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CHAPTER SEVEN
THE CONTROLLING FUNCTION

8.1 Meaning and importance of controlling

Controlling is the process through which managers assure that actual activities conform
to the planned activities.Controlling is the process of regulating organizational activities
so that actual performance conforms to expected organizational standards and goals.It
is checking current performance against predetermined standards contained in the
plans.
Importanceof Controlling
All the good planning efforts and brilliant ideas in the world do little good if a firm has
no system of managing control. Control,therefore, is an essential part of effective
organizational management. Specifically, control helps an organization adapt to
changing conditions, limit magnification of errors and provide the means to monitor
performance.

Adapting to changing conditions:in today’s dynamic and unpredictable business

environment, control plays a crucial role than ever. A properly designed control
system allows managers to effectively anticipate, monitor, and respond to often
constantly changing conditions.
Limiting the magnification of errors: generally, a small error or mistake does not
adversely affect organizational operation. However, a small error/mistake left
uncorrected (perhaps one undetected as a result of a lack of control) may be magnified
with the progress of time, eventually harming the whole organization.

Another purpose of controlling is to determine whether people and the various parts of
an organization are on target, achieving the progress toward their objectives that they
planned to achieve.
8.2 The Controlling Process
Although control systems must be tailored to specific situations, such systems generally
follow the same basic process. The controlling process has five major steps.
1. Determine Areas to Control
The first major step in the control process is determining the major areas to control, i.e.
identify critical control points. Critical control points include all the areas of an
organization's operations that directly affect the success of its key operations, areas
where failures can not be tolerated, and costs in time and money are greatest.
Managers must make choices because it is expensive and virtually impossible to control
every aspect of an organization’s activities. In addition, employees often resent having
their every move controlled. Managers usually base their major controls on the
organizational goals and objectives developed during the planning process.
2. Establishing Standards
Standards are units of measurements established by management to serve as
benchmarks for comparing performance levels. They spell out specific criteria for
evaluating performance and related employee behaviors. The exact nature of the
standards to be used depends on what is being monitored.Standards, if possible, must
be
- Specific and quantitative as much as possible.
- Flexible to adopt the changes that may occur over the future.
- Challenging and should aim for improvement over past performance.

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There are three types of standards: performance standards, corollary standards and
standards of conduct.
Performance standards deal with quality, quantity, cost and time.
Corollary standards support a given level of performance. These include minimum
personnel requirements and adequate physical resources, such as when a company
knows it will need at least five hundred workers and well-equipped factory to produce a
certain number of terminals.
Standards of conduct are moral and ethical criteria that shape the behavioral climate of
the work place. They originate from law, custom and religious beliefs.

Examples of standards: Producing 800,000 units per year, increasing market share by
20%, cutting costs by 15%, answering all customer complaints within 24 hours.
3. Measuring Actual Performance
Once standards are determined, the next step is measuring performance. For a given
standard, a manager must decide both how tomeasure actual performance and how
oftento do so.
4. Comparing Performance against the Standards
This is a step where comparison is made between the “what is” and the “what should
be.” Managers often base their comparisons on information provided in reports (oral
and written) that summarize planned versus actual results, and by working around work
areas and observing conditions, a practice sometimes referred to as Management by
Wondering Around (MBWA). The purpose of comparing actual performance against
intended performance is, of course, to determine if corrective action is needed.

Consequently, the comparison result may show that the actual performance exceeds
(positive deviation), meets (zero deviation), or falls below (negative deviation)
expectations (standards). Accordingly, if performance fulfills expectations (meets
standards), no control problem exists. However, if performance exceeds or fails to meet
expectations, further investigation is required to determine the cause. Performance that
exceeds expectations may mean either superior talent or inappropriately set standards.
A performance that fails to meet expectation may likely mean inappropriately set
standards, poor talent or improper use of resources. The key question in both cases will
be, “How much variation from standards is acceptable before action is taken?” The
answer to this question will lead to the development of ranges defining upper and lower
limits. And performance outside of acceptable range servers as a red flag calling for
taking the necessary corrective action.

The managerial principle of exception states that control is enhanced by concentrating

on exceptions, or significant deviations from the expected result or standard. Therefore,
in comparing performance with standards managers need to direct attention to the
exception, and by doing so, managers can save time and effort.
5. Taking Corrective Action (on time)
The corrective action to be taken depends up on the type of deviation that exists. When
performance exactly meets (deviation of zero) or exceeds (positive deviation) the
standards set, usually no corrective action is necessary. However, managers do need to
consider recognizing the positive performance. The type of recognition given can vary
from a verbal “well done” for a routine achievement to more substantial rewards, such
as bonuses, training opportunities, or pay raises, for major achievements or consistently
good work. Yet, favorable deviations should be examined to understand such success.
When standards are not met, managers must carefully assess the reason why and take
corrective action. During this evaluation, managers often personally check the
standards and the related performance measures to determine whether these are still

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realistic. Sometimes, managers may conclude that the standards are, in fact,
inappropriate-usually because of changing conditions-and that corrective action to meet
standards is therefore not desirable. More often, though, corrective actions are needed
to reach the standards. The standards may have been based on historical data which
may be inappropriate to current conditions. In such instances, the past is a poor basis
on which to predict the future. Similarly, the use of comparative standards may prove to
be problematic since no two organizations are alike.

In taking corrective actions, managers must carefully avoid two types of errors: taking
corrective action when no action is warranted and failing to take corrective action when
it is clearly needed.
8.3Typesof Controlling
In addition to determining the areas they want to control, managers need to consider
the types of controls that they wish to use. Based on the time period in which control is
applied in relation to the operation being performed, or the stage of productive cycle in
which controlling is carried out, there are three basic types of controls: preventive,
concurrent, and feedback. Thus, an organization’s performance can be monitored and
controlled at three points: before, during, or after an activity is completed.
1. Preventive/Steering/ Preliminary / Input Control
Preventive control focuses on the regulation of inputs to ensure that they meet the
standards necessary for the transformation process. It attempts to monitor the quality
and/or quantity of resources (financial, physical, human and information) before they
become part of the system. Preventive control is future oriented and takes place before
the operation begins. It focuses on prevention in order to preclude later serious
difficulties in the production process - its aim is to prevent problems before they arise.
Nevertheless, since preventive control can’t cover every possible contingency, other
type of controls may also be needed.
E.g. Entrance exams for colleges and universities, policies, rules, procedures, proper
selection and training of employees, inspecting raw materials, the implementation of
induction and orientation programs-save trial and error cost, frustration of employee.
Preventive control comes from an old saying “A gram of prevention is worth a kg of
cure.”
2. Concurrent/Screening/ Yes-No/Checking Control
Concurrent control involves the regulation of ongoing activities that are part of the
transformational process to ensure that they conform to organizational standards. It is
designed to detect and anticipate deviations from standards at various points
throughout the processes, i.e. the controlling is carried out during the actual
transformation process. The emphasis here is on identifying difficulties in the
production process that could result in faulty outputs.

Because concurrent controls involve the monitoring of ongoing activities, they are the
only controls that can cope with contingencies (unexpected events) that cannot be
anticipated. When contingencies arise involving activities in a transformation process, a
yes/no decision is required. That is, decision must be made whether to continue as
before or follow an alternative course, or take corrective action, or stop working
altogether. In this way, concurrent controls allow adjustments to be made while work is
being done.

E.g. On the job training, on the spot observation, exams, tests, quizzes

3. Feedback/Post-Action/ Output Control

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As the name indicates post action control focuses on the end results of the process. It is
regulation exercised after the product (goods or services) has been completed in order
to ensure that the final output meets organizational goals and standards. The
information derived is not used for corrective action on a project because it has been
completed.

The feedback control provides information for a manager to examine and apply to
future activities that are similar to the present one. That is why it is called “historical
results guide future actions.” The purpose of feedback control is to help prevent
mistakes in the future and also it can be used as a base for reward; and in cases where
other (preliminary & concurrent) controls are too costly.

E.g. Performance evaluation, financial statement analysis, final exams

Fig: Major Control Types by Timing

Controls Controls Control

INPUTS TRANSFORMATION OUTPUTS

Controls Controls Controls

Preventive Control Concurrent Feedback Control

Cybernetic and Non-cybernetic Controls

A basic control process can be either cybernetic or non-cybernetic, depending on the
degree to which human discretion is part of the system. A cybernetic control system is a
self-regulating control system that, once it is put into operation, can automatically
monitor the situation and take corrective action when necessary. E.g. computerized
inventory system, a heating system controlled by a thermostat

A non-cybernetic control system is a control system that relies on human discretion as a

basic part of its process.
8.4. Techniques of control
1. Financial Controls
Every business wants to earn a profit. To achieve this goal, managers need financial
controls. For instance, they might analyze quarterly income statements for excessive
expenses. They might also calculate financial ratios to ensure that sufficient cash is
available to pay ongoing expenses, that debt levels haven’t become too high, or that
assets are being used
productively
2. Balanced Scorecard
The balanced scorecardapproach is a way to evaluate organizational performance from
more than just the financial perspective. A balanced scorecard typically looks at four
areas that contribute to a company’s performance: financial, customer, internal
processes,and people/innovation/growth assets. According to this approach,
managersshoulddevelop goals in each of the four areas and then measure whether the
goals are being met.
3. Information Controls
Managers need the right information at the right time and in the right amount to
monitor and measure organizational activities and performance. In measuring actual

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performance, managers need information about what is happening within their area of
responsibility and about the standards in order to be able to compare actual
performance with the standard. They also rely on information to help them determine if
deviations are acceptable. Finally, they rely on information to help them develop
appropriate courses of action. Information isimportant! Most of the information tools
that managers use come from the organization’s management information system
4. Benchmarking of Best Practices
Managers in such diverse industries as health care, education, and financial services are
discovering what manufacturers have long recognized—the benefits of benchmarking,
which is the search for the best practices among competitors or noncompetitors that
lead to their superior performance. Benchmarking should identify various benchmarks,
which are the standards of excellence against which to measure and compare. At its
most basic, benchmarking means learning from others. As a tool for monitoring and
measuring organizational performance, benchmarking can be used to identify specific
performance gaps and potential areas of improvement.
8.5 Characteristics of an effective control system
Controls may have many different characteristics, but some of the most important are:
Future–Oriented
To be effective, control systems need to help regulate future events, rather than fix
blame for past events. A well designed control system focuses on letting managers
know how work is progressing toward unit objectives, pinpointing unforeseen
opportunities that might be developed – all aids to future action
Multidimensional
In most cases, control systems need to be multidimensional in order to capture the
major relevant performance factors, such as, quality, quantity, overhead, etc.
Economically Realistic/ Cost Effective
The cost of implementing a control system should be less, or at most, equal to the
benefits derived from the control system. The benefits received from controls should
off-set their expenses.
Accurate
Since control systems provide the basis for future actions, accuracy is vital. Control data
that are inaccurate may be worse than no control at all, since managers may make poor
decisions on the basis of faulty data they believe to be accurate. An inaccurate data
from a control system can cause the organization to take action that will either fail to
correct a problem or create a problem when none existent. Evaluating the accuracy of
the information they receive is one of the most important control tasks that managers
face.
Acceptable to Organization Members
Control systems operate best when they are accepted by the organization members
who are affected by them. Otherwise, members may take actions to override and
undermine controls; i.e. controls will not work unless people want them to. Too many,
arbitrary, too few and too rigid controls often cause the satisfaction and motivation of
employees to decline.
Timely
Control systems are designed to provide data on the state of a given production cycle
or process as of a specific time. In order for managers and employees to respond
promptly to irregularities, control systems must provide relevant information soon
enough to allow corrective action before there are serious repercussions or
consequences.
Reliability and Validity

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Controls not only must be dependable (reliable), but also must measure what they
intend to measure (must be valid). When controls can’t be relied on and are invalid,
they are unlikely to be trusted and can lead to very bad consequences.
Monitorable
Another desirable characteristic of control system is that they can be monitored to
ensure that they are performing as expected. One way of checking a control system is
to deliberately insert an imperfection, such as a defective part, and then observe how
long it takes the system to detect and report it to the correct individual.
Organizationally Realistic
The control system has to be compatible with organizational realities. All standards for
performance must be realistic. Status differences between individuals have to be
recognized. Individuals have to be able to see a relationship between performance
levels they are asked to achieve and rewards that will follow.
Flexible
Just as organizations must be flexible to respond rapidly to changing environments,
control systems need to be flexible enough to meet new or revised requirements.
Accordingly, they should be designed so that they can be changed quickly to measure
and report new information and track new endeavors.
Focus on Critical Control Points
Critical control points include all the areas of an organization’s operations that directly
affect the success of its key operations. The focus should be on those areas where
failures cannot be tolerated and where that costs in time and money are the greatest.
Easy to Understand
Complexity often means lack of understanding. The simpler the control, the easier it will
be to understand and apply. Controls often become complex because more than one
person is responsible for creating, implementing or interpreting them.
Emphasis on Exception
A good system of control should work on the exception principle, so that only important
deviations are brought to the attention of management. In other words management
does not have to bother with activities that are running smoothly. This will ensure that
managerial attention is directed towards error and not towards conformity. This would
eliminate unnecessary and uneconomic supervision, marginally beneficial reporting and
waste of managerial time.
Over control versus Under control
Since excessive amount of control can make the occurrence of dysfunctional aspects of
control systems more likely, managers need to avoid over control. Overcontrol is the
limiting of individual job autonomy to such a point that it seriously inhibits effective job
performance. At the same time, managers need to avoid going too far in the other
direction, which results in a situation of undercontrol. Undercontrol is the granting of
autonomy to an employee to such a point that the organization loses its ability to direct
the individual's efforts toward achieving organizational goals.

Determining the appropriate amount of control that should exist in organizations is a

significant management decision. With the appropriate amount of control, a manager
can be reasonably certain that no major unpleasant surprises will occur and that
employees will achieve organizational goals.

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