Management Functions and Managerial Roles – Part 4

Introduction to Controlling

Controlling is one of the essential functions of management, alongside planning, organizing, staffing, and directing. It is not the last function but works simultaneously with the others. The controlling function involves measuring actual performance, comparing it with planned standards, and taking corrective action to achieve organizational objectives.

Controlling ensures that work is carried out according to plans, and corrective measures are taken if necessary. Corrections can be made continuously during the process, not just at the end. Corrective actions may involve changes in technical processes, individual behavior, or organizational structure.

In summary, controlling is the process of comparing actual performance with standards, identifying deviations, and taking necessary corrective action to prevent their recurrence.

Nature of Controlling

1. Goal-Oriented Function:

Controlling measures progress toward organizational goals, identifies deviations, and ensures corrective actions are taken to achieve those goals.

2. Pervasive Function:

Controlling is performed in all types of organizations, whether business or non-business (such as educational institutions, hospitals, or the military). It operates at all levels of management—top, middle, and operational.

3. Continuous Process:

Controlling is a constant review process. It brings the management cycle back to planning, as corrective actions based on past performance help improve future planning.

4. Forward-Looking:

Controlling is linked to the future since past actions cannot be controlled. Managers take corrective actions for future operations, minimizing wastage and losses.

Controlling Process

The controlling process consists of several systematic steps:

1. Setting Performance Standards:

The first step is to establish standards, which act as benchmarks for measuring performance. These standards can be of two types:

Quantitative Standards: Expressed in numerical terms, such as production targets, sales volume, or financial metrics.

Examples:

Reducing defects from 20 in every 1000 pieces produced to 10 by the end of the month.

Achieving a sales volume target of ₹10 lakh per month.

Limiting capital expenditure to ₹5 crore for a new project.

Qualitative Standards: Intangible standards used for areas like customer satisfaction, employee morale, and industrial relations.

Examples:

Reducing customer waiting time at McDonald’s to 10 minutes.

Improving employee efficiency by completing a task within 2 hours.

Reducing labor turnover and absenteeism.

2. Measurement of Performance:

Once standards are set, actual performance is measured. Measurements should be quantitative when possible, making evaluation simple and clear. In cases where qualitative factors are involved, personal observations, inspections, and reports are used.

Examples of qualitative performance measurements include:

Assessing industrial relations through worker attitudes and the frequency of strikes.

Evaluating employee morale through feedback and behavioral assessments.

3. Comparing Performance with Standards:

This step involves evaluating actual performance against predetermined standards to detect deviations. Quantitative comparisons are more straightforward, while qualitative assessments rely on personal observations and reports. The evaluator should identify performance gaps and investigate their causes.

4. Analysis of Deviations:

Deviations are analyzed to determine their causes and acceptable limits. Two important techniques used in this analysis are:

Critical Point Control (CPC): Focuses on key result areas (KRAs) that are crucial for organizational success. Monitoring critical points is efficient, as not every activity can be controlled in detail.

Example: A 10% increase in labor costs may be more concerning than a 20% increase in postal charges.

Management by Exception (MBE): Focuses only on significant deviations, helping managers concentrate on areas that require urgent attention.

Example: Management may be alerted only if expenses exceed ₹10,000 or are 20% higher than expected.

5. Taking Corrective Action:

Corrective actions address deviations to prevent their recurrence. The type of corrective action depends on the cause of the deviation:

If deviations are within acceptable limits, no action is needed.

If deviations exceed acceptable limits, immediate managerial intervention is necessary.

If deviations persist despite managerial efforts, the performance standards themselves may need revision.

Examples of corrective actions include:

Changing material quality specifications to address defective materials.

Repairing or replacing defective machinery.

Upgrading technology to address obsolete machinery.

Modifying processes causing defects.

Improving physical working conditions.

Importance of Controlling

Controlling is essential for the effective management of an organization and offers several benefits:

1. Accomplishing Organizational Goals:

Controlling measures progress, detects deviations, and ensures corrective actions are taken to keep the organization on track.

2. Judging the Accuracy of Work:

By monitoring changes and reviewing standards, controlling helps maintain accuracy and relevance in performance benchmarks.

3. Efficient Use of Resources:

Controlling ensures that resources are used according to predefined standards, minimizing wastage and maximizing efficiency.

4. Ensuring Order and Discipline:

Through close supervision and monitoring, controlling maintains discipline and prevents misconduct among employees.

5. Improving Employee Motivation and Morale:

Clear performance expectations and consistent evaluations boost employee morale and motivation.

6. Facilitating Coordination:

By setting performance standards for all departments, controlling promotes coordination and teamwork.

Limitations of Control

Despite its importance, the controlling function has some limitations:

1. External Factors:

Controlling cannot manage external factors such as changes in government policies, technology, fashion, or societal trends.

2. High Cost:

Implementing an effective control system requires time, effort, and resources, making it an expensive process.

3. Difficulty in Measuring Performance:

Control loses effectiveness when standards cannot be defined quantitatively, such as in areas like employee behavior and morale.

4. Resistance from Employees:

Controls may be resisted if employees feel they restrict their freedom or autonomy. Additionally, if standards are unrealistic, they may lead to non-cooperation.

Types of Control

Controls can be classified based on when corrective action is taken:

1. Post-Action or Feedback Control:

This type of control measures results after the action is completed. Deviations are analyzed, and corrective actions are taken to prevent recurrence in future operations.

Examples include accounting records, performance appraisals, and quality inspections.

For instance, after a production run, a sample of finished products is tested against quality standards to identify any deviations.

2. Concurrent Control:

Also known as real-time or steering control, concurrent control involves making adjustments while an activity is in progress.

Examples include continuous monitoring of a ship’s course by a navigator or a car’s steering adjustments by a driver. In factories, control charts and safety checks are examples of concurrent control.

3. Pre-Action or Feedforward Control:

Feedforward control focuses on inputs and anticipates problems before operations are completed. It is preventive and aims to avoid deviations before they occur.

Examples include preventive maintenance programs to avoid machinery breakdowns and cash budgets to forecast and prevent cash shortages.

Feedforward control requires thorough planning, regular data collection, and timely preventive actions. Although it is costlier than other types of control, it can be highly effective when implemented correctly.

Relationship Between Planning and Controlling

Planning and controlling are closely interrelated and interdependent. They are often referred to as inseparable twins of management:

1. Controlling Depends on Planning:

Controlling is based on the standards set during planning. Without plans, there are no benchmarks for comparison, making controlling ineffective.

2. Planning is Meaningless Without Controlling:

Controlling ensures that activities conform to plans by identifying deviations and taking corrective actions. Without controlling, plans may remain unimplemented or ineffective.

3. Mutual Support:

Planning outlines the actions required to achieve objectives, while controlling evaluates whether those actions produce the desired results.

4. Both are Forward and Backward Looking:

Planning is forward-looking but is guided by past experiences and problems.

Controlling is backward-looking because it reviews past performance to identify deviations and suggest improvements.

In conclusion, controlling is a vital function that ensures organizational objectives are achieved efficiently and effectively. It not only corrects deviations but also provides valuable feedback for better planning, making the management cycle complete.

Major Techniques of Control

Budgetary Control

Definition of Budget:

A budget is an estimate of future needs for a specific period, representing anticipated results in financial or quantitative terms.

Definition of Budgetary Control:

Budgetary control is the process of preparing budgets, comparing actual performance with budget estimates, and taking corrective actions for deviations.

Steps in Budgetary Control:

1. Preparation of Budgets: Creating financial plans based on future actions.

2. Comparison of Actual Results: Measuring actual outcomes against budgeted figures.

3. Corrective Actions: Revising plans to address variances.

Objectives of Budgetary Control:

Goal Setting: Establishes clear targets for different activities.

Activity Rationalization: Brings discipline and precision to daily operations.

Coordination: Promotes inter-departmental cooperation through master budgets.

Participation: Involves subordinates in budget preparation, fostering commitment.

Operational Efficiency: Ensures optimal use of resources and limits overhead costs.

Control: Identifies performance gaps by comparing actual results with budgeted standards.

Limitations of Budgetary Control:

Inaccuracy: Budgets depend on forecasts, which may be unreliable in dynamic conditions.

Rigidity: Excessive adherence to budgets can stifle innovation and flexibility.

Expense: Budgeting can be time-consuming and costly, requiring significant effort.

Essentials for Effective Budgetary Control:

Accurate Forecasting: Reliable estimates based on thorough research.

Organizational Structure: Clear roles, responsibilities, and a budget committee.

Flexibility: Ability to revise budgets when needed.

Quick Reporting: Timely and accurate performance reports.

Top Management Support: Active involvement from senior leadership.

Participation: Inclusion of lower-level managers in budget formulation.

Sufficient Time: Gradual implementation for better integration.

Open Communication: Transparent sharing of budget policies and expectations.

Budget as a Tool of Planning and Control:

As a Planning Tool: Represents organizational goals and provides clear targets.

As a Control Tool: Acts as a benchmark to measure actual performance and identify deviations.

Balanced Scorecard (BSC) – Stakeholder’s Approach

The Balanced Scorecard, introduced by Robert Kaplan and David Norton in 1992, links key performance measures (financial and non-financial) to business strategy.

Four Perspectives of the Balanced Scorecard:

1. Financial Perspective: Measures profitability, growth, and shareholder value. Example: Return on Capital Employed (ROCE).

2. Customer Perspective: Evaluates customer satisfaction, loyalty, and market share. Example: On-time delivery rate.

3. Internal Business Process Perspective: Focuses on operational efficiency, cycle times, and defect rates. Example: Reducing production delays to increase customer retention.

4. Learning and Growth Perspective: Measures employee satisfaction, retention, and innovation. Example: Rate of new product development.

BSC in Indian Industry:

Companies such as Godrej, Tata, Dabur, and Infosys use the BSC to:

Translate strategies into actionable goals.

Communicate objectives across the organization.

Set measurable targets.

Review performance and provide feedback.

Integrated Ratio Analysis (Accounting Measures)

Return on Investment (ROI):

ROI measures the profitability of investments relative to their cost.

Formula: ROI = (Net Profit / Total Investment) × 100

ROI evaluates how effectively a company utilizes its capital to generate profits.

Economic Value Added (EVA) – Financial Measure

Definition of EVA:

EVA is the surplus generated from operations after deducting the cost of capital.

Formula: EVA = (Return on Operating Capital − Weighted Average Cost of Capital) × Capital

Applications of EVA:

Business Planning: Better indicator of efficiency than Profit After Tax (PAT).

Investor Decision-Making: Helps investors evaluate a company's performance.

Valuation of Goodwill and Shares: Useful in mergers and acquisitions.

Employee Compensation: Can be used as a performance-based incentive metric.

Ways to Improve EVA:

Invest in projects with returns exceeding the cost of capital.

Utilize resources efficiently to enhance productivity.

Eliminate low-profit business units.

Link employee incentives with EVA performance.

Market Value Added (MVA)

Concept:

Market Value Added (MVA) measures the stock market’s estimate of the net present value of a company’s past and expected capital investment projects.

Difference from Shareholder Value and EVA:

Shareholder Value: Present value of the anticipated future cash flows plus the company's liquidation value.

EVA (Economic Value Added): Measures value added to shareholders by generating operating profit beyond the cost of capital. It is residual income after charging the cost of capital.

Example:

If the market value of a company (equity + debt) is ₹1,00,000 and the capital employed is ₹80,000, then:

MVA = Market Value - Capital Employed

MVA = ₹1,00,000 – ₹80,000 = ₹20,000

MVA can be positive or negative. Positive MVA indicates value creation, while negative MVA indicates value destruction.

Companies and EVA Performance:

High EVA: ONGC, Hindustan Lever, VSNL, Bajaj Auto, Bharat Petroleum

Low EVA: TISCO, L&T, Essar Steel, Indo Rama

Network Techniques

Network techniques are essential management tools used in project management. They help in planning, scheduling, and controlling project activities by breaking down a project into smaller tasks and arranging them logically.

Key Elements of Network Analysis:

Activities: Operations required to accomplish a goal, needing specific time for completion.

Events: Points when activities begin or finish

Sequential Activities: Activities that must follow a specific order.

Concurrent Activities: Activities that can happen simultaneously.

Purpose of Network Analysis:

Helps in planning, organizing, and controlling project activities.

Identifies interdependencies between tasks.

Highlights gaps or inefficiencies in the workflow.

Supports management in achieving project objectives economically and efficiently.

Popular Network Techniques:

Two widely used network techniques are:

1. Programme Evaluation and Review Technique (PERT):

Use: Suitable for projects where activity durations are uncertain (e.g., R&D projects).

Focus: Time and cost management using probability and statistical methods.

PERT/Cost System: Integrated system for schedule and cost control.

PERT Assists Project Managers in:

Planning schedules and costs.

Determining time and cost status.

Forecasting manpower requirements.

Predicting schedule slippages and cost overruns.

Developing alternate time-cost plans.

Allocating resources among tasks.

Applications: Commonly used in shipbuilding, construction, product launches, book publishing, and computer system installations.

2. Critical Path Method (CPM):

Use: Suitable for projects where activity durations are known (e.g., construction projects).

Focus: Optimizing resource use and time management.

Technique: Identifies the longest path of dependent activities and highlights critical tasks.

Advantages of CPM:

Analytical approach to achieving project objectives.

Identifies and focuses on critical activities.

Helps in setting time schedules.

Promotes detailed and efficient planning.

Reduces wastage of resources by prioritizing crucial tasks.

Provides a standard method for communicating project plans and costs.

Applications: Commonly used in construction, manufacturing, and large-scale industrial projects.

Coordination

Concept: Coordination is the process of synchronizing activities across various departments to ensure unity of action. It reconciles differences in interest to maximize contributions towards achieving common organizational goals.

Henry Fayol's Definition:

“To coordinate is to harmonize all activities of a concern so as to facilitate its working and its success. It is to accord things and actions their right proportions and to adapt means to ends.”

Importance of Coordination:

Acts as the essence of management, binding all functions together.

Begins at the planning stage and continues through organizing, staffing, directing, and controlling.

Ensures smooth workflow and reduces conflicts.

Nature/Characteristics/Features of Coordination:

1. Integrates Group Efforts: Unifies diverse interests for achieving common goals.

2. Ensures Unity of Action: Acts as a binding force between departments to avoid conflicts.

3. Continuous Process: Begins with planning and continues until controlling.

4. All-Pervasive Function: Required at all levels and in all departments.

5. Responsibility of All Managers: All management levels must coordinate their respective teams.

6. Deliberate Function: Requires conscious effort from managers to ensure synergy and avoid conflicts.

Need and Importance of Coordination:

1. Growth in Size: Larger organizations need coordination to integrate efforts and harmonize individual and organizational goals.

2. Functional Differentiation: Prevents conflicts between departments with differing goals (e.g., marketing vs. finance on discount policies).

3. Specialization: Mitigates conflicts between specialists who may work in isolation without considering others' inputs.

Conclusion:

Coordination acts like a thread in a garland, binding all management functions together. It ensures organizational objectives are achieved with minimal conflict and maximum efficiency.

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