aren’t what the company expected or are fall below expected norms, it is important to determine the root cause. It may be that the objectives weren’t realistic, or that more resources are needed to meet goals. Outside factors might have contributed to poor performance. The internal and external information above will help pinpoint the root cause. Once it is determined, corrective action is necessary to help the measured process meet expectations.

If the results far exceeded expectations, the goals or standards may be set too low. The process should be reexamined and the objectives should be increased in order to make sure the company is competitive in its market. Competitive analysis is often helpful in setting realistic but challenging goals for management, employees, or production.

Taking Corrective Action

Taking corrective action requires identifying the problem and implementing a potential solution.

Learning Objectives

Model the problem-solving process of identifying contributing factors, taking corrective action, and assessing the effectiveness of a solution

Key Takeaways

Key Points

  • Managers need to understand the contributing factors of a problem and how it impacts key processes; they must then figure out a workable solution.
  • Step one in the problem-solving process is identifying the problem, which can be hard to distinguish from symptoms of the problem.
  • Once the problem is identified, the manager must decide what corrective action to take. In many ways, identifying and solving a problem (the control process) is a process, not a silver bullet.
  • Organizations may decide to discuss a problem and potential solutions with stakeholders.

Key Terms

  • dichotomies: Two elements, often mutually exclusive, that stand in juxtaposition to one another.
  • tacit: Not derived from formal principles of reasoning; based on induction rather than deduction.

Taking corrective action is one of the three essential elements of the control process. If result of the control process don’t meet company standards, then it needs to be revamped to meet organizational goals.

Managers are Problem Solvers

One key aspect of taking corrective action is problem-solving. Managers need to understand the contributing factors of a problem and how it impacts key processes; they must then figure out a workable solution. Once the solution is plotted, it is important to determine how best to implement it. This problem-solving process is the central consideration for effective corrective action.

Identify the Problem

Step one in the problem-solving process is identifying the problem, which can be hard to distinguish from symptoms of the problem: it can be easy to mistake repercussions of a problem for the problem itself. Gathering information and measuring each process carefully is prerequisite to pinpointing the problem and taking the proper corrective action.

Common Mistakes

Attempts at corrective action are often unsuccessful because of failures in the problem-solving process, like not having enough information to isolate the real problem, or a decision maker who has a stake in the process and may not want to admit that their department made an error. Another reason why a decision-making process may result in an incorrect solution is that the decision-maker was never properly trained to analyze a problem.

Outline Corrective Action Method

Once the problem is identified, and a method of corrective action is determined, it needs to be implemented as quickly as possible. A map of checkpoints and deadlines, assigned to individuals in a clear and concise manner, facilitates prompt implementation. In many ways, the control process must also be a process. Its steps can vary greatly depending on the issue being addressed, but in all cases it should be clear how the corrective actions will lead to the desired results.

Next, schedule an analysis of the effectiveness of the solution. This way if the corrective action doesn’t create the expected results, further action can be taken before the organization falls even further behind in meeting its goals. Organizations may decide to discuss a problem and potential solutions with stakeholders. It is useful to have some contingency plans in place, as employees, customers, or vendors may have unique perspectives on the problem that management lacks that can lead to a more effective solution.