Control Process and Techniques Session 6 | Prof. Chhavi Gupta

What is the ‘control’ process?  Controlling  The process of measuring performance and taking action to ensure desired results.  Ensures that the right things happen, in the right way, at the right time.  Involves organizational learning and after-action review.  Has a positive and necessary role in the management process.

Importance of Control  Facilitates achievement of goals  Cope with uncertainty and change  Identifying problems and opportunities  Execution and revision of plans  Brings order and discipline  Facilitates decentralization of authority

Characteristics of an effective control system Suitable Simple, Objective and Impersonal Sound and Economical Flexible Forward Looking Indicates responsibility for failures Acceptable

Steps in the control process 1. Establish objectives and standards. 2. Measure actual performance 3. Compare results with objectives and standards - calculate deviations 4. Take corrective action as needed ( Correction of Deviations)

 Step 1 — Establishing objectives and standards  Output standards  Establish performance standards in terms of quantity, quality, market position, cost, or time.  Input standards  Establish and measure effort in terms of amount of work expended in task performance.

 Step 2 — Measuring actual performance  Effective control requires measurement  Goal is to accurately measure actual performance results or performance efforts.  Step 3 — Comparing results with objectives and standards  Identify significant differences between actual results and original plan.  Need for action reflects the difference between desired performance and actual performance – ‘Deviation’

 Step 4 — Taking corrective action  Taking action when a discrepancy exists between desired and actual performance  Management by Exception  Giving attention to situations showing the greatest need for action – i.e. situations showing greatest deviations, rather than each and every organizational activity.  The more the managers concentrate control efforts on significant exceptions, the more efficient will be the results of their control

1. Feedforward control  Employed before a work activity begins – anticipates problems. Also known as predictive control.  Ensures that:  Objectives are clear.  Proper directions are established.  Right resources are available.  Focuses on quality of resources  Ex: Cash Budgets Types of organizational controls

2. Concurrent control  Focus on what happens during work process. Also known as Real-time or Steering control.  Monitors ongoing operations to make sure they are being done according to plan.  Can reduce waste in unacceptable finished products or services.  Ex: Control charts

3. Feedback controls  Take place after work is completed. Also called as Historical or Post –control.  Focus on quality of end results.  Provide useful information for improving future operations.  Ex: Year end Performance appraisal system

The role of Feedforward, Concurrent and Feedback controls in organizations

Behavioral Control in Organizations  Management by Objectives (MBO)  A structured process of regular communication wherein the supervisor and workers jointly set performance objectives and jointly review results.

 MBO involves a formal agreement specifying  Workers’ performance objectives for a specific time period.  Plans through which performance objectives will be accomplished.  Standards for measuring accomplishment of performance objectives.  Procedures for reviewing performance results.

 Pitfalls to avoid in using MBO  Focusing too much attention on easily quantifiable objectives  Having managers tell workers their objectives  Advantages of MBO  Focuses workers on most important tasks and objectives.  Focuses supervisor’s efforts on important areas of support.  Contributes to relationship building.  Gives workers a structured opportunity to participate in decision making.  Improves commitment of workers towards goal achievement

Techniques of Control Traditional Techniques Modern Techniques  Personal observation and Employee Discipline Systems  Budgeting  Break Even analysis  Financial statements analysis  Purchasing and Inventory Control  Quality Control - TQM  MIS  Management Audit  Responsibility Accounting  Network Techniques – PERT & CPM  Ratio Analysis  Balanced Score Card

 Personal Observation – By supervisors to ensure employee discipline  Employee discipline systems  Discipline is the act of influencing behavior through reprimand.  Discipline that is applied fairly, consistently, and systematically provides useful control.  Progressive discipline ties reprimands to the severity and frequency of the employee’s infractions.  Progressive discipline seeks to achieve compliance with the least extreme reprimand possible. Traditional Techniques of Control

 To be effective, reprimands should …  Be immediate.  Be directed toward actions, not personality.  Be consistently applied  Be informative  Occur in a supportive setting  Support realistic rules

 Budgeting  A process of stating in quantitative terms, planned organizational activities for a given period of time.  A budget is a statement which reflects future incomes, expenditures and profits of a firm  Types of Budgets:  Operating Budgets: Concerned with planned operations within an organization. Example - Revenue and Expense Budgets  Financial Budgets: Facilitate the working of operational budgets. Example - Capital Expenditure Budgets, Cash Budgets

 Break-even analysis  Calculates the point at which sales revenues are sufficient to cover costs.  Used in evaluating:  New products  New program initiatives  Break-Even Point  Is the point ( in terms of no. of units sold) at which revenues equal total costs How to Calculate a Breakeven Point Breakeven Point = Fixed Costs / (Price - Variable Costs)

Graphical approach to break-even analysis

Purchasing and Inventory Control  Purchasing control  Buying what is needed at the right quality, at a good price, and for on-time delivery.  Trends in purchasing control:  Leveraging buying power  Committing to a small number of suppliers and working together in supplier-purchaser partnerships  Supply Chain Management - uses information technology to link suppliers and purchasers in cost efficient ways.

 Inventory control  Goal is to ensure that ensures that inventory is only big enough to meet immediate needs, thus minimizing the storage and handling cost.  Methods of inventory control:  Economic Order Quantity : Places new orders when inventory levels fall to predetermined points  Just-in-time Scheduling : Routes materials to workstations just in time for use

 Statistical quality control  Quality control involves checking processes, materials, products, and services to ensure that they meet high standards.  Statistical quality control involves :  Taking samples of work.  Measuring quality in the samples.  Determining the acceptability of results.  Forms the basis of Total Quality Management (TQM)

 Organizational philosophy and strategy that makes quality a responsibility of all employees, not just manufacturing.  Commits to quality objectives, continuous improvement, and doing things right the first time.  Quality Circle  Is a small group that meets regularly to discuss ways of improving work quality Total Quality Management (TQM)

 Financial Statement Analysis  Financial statements show the financial position of the firm over a period of time, generally one year  2 most commonly used financial statements are Balance Sheet and Income Statement  These statements offer information on the following aspects:  Liquidity  The cash position/ability to generate cash to pay bills.  Financial Strength  It represents assets, liabilities and equity position of the firm  Profitability  The ability to earn revenues greater than costs.

 Management Audit  Periodic inspection of financial statements and verifying that they are honestly and fairly prepared according to accounting principles  Types of Audit  Internal Audit  Verification of various statistical data and reports to see whether correct and fair presentation of financial reports is made.  External Audit  Verification of financial statements – deviations reported to managers for action Modern Techniques of Control

 Responsibility Accounting  Responsibility Centre  An organizational unit under the supervision of a single person who is responsible for an activity  3 types: Cost centers, Profit centers, Investment centers  Each department is treated like a semi-autonomous unit.  Responsibility Accounting  It is a system of accounting in which each department head is made responsible for the performance of the department

 Network Techniques  Program Evaluation & Review Technique (PERT)  Critical Path Method (CPM)  Both PERT and CPM  Graphically display the precedence relationships & sequence of activities  Estimate the project’s duration  Identify critical activities that cannot be delayed without delaying the project  Estimate the amount of slack ( spare time) associated with non- critical activities

 Ratio Analysis  Draws comparison between selected items from the financial statements and assesses financial performance of the firm  Some important financial ratios:  Liquidity ratios  Current ratio= CA / CL  Activity ratios  Inventory turnover ratio = Cost of goods sold / Inventories  Leverage ratios  Debt Equity ratio = LT Loans / (Share capital + Reserves)  Profitability Ratios  ROI= Pre tax profit / (Share capital+ Reserves +LT loans)

 Balanced Score card  A Performance measurement and control tool that looks at 4 critical areas that contribute to a firm’s performance  Managers set goals in these 4 areas and take steps to achieve these goals 1. Financial perspective 2. Customer perspective 3. Internal Business processes 4. People/ Innovation ( Learning and Development)

 Management Information Systems (MIS)  MIS is a formal system of gathering, integrating, comparing, analyzing and dispersing information internal and external to the enterprise in a timely, effective and efficient manner  Advantages of MIS 1. Accurate information 2. Relevant information 3. Facilitates managerial functions 4. Facilitates coordination and decision making

MIS at different managerial levels Junior managers Continuous stream of information regarding routine, operational level activities. Ex: Daily, weekly sales figures which helps in adjusting production schedules Middle Level Managers Department or unit heads monitor performance of their respective departments for future planning of unit activities. Ex: HR department: Employee turnover rate, Absenteeism rates for recruitment planning Senior Management Information about external and internal organizational factors, to aid in strategic planning and control Ex: Industry data, PESTEL environment related changes and data Managers at different levels can use MIS to retrieve different information

Guidelines for effective MIS  Involvement of Users  Cost- Benefit analysis  Focus on quality of information rather than quantity  Pretesting the MIS

To reiterate…  MIS gives first line supervisors operational data for planning, scheduling and control.  It helps middle management in short term planning, target setting and control the business functions.  It helps top management in strategic / long range business planning, implementation and control. Thus, MIS helps in generating information, communicating of the generated information, problem identification and decision making.

Caselet “Our problems of Control are over” said Venkatesh, the director of Information systems, to Mr. Kumar, director of Eastern Enterprises Ltd. “ With our new computer installation, data gathering, departments and plant terminals, high speed printers and cathode ray tube display stations, every manager can find out what is happening in his or her area as it happens. Delayed reports can now be a thing of the past. I am sure you will find that the investments we have made in these systems is the best expenditure this company has ever made. We will soon have real time control and, we can manage to a desired standard, in exactly the same way a thermostat keeps our offices at a desired temperature. “I hope you are right” responded Mr. Kumar, “But I wonder”.  Ques 1. Exactly what is real-time control?  Ques 2. Was Venkatesh right? Why or Why not? What would you suggest to be done?

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