Business Studies Chapter 1.8 – Controlling

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Chapter 1.8 – Controlling

Business Studies Chapter 1.8 – Controlling

1. Meaning of Controlling

Controlling is a fundamental function of management that ensures the activities within an organization are conducted according to the plans, policies, and standards established during the planning stage. It involves a process where actual performance is measured against set standards, deviations are identified, and corrective actions are taken to align the performance with the desired objectives.

Key Points:

  • Ensuring Adherence to Plans: Controlling ensures that actual activities conform to the standards set during planning. It helps identify gaps between planned and actual performance.
  • Pervasiveness: Controlling is essential at all levels of management—top, middle, and lower—and across all departments (production, finance, marketing, HR, etc.).
  • Goal-Oriented: The primary objective of controlling is to ensure that organizational goals are met efficiently.
  • Continuous and Cyclical: Controlling is not a one-time activity. It is ongoing and cyclical as it helps identify areas of improvement for future planning cycles.

2. Importance of Controlling

Controlling is indispensable to management because it ensures that plans are implemented effectively. Without it, even the best-laid plans can fail. The following points highlight the significance of controlling:

a) Accomplishing Organizational Goals

  • Controlling measures actual performance against organizational goals and identifies deviations. By providing a corrective mechanism, controlling ensures that goals are consistently met.

b) Judging Accuracy of Standards

  • An effective control system verifies the accuracy and relevance of the standards set during planning. It helps determine whether these standards are realistic and in line with the current internal and external environment. For example, market fluctuations or technological advancements might require a revision of standards.

c) Ensuring Efficient Use of Resources

  • By monitoring the use of resources (such as materials, machinery, and labor), controlling helps minimize waste and ensures maximum productivity. Each activity is carried out according to predetermined norms, optimizing the use of resources.

d) Improving Employee Motivation

  • When clear performance standards are communicated to employees, and they know in advance how their performance will be evaluated, it creates motivation and helps them work towards specific goals.

e) Ensuring Order and Discipline

  • Through control mechanisms like surveillance, monitoring, and performance reviews, managers can detect and prevent dishonest or unproductive behavior, maintaining order and discipline within the organization.

f) Facilitating Coordination in Action

  • Controlling ensures that all departments and employees are aligned with the overall organizational objectives. It provides direction for all activities, ensuring they move in the same direction.

3. Limitations of Controlling

Despite its numerous benefits, controlling also has its limitations. These include:

a) Difficulty in Setting Quantitative Standards

  • Some aspects of performance, such as employee morale or job satisfaction, cannot easily be quantified. This makes it difficult to set clear, measurable standards for certain activities.

b) Little Control Over External Factors

  • External factors such as changes in government policies, technological advancements, market competition, and social changes are often beyond the organization’s control. These factors can adversely affect the organization’s ability to implement control measures effectively.

c) Resistance from Employees

  • Employees may resist control mechanisms as they can perceive them as restrictive or as an invasion of privacy (e.g., surveillance or strict monitoring). This can lead to dissatisfaction and a decline in motivation.

d) Costly Affair

  • Implementing a robust control system, especially one with modern technological tools like Management Information Systems (MIS) or advanced software, can be expensive. Smaller organizations might find it challenging to justify the costs of an elaborate control system if the benefits don’t outweigh the costs.

4. Relationship Between Planning and Controlling

Planning and controlling are closely linked and interdependent, often referred to as “the inseparable twins of management.”

a) Planning Provides the Standards for Controlling

  • Controlling depends on the standards established during planning. These standards serve as the benchmark for comparing actual performance.
  • Without a plan, there can be no control because control involves monitoring progress toward pre-set goals.

b) Controlling Ensures the Success of Planning

  • Once plans are implemented, controlling monitors the actual results. It measures deviations, if any, and ensures that corrective actions are taken to meet the plan’s objectives.

c) Forward and Backward Looking

  • Planning is forward-looking as it anticipates future events and lays down a roadmap to achieve future goals.
  • Controlling, on the other hand, is both forward- and backward-looking. It looks backward to assess past performance and take corrective actions to ensure future improvements.

d) Continuous and Reinforcing Cycle

  • The feedback from controlling helps improve future planning. Deviations identified during the controlling process allow managers to formulate better, more accurate plans in the future.

5. Controlling Process

The controlling process is systematic and involves five major steps:

Step 1: Setting Performance Standards

  • Performance standards serve as the benchmarks for measuring actual performance. These standards can be:
    • Quantitative (e.g., costs, time, revenue, units produced)
    • Qualitative (e.g., improving goodwill, enhancing customer satisfaction)

Standards should be:

  • Precise and Measurable: Managers should aim to set specific, quantitative standards wherever possible, as this makes performance evaluation easier.
  • Flexible: Standards should be adaptable to changing internal and external conditions. For example, due to unforeseen circumstances like an economic downturn, standards might need adjustment.

Step 2: Measurement of Actual Performance

  • Once the standards are set, the next step is to measure the actual performance. This can be done using various methods:
    • Personal observation: Direct supervision and monitoring.
    • Sample checking: Random checks to assess the quality of work.
    • Performance reports: Detailed reports summarizing performance.

Timing:

  • Measurement can occur both during and after task completion. For example, in assembly line production, performance can be measured after each phase of production to prevent faulty products from reaching the final stage.

Step 3: Comparing Actual Performance with Standards

  • After measuring actual performance, managers compare it with the established standards. This comparison reveals any deviations.
    • Example: If a worker is expected to produce 100 units a day but produces only 80, there is a deviation of 20 units.

Step 4: Analysing Deviations

  • Deviations from standards are inevitable in every process. It is essential to determine the acceptable range of deviations.
  • Critical Point Control: Not all deviations are equally important. Critical areas (e.g., production costs) should be focused on, as even small deviations here can significantly impact the organization.
  • Management by Exception: Only significant deviations that exceed the acceptable range need managerial attention.

Causes of Deviations could include:

  • Unrealistic standards
  • Defective processes
  • External factors
  • Resource constraints

Step 5: Taking Corrective Action

  • The final step is taking corrective action. If deviations are within the acceptable range, no action is needed. However, if they exceed the limits, corrective actions should be taken to ensure that performance aligns with the standards.
    • Examples of Corrective Actions: Training employees, assigning additional resources, revising processes, or modifying standards.

6. Techniques of Managerial Control

Controlling can be done using both traditional and modern techniques.

Traditional Techniques:

  1. Personal Observation: Direct supervision of activities.
  2. Statistical Reports: Data-driven reports providing insight into organizational performance.
  3. Breakeven Analysis: Identifies the point where revenue equals costs.
  4. Budgetary Control: Comparison of actual results with budgeted figures to control expenses and performance.

Modern Techniques:

  1. Return on Investment (ROI): Measures the profitability of investments.
  2. Ratio Analysis: Financial ratios such as liquidity ratios, profitability ratios, and efficiency ratios help assess financial health.
  3. Responsibility Accounting: Assigns responsibility for financial outcomes to specific managers.
  4. Management Information System (MIS): Provides timely and relevant data for decision-making.
  5. PERT (Program Evaluation and Review Technique) and CPM (Critical Path Method): Project management techniques to ensure timely completion of complex tasks.

7. Summary of Key Concepts

  1. Controlling ensures that actual activities align with plans and helps achieve organizational goals.
  2. Effective control systems judge the accuracy of standards, facilitate resource efficiency, and improve employee motivation and coordination.
  3. Planning and controlling are interdependent, reinforcing each other to drive efficient management.
  4. Various traditional and modern techniques can be employed for effective managerial control.

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