Controlling is defined as the process of analyzing whether actions are producing desired results. To control means to check and ensure that each activity is performed in a planned manner. As a function of management, the controlling takes necessary preventive and corrective actions which ensure that the resources are being effectively utilized, to accomplish the goals.
“Control is simply the process through which managers assure that activities confirm to planned activities.” In planning, the fundamental goals and methods for attaining these are established, while controlling measures these goals and plans in time to take corrective action.
Learn about: 1. Meaning and Definition of Controlling in Management 2. Characteristics of Controlling in Management 3. Nature 4. Areas 5. Types 6. Important Aspects 7. Steps 8. Reasons of Deviations 9. Purposes
10. Role of Information System 11. Behaviour Implications 12. Causes of Resistance 13. Tools 14. Techniques 15. Modern Management Control Techniques 16. Planning and Controlling 17. Advantages 18. Limitations.
Controlling in Management: Meaning, Definitions, Types, Steps, Process, Tools, Techniques, Advantages and Other Details
Controlling in Management – Meaning and Definitions
Controlling is the process of ensuring that the activities in an organization are performed as per the plans. Controlling also ensures that an organization’s resources are being used effectively and efficiently for the achievement of predetermined goals.
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Controlling can be defined as comparison of actual performance with the planned performance.
The controlling function find out how far actual performance deviates from standards, analyses the causes of such deviations and attempts to take corrective actions based on the same.
Earnest Dale, “control envisages a system that not only provides a historical record of what has happened to the business as a whole but, pinpoints the reasons why it has happened and provides data that enables the chief executive on the departmental head to take corrective steps if he finds he is on the wrong track.”
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E. F. L. Brech, “Control – checking current performance against pre-determined standards contained in the plans, with a view to ensure adequate progress and satisfactory performance, also recording the experience gained from the working of these plans as a guide to possible operations.”
Billy E. Goetz, “Management control seeks to compel events to conform to plans.”
Knootz and O’Donnel, “Controlling is the measurement of accomplishment against the standards and the correction of deviations to assure attainment of objectives according to plans.”
Henry Fayol, “Control consists in verifying whether everything occurs in conformity, is with the plans adopted, the instructions issued and principles established. It has for its object to point out weaknesses and errors in order to rectify them and prevent recurrence.”
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George R. Terry, “Controlling is determining what is being accomplished, that is, evaluating the performance and if necessary, applying corrective measures so that the performance takes place according to plans.”
Robert N. Anthony, “Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of an organisation’s objectives.”
Mary Cushing Niles, “Control thus viewed, is an aspect and projection of planning whereas planning sets the course to the chosen courses or to an appropriately changed one.”
Haynes and Massie, “Control is any process that guides activity towards some predetermined goal. The essence of the concept is in determining whether the activity is achieving the desired results.”
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J. K. Rosen, “Control is that function of the system which provides direction in performance to the plans.”
Dalton E. Mc Farland, “The presence in a business of that force which guides it to a pre-determined objective by means of pre-determined policies and decisions.”
Controlling is one of the important steps in management process. It is a final step which ensures the attainment of objectives of the organisation. Control is one of the most important functions of management. It is an essential feature of scientific management also. Control is necessary to minimise variability and unpredictability in the use of means and attainment of ends or goals.
Following are some important definitions of control:
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According to George Terry, “Controlling is determining what is being accomplished that is, the performance, evaluating the performance and if necessary, applying corrective measures, so that performance takes place according to plans”.
According to Henry Fayol, “In an undertaking control consist of verifying whether everything occurs in conformity with the plans adopted, the instructions issued and the principle established. Its object is to point out the weakness and error in order to rectify them and.to prevent recurrence. It operates on everything, i.e. people and action”.
According to Mc Farland, control, in its managerial sense, can be defined as, “The presence in a business of that force which guides it to a pre-determined objective by means of pre-determined policies and decisions”.
According to E. F. L. Breach, “Control is checking current performance against pre-determined standards contained in the plans, with a view to ensuring adequate progress and satisfactory performance.”
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According to Billy E. Goetz, “Management control seeks to compel events to conform to plans”.
J. K. Rosen defines, “Control is that function of the system which provides direction in conformance to the plans”.
Peter Drucker defines, “Control maintains equilibrium between the ends and means, output and efforts”.
Knoontz and O’Donnell defines, “Control, like planning, is ideally forward looking and the best kind of managerial control corrects deviations from plans before they occur”.
After careful study of all the above definitions we come to the conclusion that, even though control is the last step in the process, it is equally important for efficient, smooth, speedy and proper attainment of organisational goals. Even if all effort like, formulating policies, procedures and other factors are put in by the management, next important and crucial part of the road to attainment of goals is their implementation by the concerning personnel.
If the implemented are lethargic, careless, unloyal and inefficient, the performance is going to be adversely affected. It is, therefore, essential to overcome all these. Control aims at this. Naturally prerequisite of control is observation of the performance and locating points of lapses. This can be done by evaluation of the performance, its comparison with set out standards and by taking measures to correct the deviations. The complete process is “Process of control.”
Controlling is the function of every manager from president to supervisor. Like other managerial functions, the need for control arises to maximize the use of resources and to achieve the purpose of the organisation. Managers try to visualize whether the resources are utilized in a planned manner in controlling functions.
Management achieves the objectives of the organisation through their limited resources. Control activities take into consideration the important factors and visualize the actions and resources from time to time. It means certain things in the organisation require some changes and organization have to do right again. Control finds out deviation and determines the future course of action to make it correct.
According to Heinz Weihrich and Harold Koontz, “The managerial function of controlling is the measurement and correction of performance in order to make sure that organization objectives and plans devised to attain them are being accomplished.”
Controlling is defined as the process of analyzing whether actions are producing desired results. To control means to check and ensure that each activity is performed in a planned manner. As a function of management, the controlling takes necessary preventive and corrective actions which ensure that the resources are being effectively utilized, to accomplish the goals.
“Control is simply the process through which managers assure that activities confirm to planned activities.” In planning, the fundamental goals and methods for attaining these are established, while controlling measures these goals and plans in time to take corrective action.
According to Robert Anthony, “Managerial Control is a process by which the managers assure that resources are obtained and used effectively and efficiently in the accomplishment of organizational objectives.”
According to E.F.L. Brech, “Control is the process of checking actual performance against the agreed standards or plans with a view to ensuring adequate progress and satisfactory performance.”
Control process tries to find out deviations between planned performance and actual performance and to suggest corrective actions, whenever these are needed. If the resources of the organisation are not utilized according to planned manner; if any deviation should take place in any manner or simply if any deviation takes place in the achievement of objectives or goals of the organization; then control tries to phase out those deviations to achieve stated objectives.
Controlling in Management – Top 5 Characteristics
A good effective control has some characteristics.
They can be listed as follows:
1. Forward Looking:
The control should be forward looking with a view to guard the business against future dangers. It helps in taking corrective actions well in advance rather than wait for the situation to develop to the danger level before tackling them.
2. Continuous Process:
Controlling should be a continuous process.
3. Flexible:
Controlling should be flexible and should match with the requirements of the organisation and the changing environment.
4. Controlling at All Levels:
Managers, at all levels, exercise control with varying degrees.
5. Tailor Made to Suit Individual Plans and Managers:
Controls should be designed to suit individual plans and manager and their personalities. For example, the budgets and various financial ratios have broad applications. One should be aware of the critical factors and they should be able to use techniques and information suited to them.
Controlling in Management – Nature
The nature of controlling can be described as follows:
(i) Controlling is a basic function of management – The basic functions of management are planning, organising, staffing, directing and controlling. Since controlling is a follow-up action to other functions of management, the process of management cannot be completed without it.
(ii) Controlling is an essential function of all managers – Controlling is essential for managers at all levels, be it chief manager or any supervisor. However, the nature and extent of controlling may differ from one level to another.
(iii) Controlling is a continuous process – Controlling is not a function which is performed only once. It is a continuous process because business situations are always changing and the work-progress of one individual does not remain the same forever.
(iv) Controlling is both the beginning and the end of the process of management – Controlling is required both at the beginning and at the end of the process of management. At the beginning of the management process, controlling helps in formulating plans for the future and at the end, it helps to measure the effectiveness of the results achieved.
(v) Action is the essence of controlling – A manager takes corrective action for any deviations between the actual performance and the standard performance. If no corrective action is taken, then the whole process of controlling goes waste. He would be able to achieve his objectives only when he undertakes adequate steps to remove these deviations. Thus, corrective action is the soul of controlling.
Controlling in Management – 13 Key Areas (With Problems and Methods of Control)
For effective control, it is important to know the critical areas where control would be exercised. The identification of these areas of control enables the management to – (i) delegate authority and fixing up of responsibility, (ii) reduce burden of supervising each activity in detail, and (iii) have means of securing satisfactory results.
Though controls are needed in every area where performance and results directly and vitally affect the survival and prosperity of the organization, these areas need to be specifically spelled out. Holden, Fish, and Smith have identified thirteen key areas where control should be exercised- policies, organization structure, personnel, wages and salaries, costs, methods and manpower, capital expenditure, service department efforts, line of products, research and development, foreign operations, external relations, and overall control.
The following discussion points out the problems and methods of control in each major area:
1. Control over Policies:
Policies are formulated to govern the behaviour and action of personnel in the organization. These may be written or otherwise. Policies are generally controlled through policy manuals which are prepared on the inputs provided by top management. Each individual in the organization is expected to function according to policy manuals.
2. Control over Organization Structure:
Organization charts and manuals are used to keep control over organization structure. Organization manuals attempt at solving organizational problems and conflicts, making long-range organizational planning possible, enabling rationalization of the organization structure, helping in proper designing and clarification of each part of the organization, and conducting periodic check of facts about organization practice.
3. Control over Personnel:
Generally, human resource manager or head of the human resource department, whatever his designation may be, keeps control over personnel in the organization. Sometimes, a human resource committee is constituted to act as an instrument of control over key personnel.
4. Control over Wages and Salaries:
Control over wages and salaries is exercised through programme of job evaluation and wage and salary analysis. These functions are carried on by human resource and industrial engineering departments. Often wage and salary committee is constituted to provide help to these departments.
5. Control over Costs:
Control over costs is exercised through making comparison between standard costs and actual costs. Standard costs are set in respect of different elements of costs. Cost control is also supplemented by budgetary control system which includes different types of budgets. Accounting department provides information for setting standard costs, calculating actual costs, and pointing out differences between these two.
6. Control over Methods and Manpower:
Control over methods and manpower is exercised to ensure that each individual is working properly and timely. For this purpose, periodic analysis of activities of each department is conducted. The functions performed, methods adopted, and time consumed by every individual are studied to eliminate nonessential functions and methods to save time. Many organizations create separate department or section known as ‘organization and methods’ to keep control over methods and manpower.
7. Control over Capital Expenditure:
Control over capital expenditure is exercised through the system of evaluation of projects, ranking of projects on the basis of their importance, generally on the basis of their earning capacity. A capital budget is prepared for the business as a whole. The budget is reviewed by the budget committee or appropriation committee. For effective control over capital expenditure, there should be a plan to identify the realization of benefits from capital expenditure and to make comparison with anticipated results. Such comparison is important in the sense that it serves as an important guide for future capital budgeting activities.
8. Control over Service Departments:
Control over service departments is effected either through- (i) budgetary control within operating departments, (ii) putting the limits on the amount of service an individual department can ask, and (iii) authorizing the head of service department to evaluate the request for service made by other departments and to use his discretion about the quantum of service to be rendered to a particular department. Sometimes, a combination of these methods may be used.
9. Control over Line of Products:
Control over line of products is exercised by a committee whose members are drawn from production, marketing, and research and development departments. The committee exercises control through study of market needs. Efforts are made to simplify and rationalize the line of products.
10. Control over Research and Development:
Control over research and development is exercised in two ways- by providing a budget for research and development and by evaluating each project keeping in view savings, sales, or profit potentialities. Research and development being a highly technical activity is also controlled indirectly. This is done by improving the ability and judgement of the research staff through training programmes and other devices.
11. Control over Foreign Operations:
Foreign operations are controlled in the same way as domestic ones. The tools and techniques applied are the same. The only difference is that the chief executive of foreign operations has relatively greater amount of authority.
12. Control over External Relations:
External relations are regulated by the public relations department. This department may prescribe certain measures to be followed by other departments while dealing with external parties.
13. Overall Control:
Control over each segment of the organization contributes to overall organizational control. However, some special measures are devised to exercise overall control. This is done through budgetary control and projected profit and loss account and balance sheet. A master budget is prepared by integrating and coordinating budgets prepared by each segment. The above areas of control are relevant in a large organization and cover all levels of management- top, middle, and lower. However, managers at different levels of management are concerned with specific issues in functional areas.
Controlling in Management – 3 Types: Historical Control, Predictive Control and Concurrent Control
There are three types of control as under:
1. Historical Control:
Under this type of control performance or results are measured and compered after happening of the event or after accomplishing the performance. The management, thus, knows the extent to which the objectives or goals are achieved. This is taken as a base for future or next performance and corrective measures are taken therefore. The performance is measured with the help of budgetary control, financial ratios etc.
2. Predictive Control:
This type of control is concerned with the future. This predictive control attempts to anticipate problems before they actually occur. For example problem of absenteeism, labour turnover, disputes among workers, financial budgets etc. Predictive control is essential to keep the control on the above matter.
3. Concurrent Control:
Concurrent control is a flexible one which changes according to anticipated changes, based on observation and visualisation of future. It is concerned with the adjustment of performance before any major damage, loss, destruction takes place in manufacturing industry. Control chart is an example of concurrent control. Control charts in production department, selling department are necessary to facilitate adjustments, corrections, etc. in case of changes, if any and according to needs.
Controlling in Management – 8 Important Aspects
Controlling function is one of the four foundations of management. Its importance arises out of the necessity to ensure that tasks allocated to each department and each worker is carried out in the way it was meant to be carried out, and that the end product is of a certain quality that meets the accepted quality of the organisation.
The management, through controlling, ensures that the organisational train is running on schedule and on the right track. Controlling works according to a standard decided by the top management. The management continually monitors the organisation’s performance with a certain yardstick. This ensures corrective measures against any deviations so that the major disturbances are taken care of before they take root.
The important aspects of controlling are listed below:
1. Helps in Achieving Organisational Goals – It is through the function of controlling that we can successfully execute plans and get fruitful and targeted results. Timelines and targeted performances are ensured only through controlling. In fact, the secret of successful management lies in efficient controlling.
2. Optimum Utilisation of Resources – Controlling ensures avoidance of waste. It ensures that all avenues of wastage are plugged and resources, whether human or material, are optimally utilised. This leads to economy and greater profitability.
3. Facilitates Coordination – Controlling helps in coordinating efforts towards the common organisational objectives. It removes overlapping and duplication of efforts, and by bringing in control at every level, ensures that there is organisational harmony.
4. Improves Planning – Controlling examines every deviation and comes up with solutions. It also brings to the fore any flaw or fault in the planning. Thus, it ensures that plans are rectified and modified. In this way, it contributes to better planning, both long and short-term.
5. Eases Supervision – Controlling sees to it that regular performance reports and updates are made and looked into; thus helping in identifying deviations and taking corrective measures before the issues escalate further. It thus brings efficiency to the function of supervision.
6. Introduces Dynamism – Controlling keeps managers on the lookout for changes in the firm’s operating environment. It helps them quickly anticipate and identify changes and how those changes could be effectively countered. It teaches the management adaptability and dynamism.
7. Brings Order and Discipline – Controlling seeks to bring order and discipline into the organisation by clearly defining workers behaviour in the work environment. By laying down the norms and procedures for settling workers issues, and resolving industrial disputes it ensures a congenial atmosphere.
8. Raises Employee Morale – By ensuring that workers issues are redressed and by rewarding performances controlling seeks to raise the employees’ morale.
Controlling in Management – 5 Steps
The steps of control are discussed as follows:
Step # 1. Setting Up of the Standards of Performance:
The first step of control is to set up the bases for evaluating the performances. Standards are the indexes that guides the performances of employees. The standards fixed must not be too high or low.
It should be set in quantitative terms as far as possible (for e.g., cost, time, units, etc.). At the same time it must be flexible so that it can be changed as per varying conditions, if necessary.
Step # 2. Measurement of Actual Performance:
The second step is to measure the actual performance. There are various ways of measuring the performance, such as through scorecards, reports, sample checking, etc. For ease of comparison the performance should be measured in the same terms as the standards. The measurements should be done at fixed intervals.
Step # 3. Comparison of Actual Performance with the Standards:
Once the actual performance is measured, comparison should be made with the standards to find out the variance or deviations, if any.
Step # 4. Analysing the Grounds for Deviations:
The deviations found should be looked into by the managers and the reasons thereof should be analysed. The minor deviations may be rectified by the managers themselves, but the major ones should be attended with greater care. It should be analysed and brought to the attention of the top-level executives of the organisation.
Step # 5. Taking Remedial Measures:
The importance of controlling lies in taking remedial actions with the intention to improve the performance. Proper remedial measures have to be taken after analysis of the nature and type of anomaly that occurred. Remedial measures may include change in the existing process of production, change in supervision method, change in selection and recruitment procedure, change in the quality of resources used, change in the working conditions, and so on. All these modifications are to be made with the target of achieving perfection in performance.
Controlling in Management – Various Reasons of Deviations
At the basis of control is the fact that the outcome of plans is dependent on the people who carry them out. For instance, a poor educational system cannot be controlled by criticising its product, the unfortunate graduate; a factory turning out inferior products cannot be controlled by consigning products to the scrap heap; and a firm plagued with customer complaints cannot be controlled by ignoring the complainers.
Responsibility for controllable deviations lies with whoever has made unfortunate decisions. Any hope of abolishing unsatisfactory results lies in changing the future actions of the responsible person, through additional training, modification of procedures, or new policy. This is the crux of controlling the quality of management.
There are two ways in which responsible people modify future action. The normal procedure is to trace the cause of an unsatisfactory result back to the persons responsible for it and get then to correct their practices. This may be called direct control.
The alternative in the area of management is to develop better managers who will skillfully apply concepts, techniques and principles and who will look at managing and managerial problems from a systems point of view, thus eliminating undesirable results caused by poor management. It is also known as preventive control.
Let us have a look at the direct control. Every enterprise has many standards to compare the actual output of goods or services in terms of quantity, quality, time and cost with plans. A negative deviation indicates in terms of goal achievement, cost, price, personnel, labour-hours or machine-hours. In this case, performance is less than good or normal or standard and results do not conform to the plans.
The causes of negative deviations will often determine whether control measures are possible.
Although an incorrect standard may cause deviations, if the standard is correct, plans may fail because of the following reasons:
i. Uncertainty
ii. Lack of knowledge
iii. Lack of experience, and
iv. Lack of judgment on the part of those who make the decisions or take actions.
Managerial errors caused by unforeseeable events cannot be avoided. The fixing of personal responsibility by direct control techniques is of little avail in such situations.
If the cause of error is poor judgment, whether due to inadequate training, to lack of experience, or to failure to use appropriate information in decision-making, corrections can be made. Managers can improve their education, be transferred to acquire broader experience, or be cautioned to take better stock of the situation before making decisions.
Preventive Control:
The principle of preventive control embraces the idea that most of the responsibility for negative deviations from standards can be fixed by applying fundamentals of management. It draws a sharp distinction between analysing performance reports, essential in any case, and determining whether managers act in accordance with established principles in carrying out their functions.
The principle of preventive control, then, can be stated as follows:
The higher the quality of managers and their subordinates, the less will be the need for direct controls.
The extensive adoption of preventive control should await a wider understanding of managerial principles, functions, and techniques as well as management philosophy.
While such an understanding is not achieved easily, it can be gained through university training, on-the-job experience, coaching by a knowledgeable superior, and constant self-education. Moreover, as progress is made in appraising managers as managers, preventive control can be expected to have more practical meaning and effectiveness.
Controlling in Management – 3 Purposes: To Measure Progress, To Uncover Deviation and To Indicate Corrective Action
A control system is needed for three purposes:
1. To measure progress.
2. To uncover deviation.
3. To indicate corrective action.
Purpose # 1. To Measure Progress:
There is a close link between planning and controlling the organisation’s operations. In the planning process, the fundamental goals and objectives of the organisation and the methods for attaining them are established. The control process measures progress towards those goals.
As Fayol so clearly recognised decades ago, “In an undertaking, control consists in verifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established.” As the navigator continually takes readings to ascertain where he is relative to a planned course, so does the manager take readings to see whether his enterprise or department is on the charted and predetermined course.
Purpose # 2. To Uncover Deviations:
Once a business organisation is set into motion towards its specific objectives, events occur that tend to pull it “off the target.” A successful control process is one that effects corrections to the organisation before the deviations become serious.
Major events which tend to pull an organisation “off the target” are as follows:
i. Change:
Change is an integral part of almost any organisation’s environment. Markets shift, new products emerge, new materials are discovered and new regulations are passed. The control function enables manager to detect changes that are affecting their organisation’s products or service. They can then move to cope with the threats or opportunities that these changes represent.
ii. Complexity:
Today’s vast and complex organisations, with geographically separated plants and decentralised operations, make control a necessity. Diversified product lines need to be watched closely to ensure that quality and profitability are being maintained; sales organisation’s various markets — foreign and domestic — require close monitoring.
iii. Mistakes:
Managers and their subordinates very often commit mistakes. For example, wrong parts are ordered, wrong pricing decisions are made, problems are diagnosed incorrectly, and so on. A control system enables managers defect these mistakes before they become serious.
iv. Delegation:
When managers delegate authority to subordinates, their responsibility to their own superiors is not reduced. The only way managers can determine if their subordinates are accomplishing the tasks that have been delegated to them is by implementing a system of control. Without such a system, managers will not be able to check on subordinates’ progress, and so will not be able to take corrective action until after a failure has occurred.
Purpose # 3. To Indicate Corrective Action:
Controls are needed to indicate corrective actions. They may reveal, for example, that plans need to be redrawn or goals need to be modified or there is need for reassignment or clarification of duties or for additional staffing. When the corrective action indicated by the control system is implemented, the loop in the system closes on the operating principle of a thermostat.
Characteristics of an Ideal Control System:
An ideal system of control is one that makes the controlling function easy, effective and smooth.
The following are the characteristics of an ideal control system:
(1) System should suit the Nature, Needs and Circumstances of a Given Situation:
No two firms can be exactly alike in every respect. Likewise, no two areas of activity even in the same organization can be similar. Therefore, a control system that is good for a small firm may be inadequate in the case of a large firm. In the same way, a firm using machine-based methods of production will require a different control system as compared to the one which relies on labour-intensive methods. Again, the control system for the sales manager has to be different from that for the production or personnel manager.
As such, the control system should be appropriate to the nature, needs and circumstances of an organization and each level of activity inside it.
(2) Quick Reporting or Feedback on Performance:
Time is an important element in enforcing a control system. Subordinates should keep their respective superiors posted with the feedback as to performance of work at their levels. Delay in sending reports might hurt the purpose of control system.
(3) Anticipatory or Forward-Looking Control:
A good control system is one that makes it possible to think of deviations even before they have taken place. As far as possible, it should try to prevent, rather than remedy, the situations arising from deviations.
(4) Pragmatic and Proactive in Operation:
The control system should concern itself with actual results and view things in a matter-of-fact and practical manner. It can do so only when it has enough flexibility to be adjusted and adapted to suit the needs of the situation on hand.
(5) Objective and Impersonal to Operate:
A control system can be effective only when it is objective and impersonal, and not subjective and arbitrary. For this, it is necessary that the standards to judge the actual performance are objective clear, definite and stated in numerical terms.
A good control system is one that can be easily installed and inexpensively maintained. What an organization will spend to operate its control system will largely depend on what benefits it expects to derive from it.
To be effective, a control system should be easy to understand and operate. A complicated system will only create problems for the operative workers and defeat its very purpose.
(8) Internal Corrective Mechanism:
A control system is good only when, besides monitoring and detecting deviations, it also provides pointers to the solution of problems that cause deviations. In fact, this should rank as the sole determining factor in judging the effectiveness of any control system.
Design of Effective Control System:
A control system is a multi-step procedure applied to various types of control activities. Managers face a number of challenges in designing a control system that provides accurate feedback in a timely and economical fashion that is acceptable to organizational members. Most of these challenges can be traced back to decisions about what needs to be controlled and how often progress needs to be measured.
In order to overcome these challenges, managers should design their control system based on the following principles:
1. Integrating Strategic Planning and Control System:
Strategic planning and management control are the two most important systems contributing to the effectiveness of business organizations. Therefore, there should be proper integration of these two systems. This integration can be achieved by developing consistency of strategic objectives and performance measures.
Prescribing performance measures which are strategically important is quite significant because often it is said “what you measure is what you get.” In developing performance measures, two considerations must be taken into account. First, the performance measures should focus on whether short-term profitability, or growth and technological ascendancy, logistic efficiency, or some other objectives should be of primary concern. Second, the measures should relate to the managerial domain of each of the managers as each of them is responsible to exercise control in his own domain.
2. Identifying Strategic Control Points:
Control system should be based on management by exception. It implies that if a manager wants to control everything, he can control nothing. Therefore, managers should identify strategic control points in the system at which monitoring or collecting information should occur. The method for selecting strategic control points is to focus on the most significant elements in a given operation. Usually, only a small percentage of the activities, events, or objects in a given operation account for a high proportion of expenses or problems that managers have to face. Control system should focus more on this.
3. Organizational Communication:
The organization has to design a communication system (known as information system; for carrying the control information both downward and upward. Through the downward communication, a superior sends the information about what a subordinate is expected to do; the upward communication is used to get control information from the subordinates, that is, what they have done.
Besides, these channels also serve other purposes. Thus, the organization depends to a large extent for exercising control through communication. If the communication system is not quite effective, it will affect the control system also to that extent, in communicating what is expected from a subordinate and also how he is performing. Often communication blockade is a major source of confusion and frustration in the minds of the people and they resist control.
4. Motivational Dynamics:
The control is affected by the motivational dynamics of people and how the organization is going to satisfy the various needs of the people. The organization itself provides motivation or de-motivation to the people to work through prescription of various types of organizational systems including control system. Therefore, while designing the control system, the organization should ensure that it is in tune with the needs of the people.
Requirements of Effective Control System:
There are certain requirements of effective control system.
They are briefly explained below:
1. Feedback – Feedback is the process of adjusting future actions based upon the information regarding past performance. If feedback practice is followed by the management, the control process will be very easy.
2. Objective – Control should be objective. It means there is a certainty of control. The impartial appraisal of performance is necessary for certainty of control.
3. Suitability – The control system should conform to the nature of deviations. The control technique may be used, if there is any need.
4. Prompt reporting – The deviations from standards should be informed without any delay. If there is any delay caused, exercising control will be of no use.
5. Forward looking – Effective control system must focus how the future actions will conform to plans. In other words, the control system should provide an aid in planning.
6. Pointing out exceptions – The control system points out the deviations. But, all the deviations do not have equal impact. If the deviations have high impact, the control system should pay direct attention to them. Then, the management can take corrective actions.
7. Flexible – The standards or criteria should be altered from time to time. The reason is that the standards should conform to the present requirements. Hence, the control system should be flexible in accordance with the changed standards or criteria.
8. Economy – The benefits derived from the control system should be more than the cost of exercising such a control system.
9. Intelligible – The control system should not be a complicated one. The control system should be easily understood by an ordinary layman of the organisation.
10. Suggest remedial action – The effective control system should disclose the places of failure, persons for failure and how they have been dealt with.
11. Motivation – A good control system should be employee centred. The control is designed to secure positive reactions from employees. If large deviations are found, the employees will be properly directed and guided instead of being punished. The very purpose of control is prevention and not punishing.
Controlling in Management – Role of Information Systems
Control action is guided by adequate information from the beginning to the end. Information systems that provide information and management control system are closely interrelated; the information systems are designed on the basis of control system. In the present context, information systems of large organizations are based on Information Technology (IT) which consists of computer hardware, software, and communication network.
Based on this pattern of information systems, an information system is defined as follows:
“An information system can be any organized combination of people, hardware, software, communication network, and data resources that collects, transforms, and disseminates information in an organization.”
Role of Information Systems in Controlling:
Every manager in the organization must have adequate information about his performance, standards, and how he is contributing to the achievement of organizational objectives. Therefore, information systems should be tailored to the specific management needs at every level so that the required information is available well in time.
In the light of this phenomenon, role of information systems in controlling is as follows:
1. Management Control:
Management control is applicable to higher management levels. It refers to the task of ensuring that activities are producing the desired results. This involves measurement of actual performance in the light of desired performance, comparison of actual and desired performance, identification of deviation between the two, analysis of causes of deviation, and taking of corrective actions to overcome deviation.
Information is supposed to act as guide to management control because control action is guided by adequate information from the beginning to the end. Information systems ensure that every manager gets adequate information timely. Timely corrective action taking is vital for successful operation of a management control system because if corrective action is delayed, the organizational effectiveness is affected adversely to that extent.
2. Operational Control:
Operational control is concerned with action completed or performance achieved and evaluates the performance at the operating level. Operational control is exercised at two levels of an action — post-action control and steering control. In post-action control, performance is measured after the action is completed and corrective actions are taken for the next cycle of the similar action.
In steering control, corrective actions are taken during the process of completing the action itself. Information systems provide information for exercising both these types of control.
Controlling in Management – Behavioural Implications
Though control should aim at satisfying the needs of members of the organization, it is often taken otherwise by them. This may be either because of the adverse real impact of control on them or because of misperception of the impact of control. Thus, while designing the control system, it must be kept in mind that almost everybody in the organization not only resents the idea of being controlled but also objects to being evaluated.
It means the results of the control may not be same as anticipated by those who are exercising control. The major behavioural problems of control can be analyzed by taking the nature of control, perception of those who are being controlled, and response to control.
1. Nature of Control:
Control often puts pressure for engaging in desirable behaviour by those who are subject to control. The basic question is: will they not behave in desirable way if there is no control? Though opinions may differ on this question, often it is recognized that people engage in that behaviour which provides them satisfaction whether control or no control.
It means, if the organizational processes are in tune with the needs of the organizational participants, they can perform well in the absence of control and not in the presence of control. Behavioural scientists have concluded that people try to be self-actualized but the basic problem which comes in the way is provided by the organization itself.
They are inherently self-motivated. For example, McGregor believes that more people behave according to the assumptions of Theory Y as compared to Theory X.[3] In such a case, if their behaviour is controlled, it may be counter-productive for the organization. The results may be against the organizational interests.
Thus, the basic nature of control itself is against the very basic nature of the people. However, this is not true in all the cases. Many people may still behave according to the assumptions of Theory X and they need rigid control. In fact, the best control system may be one which focuses attention on the individual needs also, otherwise it will provide more behavioural problems and may be detrimental to the organization itself.
2. Perception of People:
Another behavioural implication of control is the perception of people who are being controlled. Though perception may be that control is against the nature of people, it is further aggravated by the fact that people perceive it to be for benefit of the organization but against them.
Thus, perception, may be right or otherwise, that control, if brings better result, is shared by organization alone whereas it may be brought by the organizational members. The control in most of the cases is used as a pressure tactic for increasing performance. This is true also because people may produce more if they are aware that their performance is being evaluated.
However, increased performance is also determined by several other factors, most important of them being how it is shared between the organization and its members. Thus, if they have positive perception about this aspect also, they will engage in higher performance. In an alternative case, they will take certain actions to thwart the control action. There is another implication of the people’s perception about control. The manager may develop some plan for control, but there are many unplanned controls also necessitated by the organizational requirements.
Thus, unplanned control is also the part of the organizational control. It is this unplanned control that has more serious repercussion and is more counter-productive. The participants may feel that it is due to improper planning on the part of management. Thus, they are controlled not because of their own shortcomings but for the shortcomings of others. Naturally, this may be more serious for those who are being controlled.
3. Response to Control:
Organizational members respond differently to control depending on the nature of control and its perception and the nature of those who are controlled.
Such responses may be of the following types:
i. Willing compliance to control, if employees feel that control serves their needs in the organization.
ii. Forced compliance, if employees feel that control is not in accordance with their need satisfaction but superior has power to get its compliance. However, this is not an ideal situation and managers should look at the control system.
iii. Resistance, if employees feel that control is not in accordance with their need satisfaction and they have a perception that they can get it changed by their efforts. This has serious implications for organizational operation and, therefore, managers should find out the causes for such resistance and take suitable measures to overcome these.
Controlling in Management – 6 Major Causes of Resistance to Control
Control implies and involves a continuous check on the performance and behaviour of people in the organization. Some individuals adjust with control, others resist it.
The major causes of resistance to control are as follows:
Cause # 1. Curb on Freedom:
The basic notion of the term control is to curb freedom as it tries to regulate behaviour and performance in a specified way. This specified way may not match with individuals’ own way of behaving and doing. To the extent, there is a difference between specified way and natural way of behaving, control is resisted to make it more meaningful. However, this gap may be interpreted differently by different individuals because they differ in their orientations. Thus, some individuals resist control more than others.
Cause # 2. Curb on Creativity and Innovation:
Human beings have been endowed with great amount of creativity and innovation. However, they can use their creativity and innovation in conductive environment which must be free from control and regulations as these put unnecessary curbs on the motivation to be creative and innovative. For example, Chris Argyris, a famous social psychologist, has pointed that individuals want to move from immaturity to maturity; from passivity to activity and creativity but organizations tend to curb this movement by imposing several types of control. Therefore, resistance to be controlled is a natural phenomenon.
Cause # 3. Rigid Control Standards:
Individuals’ resistance to control emerges from the feeling that control standards are set too high and are observed rigidly. There may be a variety of factors which influence their work performance, and many of these factors are not controllable by them. Since control results are used as basis for the progression of individuals’ career in the organization, they resist it to safeguard their career.
Cause # 4. Faulty Evaluation System:
Individuals object to control because of the perception that evaluation system through which the performance is measured may not be objective and many shortcomings may emerge in the evaluation process. This is likely to happen more in the case of work performance which cannot be measured quantitatively.
Expressing work performance in qualitative way may have different interpretations as the concept of quality is influenced by personal factors. Thus, what may be a good quality for one person may not be good for another person? Because of these individual factors, often, there is a clash between those who exercise control and who are controlled.
Cause # 5. Fear of Discrimination:
Individuals may perceive that they are likely to be discriminated by those who exercise control. This perception is likely to enhance when evaluation system is faulty; there is lack of trust between controller and controlled; and control information is used to devise reward and punishment system. In these situations, individuals tend to resist control terming it as unfair, unjust, and discriminatory.
Cause # 6. Against Self-Control:
Organizations apply control because they feel that individuals lack self-control and, therefore, some amount of control should be exercised for orderly behaviour and work performance. In fact, control mechanism is the basic in-built feature of modern organizations. For example, Charles Handy has viewed, “most of our organizations tend to be arranged on the assumption that people cannot be trusted or relied on, even in tiny matters.” Thus, this natural tendency of the organizations works against self-control.
This is the reason that control is resisted by those individuals more who have internal locus of control as against those with external locus of control. Those who have internal locus of control believe that they control and shape the course of events. These people believe more on self-control rather than externally-imposed control and resist it.
Controlling in Management – 9 Traditional Control Devices Used in Management
The western countries which have made significant progress in the field of industrial development are the leaders of global liberalisation. We are facing a change in the system of economic policy of our country from the old to a new liberalised system. Our economic system stands in the midst of a global system.
In this specific scenario, we have to compete with market forces of large corporations with different strategies. It has become a conscious need for an effective management control system in our enterprises.
An effective device of control brings productivity and profitability to an enterprise. The control system provides an adequate guideline to follow. Thus, it essentially helps maintain the cost to a bare minimum.
Developed and also the developing countries are well aware of the importance and need for control in management system.
Following are some of the traditional control devices used in management:
1. Budgetary control
2. Cost accounting and cost control
3. Production control
4. Inventory control
5. Break-even point analysis
6. Profit and loss control
7. Return on investment control
8. External audit control
9. Management self-audit.
1. Budgetary Control:
This is always related to a budget. Budget is an anticipated financial statement of income and expenditure for a specific period. In the same way a non-financial budget is prepared for material, production and so on. In a nut-shell, the budgetary control plays an important role in an organisation.
Budget indicates making a plan for a specified period in numerical terms. According to George R. Terry, budget is an estimate of future needs arranged on an orderly basis
covering some or all of the activities of an enterprise for a definite period of time; and budgetary control is a process of finding out what is being done to achieve results.
The budget control is exercised to adjust budget estimates for smooth functioning of an organisation either by curtailing unnecessary expenditure or sanctioning the necessary one.
Salient Features of Effective Budgetary Control:
i. Efficient feedback system – An executive must get the report on the performance by the fastest means from his subordinates to take adequate remedial action, if necessary.
ii. Due importance for implementation – Top executives must give due importance to implement the budget at the appropriate time itself.
iii. Authority to be commensurate with responsibility – When an individual is given the responsibility to accomplish the budget targets, he must have the authority for its execution as desired by the management.
iv. Flexibility – Whenever an inevitable change is needed, there must be flexibility to accommodate the change or to modify the budget according to the needs. The entire budget should not be replaced, as a sequel to incorporation of the changes/modification.
v. Results of the budget are not instant – Budgets are normally made for a specific period, therefore, the results normally emerge in due course of time. Budgetary system of control is an effective system of management control.
Types of Budget:
According to the purpose, the budget serves, it is classified under the following heads:
i. Budgeting provides a clear understanding of what an individual is trying to achieve.
ii. Budgetary control ensures that the manager knows his responsibility and accountability to his superior with regard to the result oriented performance.
iii. The budgetary control information is helpful to the managers in decision making.
iv. Budgetary control prescribes the use of management principles and to effect necessary changes, as corrective measures.
v. The budget must make the organisational structure strong and viable to perform smoothly to achieve the goals.
vi. It encourages the management to have self-awareness and to conduct periodical inspection/check for better operation.
vii. It helps detect lapses requiring rectification so as to enable the management carry out timely actions.
i. Occurrence of inaccurate estimates – Budgets are formed on estimates. There are devices like statistics etc., to ensure the correctness of a budget. The accuracy of a budget depends to a large extent upon the estimates made.
ii. Lack of combined effort – Every individual working for the budget must coordinate in a way, that the results obtained by managers at various levels must be actual target estimates. If the estimates are superfluous, the budget becomes ineffective to achieve the goals.
iii. Lack of cost benefit analysis – While preparing a budget, management must do the correct cost benefit analysis. This will avoid overlooking costs. Budget making can only be effective when there is a correlation between the cost to be incurred and the benefits to be derived.
iv. Lack of proper management decisions – Management must choose the best among the alternatives while arriving at a decision. The quality of a decision largely depends on accuracy. Accuracy can be achieved by a manager, who possesses experience and vision. Therefore, the decision, at times, is more likely to be a guess work and misleading.
2. Cost Accounting and Cost Control:
Cost represents the part of expenditure, which a business has to make to accomplish its objective. Cost control is a process by which the expenditure through production and distribution is limited; so that the products can be made available to the consumer at a reasonable rate. Cost control is an effective process to bring down the cost of all phases of industrial operations.
According to Batliboi, costing is a set of account, arranged systematically and accurately. The most equitable appropriation of the materials and stores consumed, the establishment charges incurred, cost of production per ton, per barrel need to be accounted for.
The following are some of the objectives of cost accounting:
i. Collection, analysis and classification of data for preparation of annual accounts.
ii. To make comparison with financial accounting, preparation of cost and profit in respect of the accounting period.
iii. Provision of data for preparation of profit and loss account from different departments of the organisation.
iv. Preparation of ‘Standard cost’, ascertaining per unit, job, activity, process, service, department cost etc., and calculation of the same.
v. To compare actual cost with standard cost.
vi. To evaluate performance
vii. Economize the activity and reduce expenditure at all levels of production.
Advantages of Cost Control:
i. Standard costs provide for measuring operating performance – The efficiency or inefficiency can be understood easily by comparing actual and standard costs.
ii. Basis of estimates and tenders — it provides information for preparing estimates and tenders.
iii. Variation in profits – The cause for variation in the rate of profit can be easily understood.
iv. Continuous stock control – Cost control makes it possible to check stock position continuously.
v. Check on the correctness of financial accounts – It enables the management find out the correctness of financial implications from the Balance sheet, Trading, profit and loss account.
i. It becomes a heap of useless information – Due to over enthusiasm accountants make the costing system excessively detail in nature. This makes the manager uncomfortable to deal properly due to unnecessary giving importance to flimsy matters by the accounting staff.
ii. Difficult to trace important information – Managers may, at times, have excess of unnecessary information. Therefore, it becomes difficult to trace important matters, which require immediate attention.
iii. It is backward looking, not forward looking – A good costing system can say what has gone wrong, it has very little to comment upon what is going wrong; e.g., it can conduct a ‘Postmortem’ of accounts and say why the losses had occurred and nothing more.
In the words of Spriegel, production control is the process of planning production in advance of operations, establishing the exact route of each individual item, part of assembly, setting, starting and finishing date for each important item, assembly and finished products and releasing the necessary orders as well as initiating the required follow up for the smooth running of the enterprise of each individual item, part of assembly, setting, starting and finishing date for each important item, assembly and finished products and releasing the necessary orders as well as initiating the required follow up for the smooth running of the enterprise.
Objectives of Production Control:
i. Implementation of production plan
ii. Make available material, machinery, equipment and labour
iii. Providing customers with goods of high quality at a reasonable rate
iv. Avoid wastages and losses in production.
Technique of Production Control:
The technique of production analyses factors affecting production, work programme and actual performance.
The production control consists of the following activities:
i. Control in the movement of raw materials
ii. Control the availability of materials and equipment.
iii. Control the standard of production process
iv. Control the equality of output.
v. Total quality control (TQM) of the product
vi. Control the efficiency of labour
vii. Control job performance and continuous progress.
4. Inventory Control:
Material management is a part of management discipline and covers all aspects of material costs, supply and utilisation. The functions of material management differ from organisation to organisation.
Inventory means a detailed list of items or goods of expendable and non-expendable nature. It also consists of usable and idle resources such as men, machines and materials. When the resource involved is material, the inventory is called as ‘stock’. No organisation can efficiently operate without an inventory.
It provides protection against uncertainty due to unforeseen failures in supply, increase in demand and delays in production. It also helps in efficient processing of materials, permit transit and handling of various usable and idle resources.
Inventory control of material management refers to controlling the kind, amount, location, movement and timing of buying various commodities used in and produced by the industrial enterprise.
Some of the important points of inventory control and cost reduction analysis are:
i. ABC analysis
ii. VED analysis
iii. Safety stock
iv. Economic order quantity
v. Value analysis
vi. Standardisation and variety reduction
vii. Codification, and
viii. Linear programming.
Break-even point is the particular ‘point of time’ at which the total income is equal to total cost, i.e., the position of no profit, no loss.
This analysis is applied to find out the expected profit at any particular level of production process. This also indicates the relationship of various volumes, costs, sale price and sale mix to profit.
Therefore, it can be stated that analysis aids the management in establishing the profitable level of output and corresponding sales. Apart from the above, the decision regarding expansion of productive capacity and control of fixed charges can be easily procured with the help of break-even point analysis.
Budgeting and cost control cannot be of any use without this analysis.
In an establishment where production activities are carried out, the organisation has to take into account which departments for its profit and loss, while making the budget figures.
Profit and loss control provides the analysis of profits, income for each department, division and branch which are self-sufficient and independent as against budget figures of estimation.
As a regular practice the management prepares estimates of income and expenditure, for each self-sufficient branch or division. These estimates are based on the average levels of efficiency expected from each branch or division. Thereafter the actual figures of income, expenditure and profit of each branch or division are compared with the estimates already prepared by the organisation.
The deviation if any, between the standard set for and the actual performance are taken into account for proper analysis for implementing suitable remedial action.
7. Return on Investment Control:
In this type of control, the individual performance of each decontrolled establishment with separate assets and infrastructure is rated on the basis of return (benefits) or investment received by the establishment.
8. Special Audit by Government:
i. Special audit – The Central Government, may, if it finds that the affairs of a company are not in order, direct that a special audit of the company’s account be conducted. This is uncommon.
ii. Of government company – The comptroller and Auditor-General of India is empowered to direct the manner in which the accounts of a Government Company are to be carried out and if necessary, supplementary or test audit may be taken up.
In audit, a careful examination of all account books, vouchers of transaction and all other relevant documents pertaining to financial transactions, profit and loss accounts and Balance Sheet of the company for the respective financial years are scrutinised thoroughly (cent per cent) to have a clear picture of the state of affairs of the financial matters of the company.
The purpose of management self-audit is to enable the top management to understand the exact state of affairs of the company. For this purpose top management deputes the ‘Audit party’ to carry out the audit. In these self-audits, normally, financial, material and administrative audits are included.
This is being carried out strictly on the basis of the company’s policy on various matters, rules and other regulations in respect of financial, material and administrative matters. This audit is carried out as per the periodicity prescribed by the top management. It is a sort of stock taking by the management to know the progress of the enterprise on a continuous basis.
Controlling in Management – Techniques: Budgetary and Non-Budgetary Control Techniques
There are several techniques of control used by management. These techniques of control are broadly classified into two categories, namely, budgetary control and non-budgetary control. These techniques are useful in measuring the overall performance of the organisation and implementation of effective control.
1. Budgetary Control Techniques:
There are a large number of control techniques used by managers, budgetary control is the oldest one amongst them. In modern times also budgetary control is one of the effective control techniques. This technique involves budgets, to plan, to co-ordinate and to control day-to-day operations of business in accordance with the overall objectives, goals and targets of the business organisations.
According to Walter W. Bigg, “The term budgetary control is applied to a system of management and accounting control by which all operations and outputs are forecast as far ahead as possible and the actual results, when known, are compared with the budget estimates.”
The Institute of Cost and Management Accountants England has defined budgetary control as, “the establishments of budget relating to the responsibilities of executives to the requirements of a policy and the continuous comparison of actuals with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis for its revision”.
Budgets are taken as standards for comparison and budgetary control revolves around them. Various types of budgets are generally prepared in an organisation based on objects. These budgets are, in turn, used as standards for implementing control.
They are of following types:
i. Master Budget:
Master budget is a summary budget incorporating all functional budgets and is prepared for the organisation as a whole. The object of this budgets is to secure overall coordination in the budgetary programmes and accordingly it is utilised for exercising effective control over the enterprise by the top management.
ii. Flexible and Fixed Budget:
A budget which is prepared at a time for varied levels of operation, is known as a flexible budget. It consists of a series of budgets depending upon varying levels of output and sales. Because of this special feature, a flexible budget automatically adjusts different levels of activity and a new budget is not required to be prepared for each level of output or sales.
It is prepared after considering the fixed and variable elements of cost and the changes expected in each item at various levels of operations. A flexible budget is used by such business enterprises in which uncertainty is more.
A fixed budget is one which remains unchanged irrespective of the level of activity in a business organisation. Once the levels of different activities are decided, they are not supposed to be changed or modified. This budget is useful where the forecast of the firm’s future activities are highly reliable and certain.
iii. Functional Budgets:
If any organisation has undertaken more functions, or if the activity of organisation is divided in various functions it is always in the interest of organisation to control every one of them on the basis of certain standards. These standards are budgets. Budget for every such function is functional budget. Main functions of an organisation are production, sales, marketing, finance personnel administration etc. and for every such function an independent budget is prepared which is called functional budget.
iv. Zero Based Budgeting:
It is originated in USA in 1970.The key element in ZBB is future- objective-orientation of past objectives. This budget assumes that instead of taking into consideration the previous year’s budget and adjusting it for preparing the future budget therefrom, zero based budgeting forces the managers to review the current objectives, goals and operations. This budget requires the managers to re-justify the past objectives, goals, targets, projects etc. and to give priorities for the future.
This budget provides an opportunity for the managers to examine, evaluate, and review each organisational activity. ZBB cuts down wastage, weeds out inefficiency and reduces the cost of production because every budget proposal is evaluated on the basis of cost benefit analysis.
2. Non-Budgetary Control Techniques:
i. Break-Even Analysis:
It is known as cost-volume profit analysis. Break-even analysis is concerned with the changes in fixed costs, variable costs, sales volume, sales prices and sales mix and their effect on profits. Basically if is an analysis of three different factors – cost, sales volume and profit. These three factors are interrelated and interdependent. The break even chart shows the breakeven point, and the areas or volume of sales that results in profit or loss.
The break even chart serves as a control aid in a number of ways. The volume of sale at which there is no profit or loss is known as break-even point. Break-even analysis can help the management to know the minimum volume of sales it should aim at to avoid losses.
ii. Product-Life-Cycle:
The product life cycle concepts is derived from the fact that a product’s sales volume and sales revenue follow a typical pattern of five phase cycle. The life cycle of any product is in fact the period during which it can exist in market yielding profit. It is similar to the human life cycle. The length of the life cycle, the duration of each phase and the shape of the curve vary widely for different products. The product life cycle should be preferably termed as product market life cycle as it is related to a given particular market.
For instance an old products in the American market will have a new life cycle when it is introduced in to a new foreign market. The product life cycle concept indicates that the product is born or introduced, it grows, attains maturity and the point of saturation in that market and then sooner or later it is bound to enters its declining state i.e. decay in its sales.
Every product moves through a life cycle having five stages- Introduction, Growth, Maturity, Saturation and Decline. The life cycle gives the sales revenue and profit margin history of a product over a time frame. The most essential feature of the product life cycle is the difference between the two curves i.e. sales curve and profit curve because, usually, the profit margin assumes declining trend before the sales volume entre that stage.
Hence, marketer must generate a continuous stream of new products in order to maintain market position, as well as the company’s image and try to hold profitability at desired level. Similarly, marketers must consider the changing relationship between sales revenue and profitability in the allocation of marketing and other resources among the product lines. Product life cycle governs strategic marketing planning at all levels.
It is involved not only in product planning and development but also in pricing, promotion and distribution policies. Thus product life cycle works as an effective non-budgetary control technique.
iii. Production Planning Control:
This control facilities to overcome the multiple and complex problems of production activities. Basically it relates to the decisions concerning quantity, quality, cost of production, time required for production, etc. along with problems of replacing old methods of production by new methods, problems of introduction of new technology etc. All this helps in the control of the entire production process.
Production control is effected through routing, scheduling, dispatching and follow up, as under:
a. Routing:
The first thing required in routing is preparations of a list of operations, the machines, equipment that are required in the production process. It involves planning of where and by whom work should be done, the determination of the path through which work should follow. It determines the operation through which a product must pass and the arrangement of these operations in the sequence that will require a minimum of handling, transportation, storage and deterioration through exposure.
The aim of routing is to determine the most feasible sequence of operations. Efficient routing permits the best utilisation of physical and human resources employed in production. Routing is an essential element of production planning and control because it’s all other functions depend upon routing.
The person who prepares the list of sequential of operations must be thoroughly familiar with all the operations and the machines as well as equipment in the plant so that proper routes, which will ensure the maximum utilisation of the plant capacity can be established. The routes laid down should be the shortest and the most economical.
b. Scheduling:
Scheduling determines as to when various operations are to be performed. It consists of the assignment of starting and completion times for various operations to be performed. The aim of scheduling is to streamline a larger volume of work so that convenient and effective use of plant, machinery and equipment is facilitated without any burden of overwork on them that may result in adverse consequences. A master schedule is always prepared first, incorporating therein schedules of various operations.
c. Dispatching:
Dispatching deals with setting the productive activities in motion through release of orders and instructions in accordance with previously planned timings as embodied in operation sheet, route card and loading schedules.
It provides official authorisation and information for – (i) movement of materials to different work places (ii) Movement of tools and fixtures necessary for each operation, (iii) beginning of work on each operation (iv) recording of beginning and completion time (v) movement of work in accordance with a routing schedule (vi) control of progress of all operations and (vii) making necessary adjustments in the release of instructions. Dispatching may be either centralised or decentralised.
d. Follow-Up (Expediting):
An ideal follow up procedure helps to reveal the defects in routing and scheduling, it also detects where communication of instructions is not clear. Lastly it identities the workshops which are either under loaded or overloaded. It involves human relations aspect also. Follow up is essential to get the work done according to plans.
iv. Internal Audit:
Internal audit is also an effective tool of control. It is conducted by an internal auditor, who is an employee of the organisation. Internal audit attempts at regular and independent appraisal of accounting, financial and other operations. Internal audit is concerned not only with the financial control but it includes, plans and the quality of management, effectiveness of methods etc.
Internal auditor can point out defects and neglected situations and can make suggestions based on his analysis. Internal audit is also instrumental in enhancing morale and motivation of employees.
v. Management Information System:
Information has been defined as the rules or guidelines which have the potential to influence managerial decisions. Manager is a decision maker. Information may be a fact or set of facts which is valuable in specific decision, from among alternative courses of action. Information provides the means by which problems are recognised, declined and eventually solved.
Management information system is a system to provide selected decision oriented information, needed by management, to plan, control and evaluate the activities of the organisation. It is designed within the frame work that emphasizes profit planning, performance planning and control at all levels. Thus MIS is a system which provides each manager, in the organisation with the information needed to take decisions, plan and control within his area of responsibility.
vi. PERT and CPM:
Programme evaluation and review technique (PERT) was firstly used in 1957 in U.S.A. as a tool of planning and controlling the “Polaris Missiles Programme” by Booz, Allen and Hamilaton in association with the U.S. Naval department. PERT and critical path method (CPM) are very useful techniques for planning large and one time projects in the area of research development and construction Work etc.
These, two techniques are basically variations of Network methods. The Network concept in PERT provides the framework for treating wide range of project management problems.
There are some steps involved in PERT as given below:
a. Identifying the component activities that must be performed.
b. Indicating the sequence of component activities in a network.
c. Analysis of time required to complete individual activity and the entire project.
d. Modification of initial plan.
e. Control the project.
Construction of ships, buildings and highways, launching a new product, publication of books, computer systems are some areas where Programme evaluation and review technique is used.
The unique contribution of PERT as a form of network analysis is that it provides a means of obtaining a probable estimate of the expected time to complete activities that have not been performed previously and therefore, have not been measured. It is both forward and backward looking control device. It brings in focus, the danger signals or potential bottlenecks, but also provides management with timely progress reports.
The critical path method was firstly employed in U.S.A. in 1958 by the E. I. Dy. Pont Denemours Company. It is basically a technique of project management, used for planning and controlling the most logical sequence of activities for accomplishing a project. The process of control starts with comparison between schedules and actual performance when the project begins.
It locates the deviations with their reasons and finally provides remedial actions. CPM is based on the assumption that the expected time is actually the time taken to complete the project. It is suitable for construction projects and plant maintenance.
Controlling in Management – 4 Modern Management Control Techniques: Balanced Scorecard, Ratio Analysis, Economic Value Added and Market Value Added
The concept of management control keeps on evolving through the years. Many techniques which were thought to be effective during the past no longer hold their relevance in today’s business environment. The modern business climate is a very dynamic one and contemporary businesses need to implement a highly effective control system to make sure that the firm’s strategic goals are being met.
The management has to adopt various control systems to ensure that the firm’s performance is consistent with the organisational goals and objectives. Most control methods are aimed at finance, operations, human resources, etc.
Some of the modern management control techniques are as follows:
1. Balanced Scorecard:
The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and non-profit organisations worldwide to align business activities to the vision and strategy of the organisation, improve internal and external communications, and monitor organisation performance against strategic goals. The balanced scorecard is an integrated method to measure the organisation’s performance.
Traditionally only financial measures were used to evaluate performance of firms, but in balanced scorecard method, non-financial performance measures are also included. Instead of depending upon just financial figures for appraisal, using a balanced set of measures ensures that all the aspects of the companies’ performance are taken into consideration.
The concept of balanced scorecard was developed in the 1990s by Robert Kaplan and Davis Norton. In its earlier days it was a simple performance appraisal framework which has now evolved into a full strategic management system. It is a holistic approach to performance measurement and it also helps the manager to identify what should be done and measured.
Features of the Balanced Scorecard Method:
i. Limited number of measurements.
ii. Focuses on the important factors for long term success.
iii. Not a very complex process.
iv. Covers a wide range of business processes.
v. Relates the diverse areas together in a dynamic relationship.
Perspectives of Balanced Scorecard System:
According to the balanced scorecard method, there are four perspectives of viewing an organisation’s objectives. Data should be collected and analysed in relation to each of these perspectives.
These four perspectives are:
i. Financial Perspective – It is necessary to measure how the shareholders view the company, and what are the financial goals of the company. It is not sufficient to view only the current financial standing of the enterprise, data related to risk assessment and cost benefit analysis should also be analysed.
ii. The Learning and Growth Perspective – This relates to the training, learning and innovation taking place in the organisation. The corporate culture and the steps that have been taken for both individual and corporate self-improvement should be taken into view. Continuous learning and growth is the basis of success for any organisation in today’s climate of rapid technological improvements.
iii. The Business Process Perspective – This refers to internal business processes. The managers need to measure how well the organisation is running, whether their products and services are up to the standards expected by customers and if the other stakeholders are satisfied with the company’s functioning.
iv. The Customer Perspective – This perspective relates to how the customers view the company. Customer satisfaction is the leading indicator of a business’s success and sustainability. If the products and services fail to satisfy the customers, then they will move away from the company.
The balanced scorecard is a modern management technique that considers financial as well as non-financial measures to appraise employee performance. This method helps in aligning the individual’s goals with the organisation’s goals. Balance scorecard can provide a focus for unifying all parts of the business. It can be a very effective tool for changing organisational culture, but it depends upon a well-defined strategy, in the absence of which the implementation of the balanced scorecard might be unsuccessful.
2. Ratio Analysis:
Ratio analysis is an effective way to understand the financial performance of a business. It is a tool for quantitative analysis which involves calculating and scrutinising a series of financial ratios based on financial statements. Powerful insights into the financial strength of the business ratio analysis can be obtained by combining ratio analysis with trend analysis which reviews the pattern or trend of measure over time. The data which is used for ratio analysis is readily available from financial statements of the firm.
Calculation of ratios facilitates comparison of firms which differ in size and to compare a particular company’s financial performance with the industry average. The accuracy of these ratios depends upon the accuracy of the financial statement data, and any discrepancy in the data will affect the credibility of such ratios.
Ratio analysis enables the manager to spot trends in the business performance and may provide early warning signs when the trends become unfavourable. This would give the management enough time to tackle the problems before they increase in proportion. Financial statement ratios focus on the liquidity, profitability and solvency of the business, which are its three key aspects.
i. Liquidity Ratios:
Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs.
a. Current ratio – This is the ratio between the current assets and current liabilities. The current assets include assets that can be converted into cash within a short time. It includes cash, bank balance, accounts receivable and inventory. Current liabilities include bills payable and debts.
Current ratio = Total current assets/Total current liabilities
A current ratio of 2:1 is generally accepted.
b. Quick ratio (Acid test ratio) – This is the ratio between quick assets and current liabilities.
Quick assets = Current assets – inventories
Quick ratio = quick assets/total current liabilities
A quick ratio of 1:1 is normally considered satisfactory.
ii. Solvency Ratios:
Solvency ratios measure the relationship between debts and owners’ equity and examine the proportion of debt the company is using.
a. Debt Equity ratio – The debt to equity ratio measures the extent to which the owners are using debt rather than their own funds to finance the company.
Debt equity ratio = Total debt/total equity
A debt to equity of 1 or less is often good.
b. Debt ratio – The debt ratio relates long term debt to all financial resources (liabilities and equity).
Debt ratio = Total debt/total assets.
iii. Profitability Ratios:
Profitability ratios measure the profits made by a company in relation to its sales and assets.
a. Gross profit margin – This is the ratio of gross profit made in relation to sales.
Gross Profit margin = (Sales – cost of goods sold)/sales
b. Net profit ratio – This is the ratio of net profits (after taxes) to net sales.
Net profit ratio = Net profit/net sales
c. Return on Investment (ROI) – ROI expresses the ratio of total profits in relation to total capital investments.
ROI = Net income/Total funds invested.
Ratio analysis is definitely a good way to study the trends of profitably and solvency of a company. By conducting ratio analysis, the manager can simplify the process of analysing vast amounts of data from the financial statements of the company. Ratios help to analyse the operational efficiency of a company and shed light on the short term liquidity and long term solvency of the enterprise.
However, the reliability of ratios depends upon the credibility of the data used, and any mistakes in the balance sheet or income statement figures can lead to misrepresentation of facts. Ratio analysis helps to compare past and current figures, but it is not futuristic in nature. Thus, ratio analysis as a measurement of company’s performance should be used along with other control techniques for better accuracy of results.
3. Economic Value Added (EVA):
The Economic Value Added (EVA) is a measure of surplus value created on an investment. In other words, it measures how much a company’s returns exceed the minimum required rate of return for its shareholders and lenders of capital. It gives information about the wealth created by the company for the providers of capital.
Management can get an idea about how successful it had been in increasing shareholders’ wealth, which is a better measure of success than profits. The purpose of EVA is to provide a more rounded measure of a company’s performance by calculating its true economic profits. The term Economic Value Added is a trademark of Stern Stewart & Co.
The EVA is calculated using the following formula:
Economic Value Added (EVA) = Net Operating Profit less applicable taxes (NOPAT) – Cost of Capital
Cost of capital = [Cost of Equity x Proportion of equity from capital] + [Cost of debt x Proportion of debt from capital x (1-tax rate)]
Cost of capital is the average cost of both equity capital and interest bearing debt. Capital is the total amount invested in the business, less depreciation. NOPAT is the total pool of profits available to the company after paying taxes which would be used to provide a cash return to the providers of capital.
EVA can be used for the following:
i. Setting organisational goals.
ii. Performance measurement.
iii. Determination of bonuses on shares.
iv. Corporate valuation.
v. Capital budgeting.
vi. Analysing equity shares.
4. Market Value Added (MVA):
MVA is the difference between the current market value of a company and the capital contributed by investors. The higher the MVA, the better it is as it means that the company has created substantial wealth for its investors.
MVA = Company’s market value – invested capital
A company’s invested capital is the sum of cash investments that shareholders and debt holders have made in the company. A point to be noted is that market value added cannot be calculated at a company division level and is not applicable to privately-held companies.
EVA and MVA are value added measures of performance, as they aim to measure the increase in the wealth of the company. They are better indicators of a company’s success as compared to other methods like ratio analysis. Employing EVA and MVA in an organisation would help in developing strategies for value creation. But EVA and MVA cannot be used by private companies which do not raise capital from the public, and implementing such measures into an enterprise is an expensive and time consuming process.
It also requires serious commitment from the board of directors and senior management to properly utilise these measures in business management. Nonetheless, these value added measures would help the company to measure performance, take capital budgeting decisions and analyse equity shares. EVA and MVA, in conjunction with each other provide a meaningful target for the company to pursue for its strategic success.
Controlling in Management – Planning and Controlling
Controlling is similar to planning. It addresses three basic questions – Where are we now? Where do we want to be? How can we get there from here? But controlling takes place after the planning is completed and the organisational activities have begun. Whereas most planning occurs before action is taken, most controlling takes place after the initial action has been taken. This does not mean control is practised only after problems occur. Control decisions can be preventive, and they can also affect future planning decisions.
Planning and controlling are the Siamese twins of management. They are inseparable from each other. As H. Weihrich and others have put it, “Any attempt to control without plans is meaningless, since there is no way for people to tell whether they are going where they want to go (the result of the task of control) unless they first know where they want to go (part of the task of planning). Plans furnish the standards of control.”
No doubt writers on management separate planning and controlling conceptually. However, the truth is that they may be viewed as the two blades of a scissors. It is not possible to cut a piece of paper unless there are two blades. As Weihrich and others have put it, “Without objectives and plans, control is not possible because performance has to be measured against some established criteria.”
Finally, strategic plans require strategic control. Strategic control refers to “systematic monitoring at strategic control points and modifying the organisation’s strategy based on this evaluation.”
Planning without control is useless and control without planning is meaningless. Planning is looking ahead and control is looking back. Planning is the determination of objectives, goals, strategies, policies and programmes of an organisation to give purpose and direction to the activities of the organisation over a specified period of time.
It is anticipatory. It reduces confusion and uncertainty. Control, on the other hand, is the direction of the operations of an enterprise towards predetermined standards and monitoring the progress in this regard for the purpose of correction and feedback.
Controlling and planning are interlinked. Managerial planning seeks consistent, integrated and articulated programmes while management control seeks to compel events to conform to plans. Control will be much better if the plans are more clear, complete and well-coordinated and cover a longer period. The best control corrects deviations from plans before they occur. The next best detects them as they occur. Thus, planning and control are interdependent and complementary to each other.
Controlling in Management – 7 Main Advantages
A good control system gives the following benefits to the management:
1. Adjustments in Operation:
Every organisation has certain objectives. These objectives are achieved only when the plans are properly implemented. If it is not done so, objectives cannot be achieved. Control provides a clue to find whether the plans are properly implemented to achieve the objectives. The deviations from standards are corrected immediately. Thus control makes necessary adjustments in operation.
2. Verification of Policy:
The management frames the policies and plans to help the organisation function smoothly. The organisational performance is reviewed in the light of these policies. The organisational performance might deviate from the plans (standard) on account of many internal and external factors. These factors may force the organisation to deviate from the original plans. Constant review of plans helps to revise and update them. Thus, the management can verify the policy through the control process.
3. Managerial Accountability:
Managerial personnel are assigned responsibilities from top to bottom. A superior may delegate his authority to his subordinates. But the superior is responsible (or accountable) for the performance of his subordinates even after the delegation. It is quite natural that the superior has control over his subordinates.
Besides, it is specified that the superiors should not misuse their authority. Control flows throughout the organisation from top to bottom as the existence of relationship between the superior and subordinates. Everyone, whether superior or subordinate, has responsibility for the work assigned to him.
4. Psychological Pressure:
Better performance is obtained by the management through the control process. It is achieved psychologically. The reason is that each person’s performance is evaluated and linked with rewards. So, the employees will work hard to achieve the standard set for them.
5. Maintaining Morality:
Control creates an atmosphere of discipline in the organisation. Everybody is responsible for the work assigned to him. The workers are expected to make best efforts to complete the work and to the satisfaction of the management. These are not possible in the absence of control.
6. Co-Ordination:
Control gives unity of direction. Proper performance of all managerial functions is necessary to achieve co-ordination. A manager has to co-ordinate the activities of his subordinates with the help of control. Control helps to maintain an equilibrium between means and ends.
7. Efficiency:
As responsibility is fixed for each individual, effective performance is possible. Control indirectly induces the employees to perform the work efficiently. They are well aware that defective performance is linked with punishment.
Controlling in Management – 6 Major Limitations
Even though the control process is essential and so many merits are demonstrated, it has some limitations and short-comings.
They are:
1. Control is an expensive and time consuming process.
2. There are some non-quantitative aspects of business like employee morale, public relations, employee motivation which cannot be expressed in quantitative terms. In control process measurable yardsticks are essential.
3. Sometimes control may be an obstacle in subordinates initiative and spirit. In the sense – over control, strict direct control would not motivate the employee to take initiative and to enhance his spirit in working activities.
4. If every member of the organisation starts working with responsibility or as a responsible member then only control process will be successful otherwise not. This thing is not possible in all cases.
5. Effective control is possible only if the subordinates accept it. Control may lose its importance if the subordinates decline to accept it.
6. Management can keep the control on internal factors but it is not possible for it to keep the control on external factors like, changing government policies, technological changes, social, cultural, political, psychological changes etc.