Controlling
In this video series, I am covering the Business Studies subject from the CBSE Class XII syllabus. We will be following the standard NCERT textbook for the topics that we will discuss. This is the eighth video of the series, and we will cover the eighth chapter—Controlling.
Introduction
First of all, what is controlling? What is the concept of controlling in the general sense?
If you go to any airport, you will see a tall tower like this. This is called the Air Traffic Control (ATC) tower. This is the place from where the Air Traffic Controllers of the airport work.
From the ATC tower, the controllers have a view of the entire airport so that they can see the movements of the airplanes and the vehicles on the ground. The ATC tower will also have radar displays from where they can see planes approaching and departing the airport.
The controllers have radio communication with all pilots, and they coordinate the safe and efficient movement of aircraft in the air and on the ground.
The controllers provide instructions to pilots for take-offs, landings, and for navigation to avoid mid-air collisions and to ensure smooth air traffic flow.
So, the primary focus of the controllers is maintaining safety, ensuring that all the rules are followed, minimizing delays, and optimizing the use of airspace.
Similarly, in companies, controlling is an aspect of management that is either done by some of the senior managers as a part of their responsibilities, or larger companies have dedicated control departments—like finance control, production control, or purchase control.
Just like an air-traffic controller has a view of the entire airport, the controllers of a company have a view of the entire company.
The controllers monitor the performance of the various departments and ensure that they are following the proper processes. In case of any deviations, they will flag it or report it to ensure that corrective and preventive actions are taken.
The controllers in a company also ensure that the senior management has a clear view of the state of affairs of the company through various reports.
Functions of Management
In the first part of this series, we discussed the various functions of management:
- Planning: Deciding at a high level what is to be done, how it is to be done, and when it is to be done. Setting goals and strategies for the organization.
- Organising: Allocating resources (like time, money, people), deciding team structures, and assigning duties to different roles or positions.
- Staffing: Creating job descriptions and hiring or recruiting the people based on the roles and team structures finalized in the organizing stage.
- Directing: Directing, giving instructions, and leading the teams to make use of the resources to work as per the plans to achieve the objectives of the organization.
- Controlling: Monitoring the performance of every function of management, checking the quality of the work done, measuring the efficiency of the various teams and processes, and suggesting or initiating any corrective and preventive actions wherever required.
In this chapter, we will discuss the different aspects of controlling.
Meaning of Controlling
Controlling has been defined as follows:
“Managerial Control implies the measurement of accomplishment against the standard and the correction of deviations to assure attainment of objectives according to plans.”
If we expand on the definition, we can say that Controlling is a function which ensures that the activities in an organization follow the plans. It ensures that the resources are used efficiently and effectively to achieve predetermined goals. It is a goal-oriented function because the very purpose of controlling is to achieve the organization’s goals.
Further, managers must manage situations and take corrective actions before harm is done to the business.
The controlling function assists managers by:
- Tracking the progress of activities
- Ensuring activities align with pre-set standards to achieve organizational goals
For example, there are some traffic rules that all vehicles have to follow—such as driving below the speed limits, driving on the proper side of the road, in the proper direction, wearing a seat-belt or a helmet, etc.
A controller is like the person monitoring the traffic—he will ensure that all vehicles are driving normally. If any vehicle has broken down, he will send help, and if any vehicle is not following the rules, the controller will take action. So the controller monitors the people, processes, and the resources of the organization.
Where is Controlling Applied?
Controlling is a pervasive function, which is required at all management levels—top, middle, and lower-level or supervisory management.
Controlling applies across all types of organizations, e.g., educational institutions, businesses, NGOs, etc. In every type of organization, whether it is big or small, there will be plans, and controlling is the process that ensures the activities are being completed as per the plan.
Relationship of Controlling with Other Management Functions
We have previously discussed that the steps in the management process are shown as a cycle because they typically follow this sequence. But just like in a circle, there is no specific end point. As long as the organization is operating, the cycle will continue.
And just like coordination is applied in every step of the process, even controlling is applied in every step where activities or processes have to be completed as per some plans.
So, controlling is not the last step in the management process—we can consider it as the step that precedes further planning because, based on the information received or the lessons learned from the controlling process, the plans can be tweaked or modified.
Controlling identifies deviations between actual performance and standards, and this is done in every step.
For example, if as per the original plan, the organizing activities had to be completed within a specific timeline, like 30 days, and we actually completed it in 45 days, there is a delay—there is a deviation between the standard and the actual. Controlling is the process through which this deviation is identified, analyzed to understand the reasons for the delay and the effects of the delay, and corrective or preventive action is taken to minimize any damage or negative impact.
Similarly, if we were supposed to hire 20 workers at an average salary of 50 thousand rupees per month—which was decided in the staffing plan—but we hired only 15 workers, and the average salary is 70 thousand rupees, here again, there are multiple deviations from the original plan.
Controlling is the process used to identify the deviations, whether the deviations are because of wrong planning or wrong execution or some other reason.
Analyzing the causes of deviations facilitates corrective actions, and the lessons learned are used to improve future planning.
In short, controlling is not the first step in the process of management—because there should be some plans against which the actual performance is measured. But once the process of management starts off, it will continue as long as the organization is active—and then controlling is not the last step in the management process since it precedes the planning process.
And controlling is applied in some way or the other in all the other steps of the management cycle.
Importance of Controlling
Controlling plays a crucial role in organizational success. The importance of controlling can be highlighted through the following points:
- Accomplishing Organizational Goals: Controlling helps measure progress towards goals, identify deviations, and guide corrective actions to stay on track as per the original plans and achieve objectives.
- Judging the Accuracy of Standards: It allows management to verify if the standards are accurate and adaptable to organizational or environmental changes, helping revise standards when needed.
- Efficient Use of Resources: Through control, managers reduce wastage and ensure that resources are used effectively and efficiently in line with standards.
- Improving Employee Motivation: By clarifying expectations and performance standards, a good control system motivates employees to perform better.
- Ensuring Order and Discipline: Control creates a disciplined atmosphere by monitoring employee activities and minimizing dishonest behavior.
- Facilitating Coordination: Controlling ensures all departments and employees work in harmony, coordinating efforts to achieve organizational goals.
Limitations of Controlling
While controlling is essential, it has certain limitations:
- Difficulty in Setting Quantitative Standards: Some performance areas, like employee morale and job satisfaction, cannot easily be measured in quantitative terms, making it harder to set effective standards and evaluate performance.
- Limited Control Over External Factors: External influences such as government policies, technological advancements, and competition are beyond the organization’s control, limiting the effectiveness of internal control systems.
- Resistance from Employees: Employees may resist control mechanisms, viewing them as restrictions on their autonomy, such as objecting to monitoring through tools like CCTV.
- Costly Process: Implementing control systems can be expensive, involving substantial time, effort, and financial investment. For smaller organizations, the cost may outweigh the benefits.
Relationship between Planning and Controlling
In the management cycle, controlling and planning are neighbors and inseparable functions. Planning and controlling are interdependent and complement each other:
- Mutual Dependence:
- Planning provides the standards, goals, and benchmarks that controlling monitors and evaluates.
- Controlling measures progress, identifies deviations, and takes corrective actions to align performance with the plan.
- Planning as a Prerequisite for Controlling:
- Without a plan, there are no clear standards for control.
- Planning is prescriptive, determining what actions should be taken, while controlling is evaluative, checking whether these actions were carried out properly.
- Forward-Looking vs. Backward-Looking:
- Planning is often described as ‘looking ahead’ because it sets the course for the future.
- Controlling is initially seen as ‘looking back’ because it evaluates past performance to detect deviations. However, controlling also informs future planning, making it both backward and forward-looking.
- Mutual Reinforcement:
- Effective planning makes controlling easier and more accurate.
- Controlling improves planning by offering feedback from past experiences, helping to refine future plans.
In short, if there is no planning, controlling will not work. And if there is no controlling, you will not know if the plan has been carried out or not.
Steps in the Controlling Process
When we look at controlling as a process, it has five steps:
- Setting performance standards
- Measurement of actual performance
- Comparison of actual performance with standards
- Analyzing deviations
- Taking corrective action
We will discuss all of these points in a little detail; and under analyzing deviations, we will also discuss the concepts of Critical Point Control and Management by Exception.
1. Setting Performance Standards
The first step in the controlling process is setting performance standards. If you don’t know what the target is, you don’t know what the company is aiming for. Standards are the benchmarks towards which an organization strives to work.
This involves establishing benchmarks against which actual performance is measured. The setting of the critical and high-level performance standards is typically done during the planning stage itself.
There can be two types of standards:
- Quantitative: Expressed in numbers (e.g., units produced, defects per number of units produced, revenue generated).
- Qualitative: Not expressed in numbers (e.g., customer satisfaction, employee motivation).
In a factory manufacturing phones, the standards can be quantitative—like the number of units produced and the percentage of defects. In a restaurant, apart from the quantitative metrics like the number of items sold, there can also be qualitative metrics like customer satisfaction.
Typically, qualitative metrics are also quantified wherever possible—for example, customer satisfaction is converted to ratings on a scale of 1 to 5 or 1 to 10. This is because pure qualitative standards are very difficult to manage or measure.
While setting or deciding the performance standards, management should ensure that the standards are precise, measurable, and flexible enough to adapt to changes in the business environment because as the business environment changes, the standards should also be changed.
2. Measurement of Actual Performance
The second step in the controlling process is measuring actual performance. In this step, the controller or the manager will need to objectively and reliably measure the actual performance using techniques like personal observation, performance reports, or sample checking.
Depending on the type of process or activity, the measurement can be done after task completion or even during the task to catch issues early.
For example, if a factory is manufacturing simple items like screws, the measurement of the quantity and the quality can be done after each batch is produced—that is, at the end of the process. But in a factory that is assembling car engines, the measurement or checking of quality should also be done at the time of the actual activity because after the assembly is complete, any mistakes inside the engine may not be visible from the outside.
Different types of metrics can be used to measure performance:
- Financial Performance: Calculating ratios like gross profit ratio, net profit ratio, return on investment, etc.
- Production Efficiency: Counting the number of items produced, counting the number of defective items per batch, etc.
3. Comparison of Actual Performance with Standards
The third step is comparing actual performance with standards. From the first step, you have the standards. From the second step, you have the actual performance. So, in the third step, you can compare the actual performance against the standard performance.
If the actual performance and the standard performance are quantitative—i.e., measured and expressed in numbers—comparison will be straightforward (e.g., units produced vs. the target).
4. Analyzing Deviations
The fourth step is analyzing deviations. In general, in most industrial processes or large-scale activities, some deviation from the plan is normal and expected. For example, if you are manufacturing a product, some wastage or some percentage of defects is expected.
The defects or deviations can be due to issues with the raw material, errors committed by the workers, complexity of the manufacturing process, or unavoidable reasons.
For example, when some types of computer chips are manufactured, around 5% of them are normally defective and are discarded. So, the normal yield is 95%.
When the original plans are made to manufacture the computer chips, the ideal plan will be to have 100% yield. But that is not possible—so a defect rate of up to 5% is considered acceptable. The standard yield is set at 95%.
If there are several machines that are making these CPUs, the defect rate of each machine is monitored. If it is within 5%, the machine is working normally. If the defect rate is more than 5%, then the deviations are analyzed. What is the issue with the machine? What is causing the extra defects, and what are the corrective and preventive steps to be put in place?
Another point to remember here is that even positive or beneficial deviations should be analyzed.
For example, if one machine is producing with a consistent defect rate of just 1%—as against the normal 5% defects—the reasons should be analyzed. What is going right with the machine? Why is it being more efficient? If the same settings can be replicated with the other machines, you could probably bring down the defect rate to just 1% across all machines.
The definition of this step, analyzing deviations, is “Determining acceptable ranges of deviations and focusing on significant deviations in key areas.”
Now we know how to decide an acceptable or normal range of deviations and how to focus on significant deviations—both positive or beneficial and negative deviations. This definition also talks about focusing on key areas.
Techniques for Analyzing Deviations
There are two techniques mentioned here:
- Critical Point Control: It is not worth the time and effort to analyze all deviations. You should focus on the key result areas—or the important areas—which can have a significant impact on the process or the organization.
- Management by Exception: This technique says that you should set acceptable deviation rates and do a thorough analysis if there is a deviation over the acceptable rate. If the deviations are within the acceptable range, they are treated as lower priority issues.
By focusing on the critical points or the key result areas and on significant deviations or exceptions, the management can:
- Save time by focusing only on significant deviations
- Direct managerial attention to critical issues, improving efficiency
- Delegate routine problems or simpler issues to subordinates, increasing morale by giving them more responsibility
- Identify critical problems that require immediate action
5. Taking Corrective Action
The fifth step in the controlling process is taking corrective action. After you have analyzed the deviations and identified the reasons for the deviations or the defects, you will need to take the necessary corrective steps to address the immediate issues and also undertake preventive measures to prevent future issues.
As mentioned earlier, there can be several reasons for the defects or the deviations, so the corrective or preventive measures may include changing the raw materials, changes to the processes, training or re-training the employees, reallocating resources, or even revising standards if necessary.
And whatever you have learned or identified in the entire controlling process should be used to refine your future plans. In that way, controlling is not the last step in the management process; it actually becomes the step preceding the next round of planning in the management cycle.
Traditional and Modern Techniques of Managerial Control
While these are not discussed in detail, the chapter summary in the textbook mentions some traditional and modern techniques of managerial control.
Traditional Techniques
- Personal Observation: A direct method of monitoring and evaluating employee performance and work processes through firsthand observation by a manager or a controller.
- Statistical Reports: The use of numerical data, charts, and graphs to analyze and track performance trends, enabling managers to make informed decisions.
- Breakeven Analysis: A financial tool that helps managers determine the level of sales needed to cover all costs, indicating the point at which there is neither profit nor loss.
- Budgetary Control: A technique where budgets are set for various organizational activities, and actual performance is compared against these budgets to manage resources effectively.
Modern Techniques
- Return on Investment (ROI): A performance metric that evaluates the efficiency of an investment by comparing the net profit generated to the cost of the investment.
- Ratio Analysis: A method of evaluating an organization’s financial performance by calculating various financial ratios, such as profitability ratio, liquidity ratio, and solvency ratio.
- Responsibility Accounting: A system where specific managers are held accountable for the financial performance of their departments or areas of control, helping in performance evaluation.
- Management Audit: A comprehensive review of the management’s efficiency, practices, and policies to ensure alignment with organizational goals and improve effectiveness.
- PERT (Program Evaluation and Review Technique) and CPM (Critical Path Method): Project management tools used to plan, schedule, and control complex projects by identifying critical tasks and ensuring timely completion.
- Management Information System (MIS): A system that provides managers with structured information for decision-making, control, and performance monitoring by collecting, processing, and presenting data.
Even if you don’t study these traditional and modern techniques in detail at this time, you should be aware of what they are, so rewatch this segment again and jot them down in your notes.
Standards Used in Various Functional Areas
There is a table included in the chapter, which mentions the standards or the metrics used in various functional areas to gauge performance.
Production
- Production Standards: Production per batch, per day, per month, etc.
- Quality Standards: Defects per hundred items produced (defect percentage).
- Cost of Manufacture: Standards set for manufacturing costs.
Employee Level
- Productivity per Employee: Used for individual employee evaluation.
- Error Rate per Employee: Measuring individual performance.
Sales and Marketing
- Sales Volume: Targets for sales.
- Sales Expense: Monitoring expenses related to sales activities.
- Marketing and Advertising Expenditures: As a percentage of sales.
- Individual Salesperson’s Performance: Measured by setting standard targets.
Human Resource Management
- Labour Relations: Number of strikes or disruptions as a standard.
- Employee Turnover: How many are resigning or being terminated and how many new employees are being recruited as replacements.
- Absenteeism: Used as a standard to measure job satisfaction.
- Employee Satisfaction Ratings: Measure the effectiveness of management.
Finance and Accounting
- Capital Expenditure: Monitoring investments in assets.
- Inventory Levels: Stocks of raw materials and finished products.
- Flow of Capital: Cash flow and liquidity ratios.
While an in-depth study of these standards is not included in this chapter, jot these down in your notes, and you can use them in your answers.
Conclusion
And with that, we have completed this chapter. If you have any questions or feedback, post a comment below. I will see you again very soon in the next video in this series.
