Module 4 – Control in Workplace

Control can mean a lot of things to different people. In a business setting, it means
guiding the activities, employees, and processes of an organization to reach goals,
prevent errors, and abide by the law. There are various styles, types, and levels of
organizational control. A good manager applies the best combination of these
elements, based on the needs and culture of the company, to successfully run the
organization.

What Does Control Mean in the Business Setting?

Learning Outcomes
 Explain what control means in a business setting.
 Describe the benefits and costs of organizational control.

Control in general is a device or mechanism used to regulate or guide the operation

of a machine, apparatus, or system. Control in a business setting, or organizational
control, involves the processes and procedures that regulate, guide, and protect an
organization. It is one of the four primary managerial functions, along with planning,
organizing, and leading.

One common type of control companies use is a set of financial policies. These policies
may not be communicated to all employees, but they exist for all but the smallest
firms. Controls start with managing cash. For example, controls limit check-writing
authority and the use of company credit cards. For example, a firm may require two
signatures on checks more than $10,000 or have one person to log journal entries and
another person to review the entries. These policies help prevent fraud and errors as
well as monitor whether company goals are being met. In larger companies, each
department manager submits an annual budget and profit-and-loss statements.

The most common style, or approach, of organizational control is top-down control.

With top-down control, decisions are made by high-level executives, and information
flows down to the lower-level employees of the organization.

The three types of organizational control include the familiar feedback, proactive, and
concurrent controls. We’ll talk about these more later, but first, let’s explore some of
the benefits and disadvantages of organizational control.

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Implementing Organizational Control

Organizational control involves developing rules, procedures, or other protocols for

directing the work of employees and processes as well as monitoring the work.
Organizational control is an important function because it helps identify errors and
deviation from standards so that corrective actions can be taken to achieve goals. The
purpose of organizational control is to ensure that a specific function is performed
according to established standards.

Benefits

Organizational control has many varied benefits, including improved communication,

financial stability, increased productivity and efficiency, help in meeting annual goals,
improved morale, legal compliance, improved quality control, and fraud and error
prevention.

Controls help to better define an organization’s objectives so that employees and

resources are focused on them. They safeguard against misuse of resources and
facilitate corrective measures. Having good records means management will better
understand what happened in the past and where change can be effective.

All businesses need controls. Even sole proprietor businesses must keep records for
tax reporting. Public companies are legally required to have extensive controls to
protect stockholders, and good controls help a company to raise funds through stock
and debt issuance.

Employee morale may be higher when workers see that management is paying
attention and knows what it is doing. As an earlier module discussed, better morale
means better productivity. Better controls can mean more freedom and responsibility
for employees. Management is able to step back a little, knowing that the controls will
flag any exceptions.

Toyota has made control a competitive advantage. As an article in the Harvard

Business Review says, “Toyota’s way is to measure everything—even the noise that
car doors make when they open and close as workers perform their final inspections
on newly manufactured automobiles.”[1] After bad publicity over unusual brake issues,
Toyota was again at the top of Consumer Reports’ 2016 reliability report.[2]

Disadvantages

Even the simplest control is an added expense. Some systems can be very expensive,
so management must weigh the cost versus the benefit for each control. Banks spend

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billions on controls, but it is worthwhile for the large banks, because they handle
trillions and their profits are still in the billions.

A control mentality can lead to overstaffing and unsustainable costs for some
businesses. Community banks, for example, feel the burden of new regulations on the
banking industry more heavily than the largest nationwide banks. Research from the
Federal Reserve Bank of Minneapolis, Minnesota, and quoted in the New York Times
“suggests that adding just two members to the compliance department would make
a third of the smallest banks unprofitable.”[3]

A less obvious expense is maintaining the controls. Systems need continuous updating
as the organization changes. If they are not maintained, the controls may become
ineffective.

Controls can become a blind spot for management. Overreliance on controls may lead
to relaxation in supervision and allow manipulation of accounts and assets. Employees
tend to follow the letter of rules, not the intent, so management needs to check in
regularly on how controls are actually operating.

A rigid implementation may lead to a slowdown in the operation of the business. At

Freddie Mac, a financial services company, the new product approval process required
25 signatures and took more than a year. The new opportunities in the market
disappeared before products could be approved.

The wrong controls may expose the firm to more errors and fraud. And employees will
be frustrated if the controls are cumbersome.

Introduction to the Control Process

Controlling activities and behaviors is a dynamic process, a cycle of repeated
corrections. The steps in the control process will be repeated in the course of
production activities. The categories of control, based on the perspective of time,
include feedback, concurrent, and proactive controls. These use past and present
information or future projections to improve an activity. Managers use all of these
controls to manage their business.

The Control Process

Learning Outcomes
 Explain the basic control process.
 Differentiate between feedback, proactive, and concurrent controls.

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The proper performance of the management control function is critical to the success
of an organization. After plans are set in place, management must execute a series of
steps to ensure that the plans are carried out. The steps in the basic control process
can be followed for almost any application, such as improving product quality,
reducing waste, and increasing sales. The basic control process includes the following
steps:

1. Setting performance standards: Managers must translate plans into performance

standards. These performance standards can be in the form of goals, such as revenue
from sales over a period of time. The standards should be attainable, measurable, and
clear.
2. Measuring actual performance: If performance is not measured, it cannot be
ascertained whether standards have been met.
3. Comparing actual performance with standards or goals: Accept or reject the
product or outcome.
4. Analyzing deviations: Managers must determine why standards were not met. This
step also involves determining whether more control is necessary or if the standard
should be changed.
5. Taking corrective action: After the reasons for deviations have been determined,
managers can then develop solutions for issues with meeting the standards and make
changes to processes or behaviors.

Consider a situation in which a fictional company, The XYZ Group, has suffered a
decrease in the profits from its high-end sunglasses due to employee theft. Senior
executives establish a plan to eliminate the occurrence of employee theft. It has been
determined that the items are being stolen from the company warehouse. The
executives establish a goal of zero thefts ($0) within a three-month period (Step 1).
The company currently loses an average of $1,000 per month due to employee theft.

To discourage the undesired behavior, XYZ installed cameras in the warehouse and
placed locks on the cabinets where the most expensive sunglasses are stored. Only
the warehouse managers have keys to these cabinets.

After three months, XYZ managers contact the bookkeeper to get the sales and
inventory figures for the past three-month period (Step 2). The managers then
compare the figures with the previous period, taking into account orders for deliveries,
returns, and defective merchandise (Step 3). It has been determined that the company
lost $200 the first month, $300 the second month, and $200 the third month due to
theft, which is an improvement but short of the goal. Managers then come up with
suggestions for making adjustments to the control system (Step 4).

XYZ senior executives approve of the suggestion to institute a zero-tolerance policy

for employee theft. Now, if there is evidence that an employee has stolen a pair of

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sunglasses, that employee’s job will be terminated. The employee handbook is
updated to include the change, and XYZ executives hold a meeting with all warehouse
employees to communicate the policy change (Step 5).

Timing of Controls

Controls can be categorized according to the time in which a process or activity occurs.
The controls related to time include feedback, proactive, and concurrent controls.
Feedback control concerns the past. Proactive control anticipates future implications.
Concurrent control concerns the present.

Feedback

Feedback occurs after an activity or process is completed. It is reactive. For example,

feedback control would involve evaluating a team’s progress by comparing the
production standard to the actual production output. If the standard or goal is met,
production continues. If not, adjustments can be made to the process or to the
standard.

An example of feedback control is when a sales goal is set, the sales team works to
reach that goal for three months, and at the end of the three-month period, managers
review the results and determine whether the sales goal was achieved. As part of the
process, managers may also implement changes if the goal is not achieved. Three
months after the changes are implemented, managers will review the new results to
see whether the goal was achieved.

The disadvantage of feedback control is that modifications can be made only after a
process has already been completed or an action has taken place. A situation may
have ended before managers are aware of any issues. Therefore, feedback control is
more suited for processes, behaviors, or events that are repeated over time, rather
than those that are not repeated.

Proactive control

Proactive control, also known as preliminary, preventive, or feed-forward control,

involves anticipating trouble, rather than waiting for a poor outcome and reacting
afterward. It is about prevention or intervention. An example of proactive control is
when an engineer performs tests on the braking system of a prototype vehicle before
the vehicle design is moved on to be mass produced.

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Proactive control looks forward to problems that could reasonably occur and devises
methods to prevent the problems. It cannot control unforeseen and unlikely incidents,
such as “acts of God.”

Concurrent control

With concurrent control, monitoring takes place during the process or activity.
Concurrent control may be based on standards, rules, codes, and policies.

One example of concurrent control is fleet tracking. Fleet tracking by GPS allows
managers to monitor company vehicles. Managers can determine when vehicles reach
their destinations and the speed in which they move between destinations. Managers
are able to plan more efficient routes and alert drivers to change routes to avoid heavy
traffic. It also discourages employees from running personal errands during work
hours.

In another example, Keen Media tries to reduce employee inefficiency by monitoring

Internet activity. In accordance with company policy, employees keep a digital record
of their activities during the workday. IT staff can also access employee computers to
determine how much time is being spent on the Internet to conduct personal business
and “surf the Web.”

The following diagram shows the control process. Note that the production process is
central, and the control process surrounds it.

The control process

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Introduction to Levels and Types of Control

In management, there are varying levels of control: strategic (highest level),

operational (mid-level), and tactical (low level). Imagine the president of a company
decides to build a new company headquarters. He enlists the help of the company’s
officers to decide on the location, style of architecture, size, etc. (strategic control).
The project manager helps develop the project schedule and budget (operational
control). The general contractor directs workers, orders materials and equipment for
delivery, and establishes rules to ensure site safety (tactical control).

Control can be objective or normative. Objective control involves elements of the

company that can be objectively measured, such as call volume, profitability, and
inventory efficiency. Normative control means employees learn the values and beliefs
of a company and know what’s right from observing other employees.

Levels and Types of Control

Learning Outcomes
 Differentiate between strategic, operational, and tactical controls.
 Differentiate between top-down, objective, and normative control.
Strategic Control

Managers want to know if the company is headed in the right direction and if current
company trends and changes are keeping them on that right path. To answer this
question requires the implementation of strategic control. Strategic control involves
monitoring a strategy as it is being implemented, evaluating deviations, and making
necessary adjustments.

Strategic control may involve the reassessment of a strategy due to an immediate,

unforeseen event. For example, if a company’s main product is becoming obsolete,
the company must immediately reassess its strategy.

Implementing a strategy often involves a series of activities that occur over a period.
Managers can effectively monitor the progress of a strategy at various milestones, or
intervals, during the period. During this time, managers may be provided information
that helps them determine whether the overall strategy is unfolding as planned.

Strategic control also involves monitoring internal and external events. Multiple
sources of information are needed to monitor events. These sources include
conversations with customers, articles in trade magazines and journals, activity at
trade conferences, and observations of your own or another company’s operations.

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For example, Toyota gives tours of its plants and shares the “Toyota Way” even with
competitors.

The errors associated with strategic control are usually major, such as failing to
anticipate customers’ reaction to a competitor’s new product. BlackBerry had a strong
position in the business cell phone market and did not quickly see that its business
customers were switching to the iPhone. BlackBerry could not recover.

Operational Control

Operational control involves control over intermediate-term operations and processes

but not business strategies. Operational control systems ensure that activities are
consistent with established plans. Mid-level management uses operational controls for
intermediate-term decisions, typically over one to two years. When performance does
not meet standards, managers enforce corrective actions, which may include training,
discipline, motivation, or termination.

Unlike strategic control, operational control focuses more on internal sources of

information and affects smaller units or aspects of the organization, such as production
levels or the choice of equipment. Errors in operational control might mean failing to
complete projects on time. For example, if salespeople are not trained on time, sales
revenue may fall.

Tactical Control

A tactic is a method that meets a specific objective of an overall plan. Tactical control
emphasizes the current operations of an organization. Managers determine what the
various parts of the organization must do for the organization to be successful in the
near future (one year or less).

For example, a marketing strategy for a wholesale bakery might be an e-commerce

solution for targeted customers, such as restaurants. Tactical control may involve
regularly meeting with the marketing team to review results and would involve
creating the steps needed to complete agreed-upon processes. Tactics for the bakery
strategy may include the following:

 building a list of local restaurants, hotels, and grocery stores

 outlining how the bakery website can be used to receive orders
 personally visiting local executive chefs for follow-up
 monitoring the response to determine whether the sales target is met

Strategic control always comes first, followed by operations, and then tactics. For
example, a strategy to be environmentally responsible could lead to an operations

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decision to seek Leadership in Energy and Environmental Design (LEED) certification.
This is a program that awards points toward certification for initiatives in energy
efficiency, such as installing timed thermostats, using occupant sensors to control
lighting use, and using green cleaning products. The tactical decision is deciding which
energy-efficient equipment to purchase. At each level, controls ask if the decisions
serve the purpose: actual energy savings, the LEED certification, and acting
responsibly for the environment.

Top-Down Controls

Top-down controls are also known as bureaucratic controls. Top-down control means
the use of rules, regulations, and formal authority to guide performance. It includes
things such as budgets, statistical reports, and performance appraisals to regulate
behavior and results. Top-down control is the most common process, where senior
executives make decisions and establish policies and procedures that implement the
decisions. Lower-level managers may make recommendations for their departments,
but they follow the lead of senior managers.

Advantages

With top-down control, employees can spend their time performing their job duties
instead of discussing the direction of the company and offering input into the
development of new policies. Senior executives save time by not explaining why some
ideas are used and not others. Heavily regulated businesses may find this approach
to be most beneficial.

Disadvantages

The top-down approach has its drawbacks. The lower levels of a company are in touch
with customers and recognize new trends or new competition earlier than senior

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management. A heavy-handed top-down approach may discourage employees from
sharing information or ideas up the chain of command.

Objective and Normative Control

Objective control is based on facts that can be measured and tested. Rather than
create a rule that may be ambiguous, objective controls measure observable behavior
or output. As an example of a behavioral control, let’s say that a store wants
employees to be friendly to customers. It could make that a rule as stated, but it may
not be clear what that means and is not measurable. To make that goal into an
objective control, it might specify, “Smile and greet anyone within 10 feet. Answer
customer questions.”

Output control is another form of objective control. Some companies, such as Yahoo,
have relaxed rules about work hours and focus on output. Because programmers’
output can be measured, this has worked well, whether an employee works the
traditional 9 a.m. to 5 p.m. or starts at noon and works until 8 p.m.

Normative controls govern behavior through accepted patterns of action rather than
written policies and procedures. Normative control uses values and beliefs called
norms, which are established standards. For example, within a team, informal rules
make team members aware of their responsibilities. The ways in which team members
interact are developed over time. Team members come to an informal agreement as
to how responsibilities will be divided, often based on the perceived strengths of each
team member. These unwritten rules are normative controls and can powerfully
influence behavior.

Normative control reflects the organization’s culture, the shared values among the
members of the organization. Every organization has norms of behavior that workers
need to learn. One company may expect employees to take the initiative to solve
problems. Another may require a manager’s approval before employees discuss
changes outside the department. Some topics may be off-base, while others are freely
discussed. Companies will have a mix of controls—top-down, objective, and
normative.

Introduction to the Need for a Balanced Scorecard

Just as humans have different systems that interact to make up a person’s overall
health, organizations have many different components that contribute to
organizational health. Though we tend to focus on symptoms to know whether we’re
healthy or not, it’s a good idea to have regular physical exams to make sure we’re not
missing any health red flags. In the case of an organization, this is where a balanced

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scorecard comes in. A balanced scorecard is the health checklist, monitoring and
measuring the health of the company.

The Need for a Balanced Scorecard

Learning Outcomes
 Identify the four typical components of the balanced scorecard.
 Explain the need for a balanced scorecard.

A balanced scorecard is a strategic planning and performance management concept

developed by Dr. Robert Kaplan and Dr. David Norton, published in a Harvard Business
Review article titled “The Balanced Scorecard—Measures That Drive Performance.
What differentiates the balanced scorecard concept is the inclusion of non-financial
operational data in addition to the customary financial metrics. In introducing their
balanced scorecard concept, Kaplan and Norton sought to identify measures that give
managers a “fast but comprehensive” view of the business. As they put it: “The
balanced scorecard includes financial measures that tell the results of actions already
taken. And it complements the financial measures with operational measures on
customer satisfaction, internal processes, and the organization’s innovation and
improvement activities—operational measures that are the drivers of future financial
performance.” The authors suggest thinking of the balanced scorecard as the dials
and indicators in an airplane cockpit, noting that in business, as in flying, reliance on
only one instrument can be fatal.

Watch the following video for Dr. Kaplan’s findings regarding why two former Marine
CEOs adopted the balanced scorecard framework. Short version: it is highly effective
in indoctrinating the firm’s mission and objectives. That is, it’s a framework that
ensures that employees know what they are trying to accomplish rather than simply
fixating on what it is they do. This is particularly important since, as discussed
previously, the actual operating environment generally requires adaptability and a
clear understanding of “success.”

Balanced Scorecard Components

The balanced scorecard analyzes a business from four perspectives—customer,

internal business processes, innovation and learning and financial. To develop these
perspectives, management asks four key questions:

1. Customer Perspective: How do customers see us?

2. Internal Business Perspective: What must we excel at?
3. Innovation and Learning Perspective: [How] can we continue to improve and
create value?

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 4. Financial Perspective: How do we look to shareholders?

To implement a balanced scorecard, organizations articulate goals for each

perspective and translate them into specific measures. Note, however, that this is not
done in the abstract. Adoption of a balanced scorecard approach to strategic and
performance management starts with an analysis of an organization’s current internal
and external environments. This analysis is conducted with reference to the
organization’s mission, vision and values and other strategic planning elements. Thus,
a BSC is the plan at the executional level that supports achievement of an
organization’s mission. Let’s drill down into the four perspectives.

Customer Perspective

In order to remain viable businesses, organizations need to deliver value to their

customers. Indeed, a recent Knowledge@Wharton article noted that “customer
experience is now Job #1 for CEOs.” To elaborate: “Job No. 1 for CEOs today is
ensuring the company delivers a compelling customer experience.”

To develop the customer perspective component of a BSC, managers must translate

their general statement of commitment—i.e., Ford’s Quality is Job 1—into specific
measures that reflect what matters to their customers. According to Kaplan and Norton
“customers’ concerns tend to fall into four categories: time, quality, performance and
service, and cost.” Measures of time might be the elapsed time between placing and
delivery of an order. For new products, time might be the number of weeks or months
it takes to go from concept to market availability. Measures of quality include the
number of defects as judged by the customer.

To develop this view, Kaplan and Norton recommend a combination of internal and
external research. For example, a company would have the data required to measure
a goal of reducing delivery time. However, to evaluate competitive standing or market
perception of quality or performance requires a company to survey customers. It’s
worth noting that customers often define factors such as “on time delivery” differently.
Compiling the data for major customers will allow the organization to make a
determination on what the target should be.

Internal Business Perspective

As stated above, the prompt to identify a company’s internal business goals is “what
must we excel at?” That is, what does the company need to do in order to meet
customer and stakeholder (financial) expectations? This view focuses on internal
processes, human resource capabilities and productivity and product and service
quality. In detailing this component, Kaplan and Norton advise managers to identify

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and leverage the company’s core competencies and to focus on processes and
competencies that differentiate the company from its competitors.

Examples of internal business measures include product, service or functional

efficiency or expertise. Think Nordstrom’s for service, Apple for design capabilities and
Proctor & Gamble’s marketing and distribution expertise.

To achieve internal business measures, managers must ensure that the goals are
clearly communicated and understood by the employees who are responsible for the
processes, projects or initiatives. The importance of communication—of employees
internalizing and focusing on specific goals—is the point that the CEO’s Dr. Kaplan
spoke to emphasize in the video above. Effective operational information systems—
collecting and reporting relevant data—are critical to be able to identify and trouble-
shoot variances from target in this view. The best case scenario is for scorecard
information to be reported in a timely manner (based on organizational dynamics) and
for the measure to be linked to relevant manager and employee evaluations.

Innovation and Learning Perspective

The Customer and Internal Processes perspectives discussed above identify what an
organization needs to accomplish from a competitive standpoint based on the current
situation. However, the larger operating environment is dynamic and businesses need
to continuously adapt or risk obsolescence.

The innovation and learning perspective (also referred to as learning and growth or
organizational capacity) is the future view, seeking to answer the question “How can
we continue to improve and create value?” According to Kaplan and Norton, “A
company’s ability to innovate, improve, and learn ties directly to the company’s value.
That is, only through the ability to launch new products, create more value for
customers, and improve operating efficiencies continually can a company penetrate
new markets and increase revenues and margins—in short, grow and thereby increase
shareholder value.”

Measures for this category include the percent of sales from new products (innovation)
and continuous improvement of internal business processes. An example of the latter
is industrial manufacturing company Milliken & Co.’s “ten-four” continuous
improvement program, a challenge to reduce quality issues—process issues, product
defects, late deliveries and waste—by a factor of ten over the next four years.

Financial Perspective

The financial perspective is the classic numbers—some would say the “bottom line”
view. Ultimately, this view shows whether the company’s strategy and execution are

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successful. Typical financial goals include profit, operating costs, target market
revenue and sales growth. Kaplan and Norton cite a company that stated its financial
goals in terms we can all understand: to survive, measured by cash flow, to succeed,
measured by quarterly sales growth, and to prosper, measured by an increase in
market share and return on equity. The authors note that although there is significant
criticism of financial measures due to their focus on past performance and inability to
account for value-creating initiatives, “the hard truth is that if improved performance
fails to be reflected in the bottom line, executives should reexamine the basic
assumptions of their strategy and mission.”

The authors conclude with a caveat: a balanced scorecard—specifically, the measures

of customer satisfaction, internal business performance, and innovation and
improvement—are based on a specific company’s interpretation of their business and
operating environment. However, that view may not be accurate.

To quote: “An excellent set of balanced scorecard measures does not guarantee a
winning strategy. The balanced scorecard can only translate a company’s strategy into
specific measurable objectives. A failure to convert improved operational performance,
as measured in the scorecard, into improved financial performance should send
executives back to their drawing boards to rethink the company’s strategy or its
implementation.”

Introduction to Financial and Nonfinancial Controls

Companies need both financial and nonfinancial controls to achieve goals, remain
competitive in industry, and be successful. Financial controls include budgets and
various financial ratios. These evaluate the performance of an organization. One
important nonfinancial control is quality management.

Financial and Nonfinancial Controls

Learning Outcomes
 Explain the use of budgets to both control and delegate authority.
 Explain the use of financial ratios (comparisons) as a control method.
 Explain the benefits of quality management.
 Explain the costs of quality management.

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Budgetary Control

A budget is a common type of financial control.

The standard financial reports are the statement of cash flows, the balance sheet, the
income statement, financial ratios, and budgets. For most large companies, the first
three are required by law. Stockholders need to know how their company is doing.
Financial ratios help in investing decisions and in managing the company. They are
common but not legally required. Budgets are internal plans, which the company does
not typically disclose.

A budget sets a limit on spending and thus is a method of control used to help
organizations achieve goals. The budget may be single number setting a manager’s
spending limit or a plan with limits for detailed items. Departments and the whole
organization will develop budgets both for planning and control.

To follow a budget requires discipline. When an expense or desirable pops up,

managers must prioritize purchases to stay within budget. In this sense, budgets help
control spending and ensure that goals are reached by allocating money to the places
where it is needed. Without this planned allocation of resources, there is the risk of
spending too much money in one or a few areas, thereby not having enough for other
areas.

Budgets can also be used to delegate authority. When an executive assigns a task to
a subordinate, the executive needs to release the funds in order for the employee to
complete the task. In releasing the funds with an assigned budget, the executive
delegates the authority to make decisions regarding the proper use of the funds. The
executive can use the budget as a means of monitoring and measuring the

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performance of the subordinate. With this means of control, the executive may feel
comfortable with delegating authority.

Financial Ratios

When people think of management, they often visualize a person giving orders, hiring
employees, checking the work of employees, establishing policies, and administering
discipline. However, watching the numbers is also an important activity in
management. The numbers can be converted to financial ratios, which allow easy
comparisons.

Managers use ratios to analyze elements such as debt, equity, efficiency, and activity.
For example, a debt ratio compares an organization’s debt to its assets. It is calculated
as total liabilities divided by total assets. The higher the ratio, the more leveraged the
company is. If a company has a high debt ratio (relative to its industry), the company
has to spend a significant portion of its cash flow on bills.

The key to understanding ratios is comparing them to relevant benchmarks. The debt
ratio for a manufacturing company might typically be 50 percent, meaning debt funds
half of the assets. In a bank the typical debt ratio is around 92 percent. The relevant
benchmark for a bank is the banking industry average or another bank, not a
manufacturer.

Analyzing financial ratios can help managers determine the financial health of the
company. Knowing the state of the company in various areas (e.g., inventory, equity,
and debt) allows managers to make the changes needed to course-correct and to
reach goals.

Quality Management

Have you ever bought a product that was defective? Have you ever been served by a
company representative in such a way that it made you want to tell people what a
great company it is or give the company five-star ratings on social media? In both
cases, quality management was behind the scenes of your customer experience.

Quality management involves controlling, monitoring, and modifying tasks to maintain

a desired level of quality or excellence. At the core of quality management is customer
satisfaction. Companies pursue the level of quality for their products and services that
customers expect and desire. Managers strive to know what customers want, and they
manage operations in such a way as to fulfill those desires. Total Quality Management
(TQM) and Six Sigma are well-known programs for managing quality.

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Benefits

Quality management helps companies please their customers. When customers are
pleased, a company can thrive. A simple example of quality management is part
inspection. When a part comes down the production line and is complete, an inspector,
or quality-assurance technician, checks and tests the part to ensure that it meets
quality standards. If it does not, the part is discarded. Thus, quality management helps
to ensure that customers are not disappointed so that a company can maintain a good
reputation, gain a competitive edge, and ultimately make a profit.

By reducing defects, companies save both time and money. There are fewer returns
from customers, and customers are more loyal, reducing the need and cost of
acquiring new customers. By catching mistakes early, the production process is not
tied up with damaged materials. The final output of acceptable goods increases.

The Systems Sciences Institute at IBM has reported that the cost to fix an error found
during beta testing was 15 times as much as one uncovered during design. If the
same error was released, the cost to fix the error was up to 100 times more during
the maintenance period.[1]

Costs

Regulations are a type of control that society puts on companies. For some large
banks, the cost of complying with regulations averages about $12 billion per
year.[2] That is a hefty control cost until you consider the cost of control failure.
Financial losses in the Great Recession were $10 trillion to $12 trillion![3]

A focus on customers often drives managers to great lengths to please customers. In

doing so, quality management can become expensive. Typically, companies need to
purchase new software and equipment, hire and train employees, conduct studies,
and consult with experts to improve the quality of its products and services. These
activities add to the cost of doing business. Management must weigh the costs and
benefits.

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