Session 29: Controlling process and overview of controlling techniques

Controlling means comparing the actual performance of an organisation with the planned
performance and taking corrective actions if the actual performance does not match the planned
performance. Controlling cannot prevent the deviation in actual and planned performance;
however, it can minimise the deviations by taking corrective actions and decisions that can
reduce their recurrence.

Process of Controlling
Different steps involved in the process of controlling are as follows:
1. Setting Performance Standards: The first step of the process of controlling is to establish
standards of performance against which the actual performance of the organisation is measured.
An organisation should clearly define its standards to the employees and must establish
attainable, understandable, and realistic standards to be achieved. Standards can be set in
quantitative terms as well as qualitative terms. Under quantitative terms, the standards of an
organisation are expressed in quantitative terms like units of the product to be produced and sold,
revenue to be earned, the cost to be incurred, etc. While setting the quantitative standards an
organisation should keep them precise so as to easily compare the actual performance with the
standards. However, under qualitative terms, the standards of an organisation are expressed in
qualitative terms like time taken to serve a customer, motivation level of employees, etc. The
qualitative standards should also be set in a way that makes the measurement easy.
Besides, the business environment in which an organisation works is dynamic and keeps on
changing. Therefore, the established standards should be flexible so that they have a scope for
change whenever the business environment changes.
2. Measurement of Actual Performance: Once the organisation has established the standards,
the second step of the process of controlling is to measure the actual performance in a reliable
and objective manner. The actual performance of an organisation can be measured through
different techniques such as sample checking, personal observation, etc., and should be measured
in the same units in which the standards are fixed to make the comparison easy. Usually, the
actual performance is measured at the end of the performance. However, in some cases,
organisations measure performance throughout the performance. For example, an electrical
appliance organisation can check the parts before assembling them together to ensure the final
product is not defective.
Also, while measuring the actual performance of an organisation, it should be kept in mind that
both quantitative and qualitative aspects are being considered. Sometimes organisations focus
more on the quantitative aspects and less on the qualitative aspects, which can be harmful to
them. For example, the quantitative standard of lowering the cost of a product can be achieved
by degrading its quality. This can for sure lower the cost of the product, but can also lose the
customers of the organisation. Different departments of an organisation can measure its actual
performance differently (like the production department by the number of units produced, the
sales department by the number of units sold or customer satisfaction level, etc.).
3. Comparison of Actual Performance with Standards: The third step of the process of
controlling is to compare the actual performance of the organisation with the established
standards (in the first step). By comparing the actual performance with the standards, an
organisation can determine the deviation between them. When the standards are expressed in
quantitative terms, it becomes easy for the organisation to make comparisons as there is no
subjective evaluation required. For example, it is easy for an organisation to compare the
number of units sold in a month against the set standard. However, the comparison between the
set standard for the motivation of employees with its actual performance is difficult.
4. Analysing Deviations: The actual performance and set standards of an organisation rarely
match with each other. Usually, there is always some variation between the expected and actual
performance. Therefore, the fourth step of the process of controlling is to analyse the deviations.
To do so, an organisation must fix an acceptable range of deviation in performance. Besides, an
organisation should focus more on the significant deviation and less on the minor deviations. For
this, managers of an organisation usually take the help of Critical Point
Control and Management by Exception.
5. Taking Corrective Action: The last and final step of the process of controlling is to take
corrective action. If the deviations are within the acceptable limits set by the managers, then
there is no need to take corrective action. However, if the deviations go beyond the set
acceptable limit in the key areas, then proper and immediate managerial actions are required. An
organisation can easily rectify the defects in the actual performance through the corrective steps.
For example, If the actual performance of the organisation deviates because of the lack of
resources, then the managers try to procure them to meet the standards. However, if the actual
performance deviates because of the lack of skills in the employees, then the managers might
give proper and required training to the employees.
It shows that every deviation does not need the same corrective action. The rule, process, or
method of corrective action changes with the requirement of deviation.
Control 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 enables 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.
Session 30: Balanced Scorecard
A strategic planning framework that companies use to assign priority to their products, projects,
and services; communicate about their targets; and plan their routine activities
What is a Balanced Scorecard?
A balanced scorecard is a strategic planning framework that companies use to assign priority to
their products, projects, and services; communicate about their targets or goals; and plan their
routine activities. The scorecard enables companies to monitor and measure the success of their
strategies to determine how well they have performed.

The balanced scorecard acts as a structured report that measures the performance of company
management. The management team can be evaluated against Key Performance Indicators
(KPIs) to show their contributions to the strategy and attainment of the targets set forth. Success
is measured against the specified goals or targets to determine the rate at which the business is
growing and how it compares to its competitors.
Other personnel in the organizational hierarchy can depend on the balanced scorecard to show
their contribution to the growth of the business, or their suitability for job promotions and salary
reviews. The key features of a balanced scorecard include a focus on a strategic topic relevant to
the organization, and the use of both financial and non-financial data to create strategies.
Four Perspectives of the Balanced Scorecard
The following are the key areas that a balanced scorecard focuses on:
1. Financial perspective
Under the financial perspective, the goal of a company is to ensure that it earns a return on the
investments made and manages key risks involved in running the business. The goals can be
achieved by satisfying the needs of all players involved with the business, such as
the shareholders, customers, and suppliers.
The shareholders are an integral part of the business since they are the providers of capital; they
should be happy when the company achieves financial success. They want to be sure that the
company is continually generating revenues and that the organization meets goals such as
improving profitability and developing new revenue sources. Steps taken to achieve such goals
may include introducing new products and services, improving the company’s value proposition,
and cutting down on the costs of doing business.
2. Customer perspective
The customer perspective monitors how the entity is providing value to its customers and
determines the level of customer satisfaction with the company’s products or services. Customer
satisfaction is an indicator of the company’s success. How well a company treats its customers
can obviously affect its profitability.
The balanced scorecard considers the company’s reputation versus its competitors. How do
customers see your company vis-à-vis your competitors? It enables the organization to step out
of its comfort zone to view itself from the customer’s point of view rather than just from an
internal perspective.
Some of the strategies that a company can focus on to improve its reputation among customers
include improving product quality, enhancing the customer shopping experience, and adjusting
the prices of its main products and services.
3. Internal business processes perspective
A business’ internal processes determine how well the entity runs. A balanced scorecard puts
into perspective the measures and objectives that can help the business run more effectively.
Also, the scorecard helps evaluate the company’s products or services and determine whether
they conform to the standards that customers desire. A key part of this perspective is aiming to
answer the question, “What are we good at?”
The answer to that question can help the company formulate marketing strategies and pursue
innovations that lead to the creation of new and improved ways of meeting the needs of
customers.
4. Organizational capacity perspective
Organizational capacity is important in optimizing goals and objectives with favorable results.
The personnel in the organization’s departments are required to demonstrate high performance in
terms of leadership, the entity’s culture, application of knowledge, and skill sets.
Proper infrastructure is required for the organization to deliver according to the expectations of
management. For example, the organization should use the latest technology
to automate activities and ensure a smooth flow of activities.