01: The System and Process of Controlling

The managerial function of controlling is the measurement and correction of performance in order to make sure that enterprise objective and the plans devised to attain them are being accomplished.

The Basic Control Process

Basic Control Process involves three steps: establishing standards, measuring performance against these standards and correcting variations from standards and plan. Establishment of Standards The first step in the control process logically would be to establish plans. Since managers cannot usually watch everything, special standards are established. Standards are simply criteria of performance. They are the selected points in an entire planning program at which measures of performance are made so that managers can receive signals about how things are going and that do not have to watch every step in the execution of Plans. Verifiable goals or objectives are the best examples of standards. Measurement of Performance The measurement of performance against standards should ideally be done on a forward-looking basis so that deviations may be detected in advance of their occurrence and avoided by appropriate actions. Correction of Deviations Standards should reflect the various positions in an organization structure. If performance is measured accordingly, it is easier to correct deviations. Correction of deviations is the point at which control can be seen as a part of the whole system of management and can be related to the other managerial functions. Correction can be done by exercising organizing function through reassignment or clarification of duties, by additional staffing, by better selection and training of subordinate, or by that ultimate re-staffing (firing)

Critical Control Points, Standards and Benchmarking

For a manager careful personal observation of subordinate is not possible because of the complexity of the operations and the fact that a manager has far more to do than personally observe performance for a whole day. A manager must choose points for special attention. The points selected for control should be critical, in the sense either of being limiting factors in the operation or of showing better than other factors whether plans are working out. The principle of critical point control is: Effective control requires attention to those factors critical to evaluating performance against plan. Another way of controlling is comparing company performance with that of other firms through benchmarking. Types of Critical-Point Standards Standards to be of following points: physical standards, cost standards, capital standards, revenue

standards, program standards, intangible standards, goals as standards and strategic plans as control points for strategic control. Physical Standards: Physical standards are non-monitory measurements and are common at the operating level. This may reflects quantities such as labor hours per unit of output. Physical standards may also reflect quality, such as hardness of bearings. Cost Standards: Cost standards are monitory measurements and, like physical standards, are common at the operating level. They attach monitory values to specific aspects of operations such as direct or indirect costs per unit produced, labor cost per unit or per hour, etc. Capital Standards: There are a variety of capital standards, all arising from the application of monetary measurements to physical items. They have to do with the capital invested in the firm rather than with operating costs and are therefore primarily related to the balance sheet rather than to the income statement. Most widely used standard is return on investment. Other capital standards are ratio of current assets to current liabilities, debt to net worth, fixed investment to total investment, cash and receivables to payables. Revenue Standards: Revenue standards arise from attaching monetary values to sales. Program Standards: A manager may be assigned to install a variable budget program, a program for formally following the development of new products or a program for improving the quality of a sales force. Intangible Standards: More difficult to set are standards not expressed in either physical or monetary measurements e.g. determining whether the advertising program meets both short and long term objectives. Goals as Standards: Modern managers are finding that through research and thinking it is possible to define goals that can be used as performance standards. Strategic Plans as Control Points for Strategic Control: Strategic Control requires systematic monitoring at strategic control points and modifying the organizations strategy based on this evaluation. Since controls facilitate comparisons of intended goals with actual performance, they also provide opportunities for learning, which, in turn, is the basis for organization change. Benchmarking It is an approach for setting goals and productivity measures based on best-industry practices. There are three types of benchmarking. First, strategic benchmarking compares various strategies and identifies the key strategic elements of success. Second operational benchmarking compares relative costs or possibilities for product differentiation. Third, management benchmarking focuses on support functions such as market planning and information systems, logistics, human resource management and so on. The steps in benchmarking include the identification of what is to be benchmarked. Then superior performers have to be selected. During the implementation of the new approach, performance is periodically measured and corrective actions are taken at that time.

Control as a Feedback System

Managerial control is essentially the same basic control process as that found in physical system. Many systems control themselves through information feedback, which shows deviations from standard and initiates changes. Managers do measure actual performance, compare this measurement against standards, and identify and analyze deviations.

Real-time Information and Control

Real-time information is information about what is happening while it is happening. Supermarkets and department stores have electronic cash register facility, where inventory, sales, gross, profit and other data can be obtained as they occur. Real-time information can also be a means of getting real-time control in areas of importance to managers. But most of the cases, real-time information does not, except possible in the simplest and most unusual cases, make possible real-time control. The analysis of causes of deviation, the development of program of correction and the implementation of these programs are likely to be time consuming tasks. It may take considerable time to discover what is causing factory rejects and more time to put corrective measures into effect. Once it is learned that an inventory is too high, the steps involved in getting it back to the desired level may take a number of months. Thus time lags are unavoidable. This does not mean that prompt measurement of performance is unimportant. The sooner managers know that activities for which they are responsible are not proceeding in accordance with the plans, the faster they can take action to make correction. Information on seat availability is likely to be crucial to serving customers. It was through that the benefit of gathering real-time data was not worth the expense because the correction process took so long.

Feed-forward or Preventive Control

The time lag in the management control process shows that control must be directed towards the future if it is to be effective. It illustrates the problem of only using feedback for the output of a system and measuring this output as a means of control. What managers need for effective control is a system that will tell them, in time to take a corrective action that problem will occur if they do not do something about them now. Feedback from the output of a system is not good enough for control it is little more than postmortem and no one has found a way to change the past. Feed-forward in Human Systems While driving, knowing that hill represents a disturbing variable in the system, the driver would probably correct for this by pressing the accelerator before speed falls. Feed-forward versus Feedback Systems Simple feedback systems measure output of a process and feed into the system or the inputs of the system corrective actions to obtain desired output. Feed-forward systems monitor inputs into a process to ascertain whether the inputs are as planned; if they are not, the inputs or perhaps the process are changed in order to obtain desire results. Also even with feed-forward system, a manager would still want to measure the final system output, since nothing can be expected to

work perfectly enough to ensure that the final output will always be exactly as desired. Feed-forward in Management If managers are to exercise effective control over inventories, they must identify the variables in the system. Each enterprise should design its own system by portraying the system variables and their impact on a process. Of course, to make feed-forward work in practice, inputs must be carefully monitored. On of the problems in all feed-forward control systems, is the necessity of watching for what engineers call disturbance. These are factors which have not been taken into account in the input model but which may have an impact on the system and the desired end result. Obviously, it would be impracticable to take into account in a model all inputs that might possibly affect the operation of a program. Requirements for Feed-forward Control 1. Make a through and careful analysis of the planning and control system and identify the more important input variables. 2. Develop a model of the system. 3. Take care to keep the model up to date. The model should be reviewed regularly to see what the input variables identified and their interrelationships continue to represent realities. 4. Collect data on input variables regularly and put them into the system. 5. Regularly asses the variations of actual input data from planned-for inputs and evaluate the impact on the expected end result. 6. Take action. Like any other technique of planning and control, all that the system can do is indicate problems; must obviously take action to solve them.

Control of Overall Performance

Planning and control are increasingly being treated as an interrelated system. There are many reasons for control of overall performance. First, just as overall planning must apply to enterprise or major division goals, so must overall controls be applied. Second, decentralization of authority especially in product or territorial divisionscreates semi-independent units, and these must be subjected to overall controls to avoid the chaos of complete independence. Third, overall controls permit measuring an integrated area managers total effort, rather than parts of it. Many overall controls in business are, financial. Financial measurements also summarize the operation of a number of plans. Further they accurately indicate total expenditures of resources in reaching the goals. Financial controls like any other control, have to be tailored to the specific needs of the enterprise or the position.

Profit and Loss Control

The income statement for an enterprise as a whole serves important control purposes, mainly because it is useful for determining the immediate revenue or cost factors that have accounted fro success or failure. The Nature and Purpose of Profit and Loss Control The survival of business usually depends on profits and since profits are a definite standard

against which success is measured, many companies use the income statement for divisional or department control. Because it is a statement of all revenues and expenses for a given time, it is a true summary of the results of business operations. Limitations of Profit and Loss Control Profit and loss control suffers from the cost of the accounting and paper transactions involving intra-company transfer of costs and revenues.

Control through Return on Investment (ROI)

The return-on-investment approach, often referred to simply as ROI, has been the core of the control system. This yardstick is the rate of return that a company or a division can earn on the capital allocated to it. The goal of a business is seen, not just as optimizing profits but as optimizing returns from capital devoted to business purpose.

Management Audits and Accounting Firms

The greatest interest in pursuing management audits has been demonstrated by accounting audit firms.

Bureaucratic and Clean Control

Bureaucratic control is characterized by a wide use of rules, regulations, policies, procedures and formal authority. This kind of control requires clear job descriptions, budgets and often standardized tasks. Employees are expected to comply with the rules and regulations and may have limited opportunities for participation. Clean control on the other hand, is based on norms, shared values, expected behavior and other aspects like organization culture.

Requirements for Effective Controls

All alert managers want to have an adequate and effective system of controls to assist them in making sure that events conform to plans. Controls used by managers must be designed for the specific task and person they are intended to serve. While the basic process and the fundamentals of control are universal, the actual system requires special design. Tailoring Controls to Plans and Positions All control techniques and systems should reflect the plans they are designed to follow. They should also be tailored to positions. Controls should also reflect the organization structure which shows who is responsible for the execution of plans and for any deviation from them. Tailoring Controls to Individual Mangers Controls must also be tailored to individual managers. Control systems and information are, of course, intended to help individual managers carry out their function of control.

Designing Controls to Point Up Exceptions at Critical Points 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. But it is not enough merely to look at exceptions, some deviations from standards have little meaning, and others have great deal. Small deviations in certain areas may have greater significance than larger exceptions in other areas. The exception principle should be accompanied in practice by the critical-point control. But one must look for exceptions at critical points. Seeking Objectivity of Controls Management necessarily has many subjective elements, but whether a subordinate is doing a good job should ideally not be matter for subjective determination. Effective control requires objective, accurate and suitable standards. Ensuring Flexibilities of Controls Controls should remain workable in the face of changed plans, unforeseen circumstances, or outright failures. If controls are to remain effective despite failure or unexpected changes of plans, they must be flexible. Fitting the Control System to the Organizational Culture To be most effective, any control system or technique must fit the organizational culture. For example, in an organization where people have been given considerable freedom and participation, a tight control system may go so strongly against the gain that it will be doomed to failure. Achieving Economy of Controls Controls must be worth their cost. Establishing Controls that Led to Corrective Action Control is justified only if derivations from plans are corrected through appropriate planning, organizing, staffing and leading.