UNIT V
MANAGERIAL CONTROL
CONCEPT
Ernest Dale in his book “Theory and Practice of Management” has stated that –
“The modern concept of managerial control envisages a system that not only provides a historical record of what has happened to the business as a whole but also pin points the reasons why it has happened and provides data that enable the chief executive or the departmental head to take corrective steps if he finds he is on the wrong track.”
Further, Koontz, O’Donnell and Weihrich have said-“Controlling as the measurement and correction of the performance of activities of sub-ordinates in order to make sure that enterprise objectives and the plans devised to attain them are being accomplished.”
Therefore, the managerial function of control implies measurement of actual performance comparing it with the standards set by plans and correction of deviations to ensure attainment of objectives according to plans.
Thus, control is an important function of management. It is an essential feature of scientific management. In fact much of the precision of managerial education is focused on the improvement of control techniques. It is generally used for putting restrains over the elements being controlled. In managerial terminology, control is ensuring work accomplishment according to plans. It is a process that guides activity towards some predetermined goals.
Definition:
(1) According to F. E. L. Brech, “Managerial control is checking current performance against pre-determined standards contained in the plans, with a view to ensuring adequate progress and satisfactory performances.”
(2) According to Henri Fayol -“In an undertaking control consists in verifying whether everything occurs in conformity with the plans adopted, the instruction issued and the principle established. Its object is to point out the weakness and error in order to rectify them and prevent occurrence. It operates on everything i.e., things, people and action.”
(3) Dalton E. McFarland has said -“Control in its managerial sense is the presence in a business of that force which guides it to a pre-determined objective by means of pre-determined policies and decision.”
Thus, we see that managerial control is fundamental management function that ensures work accomplishment according to plans. It is concerned with measuring and evaluating performance so as to secure the best results of managerial efforts.
PROCESS
The top management initially must decide what elements of the environment and the organisation need to be monitored, evaluated and controlled. The four key areas to be monitored and controlled are – the macro environment, mission and objectives, the industry environment and internal operations.
Step - 1. Key Areas to be monitored:
I. Macro-Environment:
One of the key areas to be monitored is the macro-environment of the company. This area should be focused first. Normally individual companies cannot influence the environment significantly. But the external environmental forces must be continuously- monitored as the changes in the environment influence the implementation of the plans of the company.
II. Mission and Objectives:
This includes modifying any one or more of the areas like company’s mission, objectives, plans, goals, strategy formulation and implementation. The modification depends upon the nature and degree of changes and shifts in the environment.
III. Industry Environment:
The manager also monitors and controls the industry related environment. The environmental forces may not be as they were planned. The changes in the environment may provide new opportunities or pose new threats. The plan, therefore, should be modified accordingly.
The industry environment of the future should be considered by the top management for the purpose of evaluation and control.
IV. Internal Operations:
The manager has to evaluate the internal operations continuously in view of the changes in the macro-environment and industry environment. The manager has to introduce changes in internal operations when changes in the environment affect the plans.
Step - 2. Establishing Standards:
Evaluating an organisational performance is normally based on certain standards. These standards may be the previous year’s achievements or the competitor’s records or the fresh standards established by the management. Qualitative judgments like the qualitative features of the product or service in the last year may be used.
Quantitative measures like Return on Investment (ROI), Return on sales may also be used for judging the performance. Companies should establish the standards for evaluating the performance of the strategies taking several factors into consideration.
The standards may include:
1. Quality of Products/Services.
2. Quantity of Products to be produced.
3. Quality of Management.
4. Innovativeness/Creativity.
5. Long-term investment value.
6. Volume of sales and/or market share.
7. Financial soundness in terms of return on investment, return on equity capital, market price of the share, earning per share etc.
8. Community and environmental responsibility in terms of amount spent on community development, variety of facilities provided to the community, programmes undertaken for environmental protection and ecological balance etc.
9. Soundness of human resources management in terms of percentage of employee grievances redressed, employee satisfaction rate, employee turnover rate, industrial relations situation etc.
10. Ability to attract, develop and retain competent and skilled people.
11. Use of company’s assets.
12. Production targets, rate of capacity utilisation, design of new products, new uses of existing products, rate of customer complaints about the product quality, suitability of ingredients etc.
13. Corporate image among the customers and general public.
14. Market place performance.
15. Standards relating to the organisational variables include freedom and autonomy, level of control, responsibility, formal organisation and degree of formality and informal organisation scope for innovation and creativity.
Step - 3. Measuring Performance:
The manager has to measure the performance of various areas of the organisation before taking an action. Performance may be measured through quantitative terms or qualitative terms. Reports and statements help to measure the actual performance through quantitative terms and managerial observations help to measure performance through qualitative terms.
Production, sales, profitability, staff cost etc. can be measured through quantitative terms and quality of the product, employee’s performance, attitude etc. can be measured through qualitative terms.
Step - 4. Compare Performance with Standards:
Once the performance of different aspects of the organisation is measured, it should be compared with the predetermined standards. Standards are set to achieve the already formulated organisational goals and plans. Organisational standards are yardsticks and benchmarks that place organisational performance in perspective.
The manager should set standards for all performance areas of the organisation based on organisational goals and strategies. Normally, the standards vary from one company to the other company. Further, they also vary from time to time in the same company. The standards developed by General Electric Company can be used as model standards.
These standards include:
i. Profitability Standards:
They include how much gross profit, net profit, return on investment, earning per share, percentage of profit to sales, the company should earn in a given time period.
ii. Market Position Standards:
These standards include total sales, sales region-wise and product-wise, market share, marketing costs, customer service, customer satisfaction, price, customer loyalty shifts from or to other organisation’s products etc.
iii. Productivity Standards:
These standards indicate the performance of the organisation in terms of conversion of inputs into output. These standards include capital productivity, labour productivity, material productivity etc.
iv. Product Leadership Standards:
They include the innovations and modifications in products to increase the new uses of the existing product, developing new products with new uses etc.
v. Human Resources Standards:
These standards include providing competitive salaries, benefits and different aspects of quality of work life. They also include human resources performance, productivity, turnover rates, absenteeism rates providing challenging and creative jobs etc.
vi. Employee Attitude Standards:
They include employees’ favourable attitude towards the nature of work, organisation, salaries, benefits, working environment, quality of work life, treatment by superiors etc.
vii. Social Responsibility Standards:
All organisations discharge their responsibilities towards different sections of the society. These standards are related to the services of organisations towards community, government, employees, suppliers, creditors etc.
viii. Standards Reflecting Balance between Short-Range and Long-Range Goals:
Short- range and long-range strategies should be balanced successfully. Standards in these areas should bring balance between these two goals.
Step - 5. Take No Action, if Performance is in Harmony with Standards:
If the performances of various organisational areas match with the standards, the manager need not take any action. He should just allow the process to continue. However, he can try to improve the performance above the standards, if it would be possible, without having any negative impact on the existing process.
Step - 6. Take Corrective Action, if Necessary:
Managers should take necessary corrective action, if performance is not in harmony with standards. If the deviation is positive i.e. performance is above the standards continuously, revises the standards. On the contrary, if performance is below standard, take steps to improve the performance.
The managers compare the performance with standards. If they find any deviation between the standards and performance, they should take corrective action to bridge the gap between the standards and performance.
Causes of Deviations:
It is very easy to conclude that someone made a mistake, when deviations are identified. But the deviations maybe the result of an unexpected move by a competitor, or changes in external environment.
Therefore, the manager should consider the following before making a decision, in this regard:
1. Was the cause of deviation internal or external?
2. Was the cause random, or should it have been anticipated?
3. Is the change temporary or permanent?
4. Are the present plans still appropriate?
5. Does the organisation have the capacity to respond to the change needed?
Corrective Action:
Corrective action may be defined as change in a company’s operations to ensure that it can more effectively and efficiently reach its goals and perform its established standards.
Plans that do not achieve standards produce three possible responses viz.:
(i) To revise plans,
(ii) To change standards and
(iii) To take corrective action in the existing process without changing standards and plans.
Change in plans may require a ‘fine tuning’ of the existing strategy or complete changes in plans. If it is realized that the existing standards are unrealistic under the present conditions, the manager should reset the standards taking the existing conditions into consideration.
Corrective action may be as simple as to increase the price or may be as complex as change the chief executive officer. Deviations require re-examination of the company’s mission, objectives, and relationship to its environment, internal strengths, weaknesses and plans. After having an idea of the process of control, now we shall study the types of control. Now, we shall discuss the control techniques.
Effective Control System (9 Principles of Designing Effective Control System)
Effective Control System (9 Principles of Designing Effective Control System)Managers are responsible for controlling in the organization and a manager must improve the effectiveness of the organization’s control system; as can do a great deal to improve the effectiveness of their control systems.
Controlling is the last step of management where how the implemented plan is working is assessed and evasive actions are taken.
9 principles of the effective control system are;
- Matching controls to plans and position.
- Ensuring flexibility to control.
- Ensuring accuracy.
- Seeking objectivity of controls.
- Achieving the economy of controls.
- Tailoring control to individual managers.
- Pointing up exceptions.
- Fitting the system of control to the organizational culture.
- Ensuring corrective action through control.
To design an effective control system without error for the organization; these 9 principles must be followed. They are more than just principles.
These are guidelines for managers for designing a control system that works.
Matching controls to plans and position
Control techniques should reflect the plans they are designed to follow. Managers need the information that will tell them how the plans for which they are responsible are progressing.
Controls should also be tailored to positions, i.e. they may differ in between positions.
Some control techniques, such as those involving standard hours and costs, budgets, and various financial ratios, have general application in various situations.
However, none of these techniques are completely applicable in any given situation. Managers should, therefore, be aware, of the critical factors in their plans requiring control, and they must use techniques and information suited to them.
Controls should also reflect the place in the organization wherein responsibility for action lies, thereby enabling managers to correct deviations from plans.
Ensuring flexibility to control
Flexibility is another essential characteristic of an effective control system. This means that the control system itself must be flexible enough to accommodate the change.
In other words, the controls should remain workable in the face of changed plans, unforeseen circumstances, or outright failures.
The illustration may be of an organization whose diverse product lines require 101 different raw materials. The company’s inventory control system must be able to manage and monitor the current levels of inventory for all the 101 materials.
When a change in the product line changes the number of raw materials needed, or when the required quantities of any of the existing materials change, the control system, should be able to accommodate the revised requirements.
Yet the seniors and probably other students with certain problems may simply have to take the course and they will be accommodated in its flexible computerized admission registration system.
Ensuring accuracy
Control systems must also be accurate managerial decisions based on inaccurate information that may prove costly and harmful.
If for example, sales estimates are artificially high, a manager might either cut advertising on the assumption that it is no longer needed or increase advertising to enhance the sale.
In either case, the action may not be appropriate.
Similarly, a manager, unaware of the hidden production cost, may quote a sales price much lower than is desirable. The accuracy of control systems goes a long way in preventing such damaging upshots.
Seeking objectivity of controls
As far as possible the information provided by the control system should be objective.
If on the other hand, controls are subjective, a manager’s or an executive’s personality may influence judgments of performance and make them less accurate.
Thus, the control system should ideally provide objective information to the manager for evaluation and action.
Achieving the economy of controls
A limiting factor of control: systems are their cost.
So to be effective, controls must be worth their cost.
Although it sounds simple, it is very difficult to accomplish. If tailored to the job and the size of the enterprise, control will probably be economical.
To be precise, control techniques and approaches can be called efficient when they bring to light actual or potential deviations from plans with the minimum of cost.
Tailoring control to individual managers
Control systems and information are, of course, intended to help individual managers carry out their function of control.
If they are not of a type that a manager can or will understand, they will not be useful.
What managers cannot understand they will not be useful; what managers cannot understand they will not trust; and what they do not trust they will not use.
Pointing up exceptions
One of the best ways to make control effective is to make sure that it is designed to point up exceptions.
Controls that concentrate on exceptions from planned performance allow managers to benefit from the time-honored exception principle and detect those areas that require their attention.
Fitting the system of control to the organizational culture
An effective control system must fit in with the organizational culture.
For example;
if employees have been managed without allowing them any participation in decision making, the sudden introduction of a permissive control system will hardly succeed.
On the other hand, in an organization where people have been allowed participation and freedom, the tight control system may fail to produce positive results.
Ensuring corrective action through the control
An effective control system will disclose where failures are occurring and who is/are responsible for the failures and it will ensure that some corrective action is taken.
Control is justified only if deviations from plans are corrected by an appropriate authority.
Taking the proper corrective action necessitates sufficient authority to accomplish this task.
Conclusion
An effective control system is important for an organization to run properly and achieve its goals. Any good control system will pass these 9 principles.
If any part of it is ignored; then controlling the organization’s resources will be very difficult for managers.
Control is a fundamental managerial function. Managerial control regulates the organizational activities. It compares the actual performance and expected organizational standards and goals. For deviation in performance between the actual and expected performance, it ensures that necessary corrective action is taken.
There are various techniques of managerial control which can be classified into two broad categories namely-
- Traditional techniques
- Modern techniques
Traditional Techniques of Managerial Control
Traditional techniques are those which have been used by the companies for a long time now. These include:
- Personal observation
- Statistical reports
- Break-even analysis
- Budgetary control
1. Personal Observation
This is the most traditional method of control. Personal observation is one of those techniques which enable the manager to collect the information as first-hand information.
It also creates a phenomenon of psychological pressure on the employees to perform in such a manner so as to achieve well their objectives as they are aware that they are being observed personally on their job. However, it is a very time-consuming exercise & cannot effectively be used for all kinds of jobs.
2. Statistical Reports
Statistical reports can be defined as an overall analysis of reports and data which is used in the form of averages, percentage, ratios, correlation, etc., present useful information to the managers regarding the performance of the organization in various areas.
This type of useful information when presented in the various forms like charts, graphs, tables, etc., enables the managers to read them more easily & allow a comparison to be made with performance in previous periods & also with the benchmarks.
3. Break-even Analysis
Breakeven analysis is a technique used by managers to study the relationship between costs, volume & profits. It determines the overall picture of probable profit & losses at different levels of activity while analyzing the overall position.
The sales volume at which there is no profit, no loss is known as the breakeven point. There is no profit or no loss. Breakeven point can be calculated with the help of the following formula:
Breakeven point = Fixed Costs/Selling price per unit – variable costs per unit
4. Budgetary Control
Budgetary control can be defined as such technique of managerial control in which all operations which are necessary to be performed are executed in such a manner so as to perform and plan in advance in the form of budgets & actual results are compared with budgetary standards.
Therefore, the budget can be defined as a quantitative statement prepared for a definite future period of time for the purpose of obtaining a given objective. It is also a statement which reflects the policy of that particular period. The common types of budgets used by an organization.
Some of the types of budgets prepared by an organisation are as follows,
- Sales budget: A statement of what an organization expects to sell in terms of quantity as well as value
- Production budget: A statement of what an organization plans to produce in the budgeted period
- Material budget: A statement of estimated quantity & cost of materials required for production
- Cash budget: Anticipated cash inflows & outflows for the budgeted period
- Capital budget: Estimated spending on major long-term assets like a new factory or major equipment
- Research & development budget: Estimated spending for the development or refinement of products & processes
Modern Techniques of Managerial Control
Modern techniques of controlling are those which are of recent origin & are comparatively new in management literature. These techniques provide a refreshingly new thinking on the ways in which various aspects of an organization can be controlled. These include:
- Return on investment
- Ratio analysis
- Responsibility accounting
- Management audit
- PERT & CPM
1. Return on Investment
Return on investment (ROI) can be defined as one of the important and useful techniques. It provides the basics and guides for measuring whether or not invested capital has been used effectively for generating a reasonable amount of return. ROI can be used to measure the overall performance of an organization or of its individual departments or divisions. It can be calculated as under-
Net income before or after tax may be used for making comparisons. Total investment includes both working as well as fixed capital invested in the business.
2. Ratio Analysis
The most commonly used ratios used by organizations can be classified into the following categories:
- Liquidity ratios
- Solvency ratios
- Profitability ratios
- Turnover ratios
3. Responsibility Accounting
Responsibility accounting can be defined as a system of accounting in which overall involvement of different sections, divisions & departments of an organization are set up as ‘Responsibility centers’. The head of the center is responsible for achieving the target set for his center. Responsibility centers may be of the following types:
- Cost center
- Revenue center
- Profit center
- Investment center
4. Management Audit
Management audit refers to a systematic appraisal of the overall performance of the management of an organization. The purpose is to review the efficiency &n effectiveness of management & to improve its performance in future periods.
5. PERT & CPM
PERT (programmed evaluation & review technique) & CPM (critical path method) are important network techniques useful in planning & controlling. These techniques, therefore, help in performing various functions of management like planning; scheduling & implementing time-bound projects involving the performance of a variety of complex, diverse & interrelated activities.
Therefore, these techniques are so interrelated and deal with such factors as time scheduling & resources allocation for these activities.
Change management is defined as the methods and manners in which a company describes and implements change within both its internal and external processes. This includes preparing and supporting employees, establishing the necessary steps for change, and monitoring pre- and post-change activities to ensure successful implementation.
Significant organizational change can be challenging. It often requires many levels of cooperation and may involve different independent entities within an organization. Developing a structured approach to change is critical to help ensure a beneficial transition while mitigating disruption.
Changes usually fail for human reasons: the promoters of the change did not attend to the healthy, real and predictable reactions of normal people to disturbance of their routines. Effective communication is one of the most important success factors for effective change management. All involved individuals must understand the progress through the various stages and see results as the change cascades.
Nature of Change:
1. A Dynamic process, rather than a Series of Events:
We often talk of Stone Age, agricultural age, machine age and the current information age. The ‘ages’ indicate that society has been constantly changing over time. This suggests that change is, and always has been a continuous process. ‘Every moment the time changes – every second, millisecond, microsecond, nanosecond and attosecond.’ It is this continuity, an indicator of dynamism.
2. Change can be exciting and bring about the best work of a life-time:
Change always gives hope for the betterment, and this hope brings out the best of a person.
3. The Pace, Amount, and Complexity of change only Continue to Rise, with no signs of let up:
We have seen within last one decade that the speed of change has increased many folds. The change is all round. And, there is no likelihood of any slowing of it. Thus, change is also changing.
4. Change does not take place in a vacuum:
Change is when someone is there to feel and something is there to change. Change occurs in a system.
5. Change is an accelerating constant universally:
Change, like death and taxes, is permanent. Somebody has rightly said that nothing (except God) is as permanent as change. Process of change is not restricted to one country or organisation. It is pervasive.
6. Change will generate other changes:
Change always follows systems approach. Hence a change at one place requires simultaneous changes in related aspects as well.
7. Change is not new:
Change has been here for times immemorial, and hence, it is not a new thing.
8. Change is a Natural Phenomenon:
As sunrise and sunset are natural, so is also change.
9. Change is a continuum:
The transition from night today is called dawn whereas the transition from day to night is called dusk. But no one can tell when the day ceases to be day or night ceases to be night. No one can! Since change is a continuum.
Process OF planned change
- Recognize the need for change. Recognition of the need for change may occur at the top management level or in peripheral parts of the organization. The change may be due to either internal or external forces.
- Develop the goals of the change. Remember that before any action is taken, it is necessary to determine why the change is necessary. Both problems and opportunities must be evaluated. Then it is important to define the needed changes in terms of products, technology, structure, and culture.
- Select a change agent. The change agent is the person who takes leadership responsibility to implement planned change. The change agent must be alert to things that need revamping, open to good ideas, and supportive of the implementation of those ideas into actual practice.
- Diagnose the current climate. In this step, the change agent sets about gathering data about the climate of the organization in order to help employees prepare for change. Preparing people for change requires direct and forceful feedback about the negatives of the present situation, as compared to the desired future state, and sensitizing people to the forces of change that exist in their environment.
- Select an implementation method. This step requires a decision on the best way to bring about the change. Managers can make themselves more sensitive to pressures for change by using networks of people and organizations with different perspectives and views, visiting other organizations exposed to new ideas, and using external standards of performance, such as competitor's progress.
- Develop a plan. This step involves actually putting together the plan, or the “what” information. This phase also determines the when, where, and how of the plan. The plan is like a road map. It notes specific events and activities that must be timed and integrated to produce the change. It also delegates responsibility for each of the goals and objectives.
- Implement the plan. After all the questions have been answered, the plan is put into operation. Once a change has begun, initial excitement can dissipate in the face of everyday problems. Managers can maintain the momentum for change by providing resources, developing new competencies and skills, reinforcing new behaviors, and building a support system for those initiating the change.
- Follow the plan and evaluate it. During this step, managers must compare the actual results to the goals established in Step 4. It is important to determine whether the goals were met; a complete follow‐up and evaluation of the results aids this determination. Change should produce positive results and not be undertaken for its own sake.
Keep in mind that a comprehensive model of planned change includes a set of activities that managers must engage in to manage the change process effectively. They must recognize the need for change, motivate change, create a vision, develop political support, manage the transition, and sustain momentum during the change.
References:
- “Principles of Business Management” by Dan Voich and Daniel A. Wren
- “Principles of Business Management” by Dr. S. C. Saksena
