Fundamentals of Management and

Organizational Behaviour

Overview of
Unit
Planning
2 (Part 2)
DEFINITION OF CONTROL
Controlling means ensuring that activities in an organisation are performed as per the plans. Controlling
also ensures that an organisations resources are being used effectively and efficiently for the achievement
of desired goals. Controlling is, thus a goal oriented function. Controlling is a very important managerial
function. Because of controlling manager is able to compare actual performance with the planned
performance. In order to control the activities at all levels manager needs to perform controlling function.

“Managerial Control implies the measurement of accomplishment against the standard and the correction
of deviations to assure attainment of objectives according to plans.”
-Koontz and O’ Donnel
FUNCTIONS OF CONTROLLING

1. Accomplishing organisational goals: The controlling function measures progress towards the
organisational goals and brings to light the deviations, if any, and indicates corrective action. It, thus,
guides the organisation and keeps it on the right track so that organisational goals might be achieved.
2. Judging accuracy of standards: A good control system enables management to verify whether the
standards set are accurate and objective. An efficient control system keeps a careful check on the
changes taking place in the organisation and in the environment and helps to review and revise the
standards in light of such changes.
3. Making efficient use of resources: By exercising control, a manager seeks to reduce wastage and
spoilage of resources. Each activity is performed in accordance with predetermined standards and
norms. This ensures that resources are used in the most effective and efficient manner.
4. Improving employee motivation: A good control system ensures that employees know well in advance
what they are expected to do and what are the standards of performance on the basis of which they
will be appraised. It, thus, motivates them and helps them to give better performance.
5. Ensuring order and discipline: Controlling creates an atmosphere of order and discipline in the
organisation. It helps to minimise dishonest behaviour on the part of the employees by keeping a close
check on their activities.
6. Facilitating coordination in action: Controlling provides direction to all activities and efforts for
achieving organisational goals. Each department and employee is governed by predetermined
standards which are well coordinated with one another. This ensures that overall organisational
objectives are accomplished.
CONTROLLING PROCESS

Controlling is a systematic process involving the following steps.

1. Setting performance standards

2. Measurement of actual performance

3. Comparison of actual performance with standards

4. Analysing deviations

5. Taking corrective action

Step 1: Setting Performance Standards: The first step in the controlling process is setting up of
performance standards. Standards are the criteria against which actual performance would be measured.
Standards can be set in both quantitative as well as qualitative terms.
Some of the qualitative standards are—cost to be incurred, product units to be produced, time to be spent
in performing a task etc. Improving goodwill and motivation level of employees are examples of
qualitative standards.
Step 2: Measurement of Actual Performance: Once performance standards are set, the next step is
measurement of actual performance. Performance should be measured in an objective and reliable manner.
Some of the techniques used for measuring the performance are personal observation, sample checking
performance reports etc. Progress of work in certain operating areas like marketing may be measured by
considering the number of units sold, increase in market share, etc., whereas, efficiency of production may
be measured by counting the number of pieces produced and number of defective pieces in a batch.
Step 3: Comparing Actual Performance with Standards: This step involves comparison of actual
performance with the standard. Such comparison will reveal the deviation between actual and desired
results. Comparison becomes easier when standards are set in quantitative terms. For instance,
performance of a worker in terms of units produced in a week can be easily measured against the standard
output for the week.
Step 4: Analysing Deviations: Some deviation in performance can be expected in all activities. It is,
therefore, important to determine the acceptable range of deviations. Also, deviations in key areas of
business need to be attended more urgently as compared to deviations in certain insignificant areas.
Critical point control and management by exception should be used by a manager in this regard.
 Critical Point Control: It is neither economical nor easy to keep a check on each and every activity in
an organisation. Control should, therefore, focus on key result areas (KRAs) which are critical to the
success of an organisation. These KRAs are set as the critical points.
 Management by Exception: Management by exception, which is often referred to as control by
exception, is an important principle of management control based on the belief that an attempt to
control everything results in controlling nothing. Thus, only significant deviations which go beyond the
permissible limit should be brought to the notice of management.
Step 5: Taking Corrective Action: The final step in the controlling process is taking corrective action.
No corrective action is required when the deviations are within acceptable limits. However, when the
deviations go beyond the acceptable range, especially in the important areas, it demands immediate
managerial attention so that deviations do not occur again and standards are accomplished. Incase the
deviations cannot be corrected through managerial action, the standards may have to be revised.
 TYPES/ TECHNIQUES OF CONTROL
Traditional Techniques: are those which have been used by the companies for a long time now. However, these
techniques have not become obsolete and are still being used by companies. These include:
(a) Personal observation
(b) Statistical reports
(c) Breakeven analysis
(d) Budgetary control
Modern Techniques: are those which are of recent origin and are comparatively new in management literature. These
include:
(a) Return on investment
(b) Ratio analysis
(c) Responsibility accounting
(d) Management audit
(e) PERT and CPM
(f) Management information system
TRADITIONAL TECHNIQUES
(a) Personal Observation
Personal observation enables the manager to collect first hand information. It also creates a psychological
pressure on the employees to perform well as they are aware that they are being observed personally in
their job.

(b) Statistical Reports

Statistical analysis in the form of averages, percentages, ratios, correlation etc. Present useful information
to the managers regarding performance of the organisation in various areas. Such information when
presented in the form of charts, graphs, tables etc enables the managers to read them more easily and allow
a comparison to be made with performance in previous periods and also with the benchmarks.
(c) Break-even Analysis
It is a technique used by managers to study the relationship between costs, volume and profits. It
determines the probable profits and losses at different levels of activity. The sales volume at which there is
no profit, no loss is known as break-even point. It is a useful technique for the managers as it helps in
estimating profits at different levels of activities.
Breakeven point can be calculated with the help of the following formula:
Breakeven Point = Fixed Costs Selling price per unit
Variable cost per unit

(d) Budgetary Control

It is a technique of managerial control in which all operations are planned in advance in the form of
budgets and actual results are compared with budgetary standards. This comparison reveals the necessary
actions to be taken so that organisational goals are accomplished. A budget is a quantitative statement 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. It will contain figures of forecasts both in terms of time and
quantities.
MODERN TECHNIQUES
(a) Return on Investment
Return on Investment (ROI) is a useful technique which provides the basic yardstick for measuring whether or not
invested capital has been used effectively for generating reasonable amount of return. ROI can be used to measure
overall performance of an organisation or of its individual departments or divisions. It can be calculated as under.
ROI = Net income before interest and tax
Capital Employed
(b) Ratio Analysis: It refers to analysis of financial statements through computation of ratios. The most commonly
used ratios are
Liquidity Ratios
Liquidity ratios are calculated to determinedly short term solvency of business.
Solvency Ratios
Ratios which are calculated to determine the long term solvency of business are known as Solvency ratios.
Profitability Ratios
These ratios are calculated to analyse the profitability position of a business.
Turnover Ratios
They are calculated to determine the efficiency of operations based on effective utilization of resources.
( C) Responsibility Accounting Responsibility accounting is a system of accounting in which different
sections, divisions and departments of an organisation are set up as ‘responsibility centres’. The head of
the centre is responsible for achieving the target set for his centre. Responsibility centres may be of the
following types
Cost Centre
A cost or expense centre is a segment of an organisation in which managers are held responsible for the
cost incurred in the centre but not for the revenues e.g., production department.
Revenue Centre
A revenue centre is held responsible for generating revenue, e.g., marketing department.
Profit Centre
A profit centre is responsible for both cost and revenue e.g., repair and maintenance department.
Investment Centre
An investment centre is responsible not only for profits but also for investments made in the centre in the
form of assets
(d) Management audit refers to systematic appraisal of the overall performance of the management of an
organisation. The purpose is to review the efficiency and effectiveness of management and to improve its performance
in future periods. It is helpful in identifying the deficiencies in the performance of management functions. The main
advantages are
-Helps to locate weaknesses.
-It helps to improve control system.
-Ensures updating of existing managerial policies and strategies in the light of environmental changes.
(e) PERT and CPM
Programme evaluation and review technique and critical path method are important network techniques useful in
planning and controlling. These techniques are especially useful in planning, scheduling and implementing time
bound projects involving performance of a variety of complex, diverse and inter-related activities. These techniques
deal with time scheduling and resource allocation for these activities and aims at effective execution of projects within
given time schedule and structure of costs.

(f) Management Information System

MIS is a computer based information system that provides information and support for effective managerial decision-
making. A decision maker requires up-to-date
accurate and timely information. MIS provides the required information to the managers by systematically processing
a massive data generated in an organisation. Thus, MIS is an important communication tool for managers.