9-4-3 Output Controls and Measurement

output controls and measurement

involves establishing specific goals on given metrics and then measuring to what extent these goals are being achieved at certain time intervals

Another aspect of organizational control is output and measurement. Output controls and measurement involve establishing specific goals on given metrics and then measuring to what extent these goals are being achieved at certain time intervals (e.g., quarterly, annually). There are several areas where output controls and measurement are put into practice, including profits, growth, productivity market share, quality control, and corporate social responsibility. Let’s examine each of these areas.

9-4-3a Profits Financial profits and specific financial goals are one kind of output control and measurement used by global businesses. For example, Smithfield Foods Corporation, the world’s largest pork producer, historically set the clear organizational goal of getting 10 cents profit for each pound sold of its processed pork products like Armour smoked bacon. The company’s CEO C. Larry Pope coined the phrase “[i]t’s time for the dime” and put bumper stickers with the slogan everywhere in the organization. Smithfield CEO Pope once stated that because his industry doesn’t “have a lot of Harvard people,” it’s important to keep the profitability message “simple and deliverable.”9

While the Smithfield Foods “it’s time for the dime” goal applied to all of the organization’s processed pork sales, it did not apply to its sale of whole pigs and other nonprocessed products, especially in China. With Chinese citizens consuming about one-half of the world’s pork, Smithfield Foods Corporation back in 2009 felt compelled to enter the Chinese market. That said, when Smithfield entered China it adopted substantially different output control metrics.

9-4-3b Growth When Smithfield Food started selling its products in China, it was not looking for immediate “time for the dime” profits. Instead, it was thinking ahead, hoping that its Chinese Foray could help the company and its stock share price grow/“five or ten years” down the road.10 Indeed, the positive impact on Smithfield in this regard came even more quickly, with Shuanghi International, China’s largest meat company, agreeing on May 29, 2013, to buy Smithfield for $34 per share in cash—a 31 percent premium to the company’s previous stock price. The merge also created one of the largest pork enterprises in the world.11

Another company focused on growth is Las Vega’s hotelier MGM Mirage. In a huge gamble (pun intended), MGM Mirage recently spent $8.5 billion on a new CityCenter Resort that adds more than 4,800 new rooms to a hotel room market that some argue is already saturated. The new venture leaves MGM Mirage with around $12 billion in debt—that’s billion, not million. Critics caution that MGM’s development of the huge CityCenter project is simply a long-term wager by the company on the future of Sin City. It is measuring its current output not on how financially profitable it is, but on how much successful growth it is accomplishing. In gamblers’ parlance, MGM Mirage is doubling-down on Vegas!12

As the Smithfield and MGM examples demonstrate, growth is an important control metric and may be a particularly important issue for shareholders hoping that the value of their stock holdings will appreciate over time. Global businesses are constantly examining whether their business is growing or not. In certain business contexts, if a business is not successfully growing, it may end up dying. Thus, measuring and controlling effective growth can be extremely important in today’s global business environment.

9-4-3c Productivity Another output control measure frequently used by global businesses is productivity or efficiency. In the banking industry, for example, a given bank’s “efficiency ratio” (i.e., how little expense or overhead is needed to produce a given amount of income) is a closely monitored metric. If one bank can achieve a profit of $2 million per year with 90 employees and another bank needs to employ 200 employees to achieve the same level of profits, the first bank’s employees are arguably being more productive or efficient than the second. This may signal that the first bank is a better run organization.

Technology continues to play a very important role in increasing employee and general corporate productivity. Just think to what extent computers and phone answering machines have made workers more productive and efficient. Before phone answering systems, for example, employees had to be hired specifically to answer phones and take phone messages. Moreover, sometimes written phone messages got lost or misplaced. Today’s phone answering systems often keep permanent records of calls. In sum, global businesses that put a strong emphasis on productivity are also likely to be willing to invest heavily in the technological advances necessary to increase employee and other corporate productivity.

9-4-3d Market Share The key output metric for some global businesses is market share, or the percentage of the business in a certain market that is captured by a product or service the organization provides. Market share may be an independent business goal, apart from growth. For example, Smithfield Foods, through its merger with Shuanghi International, almost immediately achieved a massive share of the Chinese pork market.

One company that has traditionally put a great deal of emphasis on attaining market share goals is Google Corporation. Indeed, in its early years, Google was so intent on capturing search engine market share that it really didn’t care about making any profits. Google’s efforts in this regard (in contrast to many other start-up Internet companies), though, have clearly paid off. Today it has over a 66 percent share of the search engine market in the United States and close to an astounding 70 percent share worldwide. In this regard, Google has clearly left competitors like Microsoft and Yahoo in the dust.13

There is, however, one very important concern that global businesses need to keep in mind when establishing high market share output control measurements: antitrust law. As discussed in Chapter 6, antitrust law is concerned about anticompetitive concentrations of business power (e.g., monopoly or oligopoly power) and very high business market shares can be one indicator of such power. Indeed, because of its extraordinary success in capturing market share, the Google Corporation has in recent years been the subject of various U.S. Department of Justice and Federal Trade Commission antitrust investigations. So, if a global company decides to make market share an important output measure, it’s very important for that company’s lawyers to provide it with a clear understanding of the potential antitrust implications of taking that approach.

Annette Shaff/Shutterstock.com

S tive C e SP al Per C thi e

McDonald’s Liability for Its U.S. Franchisees

Many large companies, especially in the retail food industry, franchise their operations. Franchising essentially involves giving a license to another business to sell the franchiser’s products. For a fee, a franchisee acquires the rights to the name, logo, products, national advertising, etc. of the franchising company. The McDonald’s Corporation is a major U.S. franchiser, with approximately 90 percent of its 14,000 U.S. restaurants currently operating as franchises. Put another way, only about 1,400 of the McDonald’s restaurants in the United States are company-owned and completely company-controlled; the rest are owned by small business owners and operated as McDonald’s franchises. Recently, though, the U.S. National Labor Relations Board (NLRB) has held that the parent McDonald’s Corporation “engages in sufficient control over its franchisees,” that it should be considered a “joint employer” with them with respect to labor practices. In essence, the NLRB is stating that the McDonald’s parent company should be held responsible for labor relations practices and violations at all its 14,000 U.S. restaurants, not just the 1,400 or so restaurants it directly owns. McDonald’s Corporation is fighting this assertion by the NLRB, arguing that its franchises are separately owned and controlled businesses and that its control over them centers mainly on food quality advertising and related issues.

Questions:

1) Why do large restaurant chains like McDonald’s,

Kentucky Fried Chicken, and Dunkin Donuts franchise so many of their U.S. restaurants? 2) Why do labor unions and employees want to be able to hold the McDonald’s parent corporation liable/responsible for restaurant labor and employment practices/violations as opposed to just the local franchise owner of the given

McDonald’s restaurant?

Sources: U.S. National Labor Relations Board Press Releases, Office of General Counsel, July 29, 2014 and December 19, 2014, www.NLRB.gov; Melanie Trottman and Julie Jargon, “Joint Employer’ at Its Franchisees,” Wall Street Journal, www.wsj.com, December 19, 2014.

9-4-3e Quality/Six Sigma Initiatives Many global businesses put a very strong emphasis on quality and then seek to measure and control for this output. Quality may apply to product, customer service, or both. For example, and as noted earlier in the chapter, the Starbucks Corporation cares a lot about the quality of its coffee and the cups of coffee it sells to the general public around the globe.

One interesting type of quality control function that has received a good deal of attention in recent years is that of six sigma initiatives. Technically speaking, these are organizational initiatives that seek to limit defects or problems to 3.4 per million. Statistically, the term “sigma” measures how far a given problem deviates from a given norm, and a six sigma procedure is one that barely deviates from perfection.

Let’s say, for example, that a major international airline handles three million pieces of passenger luggage per year and has about 50,000 pieces of lost or temporarily misplaced luggage per year. It could adopt quality control measures that reduce lost–misplaced luggage to only about 20,000 pieces per year, but the airline is not happy with this—it wants to do more. An effective six sigma program would reduce the number of lost or misplaced pieces at the international airline to about ten per year! Is this a realistic goal? And if it can’t be achieved, what are some reasonable alternatives (e.g., a successful initiative that would reduce lost or misplaced luggage at the global airline to about 2,000 pieces per year)?

9-4-3f Corporate Social Responsibility As discussed earlier in the chapter, some global businesses take more of a “stakeholder” approach to strategy formulation, giving back the communities where they do business is an important output they may want to measure and control. For such companies, corporate social responsibility (CSR) is an important output control. Google Corporation’s corporate motto is “Don’t be Evil,” and the company has committed literally hundreds of millions of dollars from both its initial public stock