Chapter 12: Controlling
Every plan an organisation makes is a statement about the future: so many units a month, so much cost per unit, so many days to deliver an order. Nothing in the plan itself guarantees that the work will turn out that way. Machines break down, material arrives late, employees lose motivation, and market conditions shift while the plan is still being carried out. Unless someone checks what is actually happening against what was intended, the gap widens quietly until it becomes expensive to close. Consider a garment unit that has planned an output of five thousand shirts a month. If dispatch records are examined only at the end of the quarter, three months of shortfall have already been suffered. If output is measured every week, the shortfall is noticed early and its cause — a faulty cutting machine, perhaps — can be removed while the plan is still worth saving. Controlling is the managerial function that performs this check. This chapter explains the meaning and nature of controlling, its importance and its limitations, its link with planning, the steps in the control process, and the principle of management by exception.
Figure
Fig. 12.0-1 — Checking Output Against The Day’s Target Photograph of a supervisor on a factory floor comparing entries on a production record sheet with a display board showing the day’s target.
12.1 Meaning and Nature of Controlling
A plan tells an organisation what should happen. Work carried out under that plan may still fall short, because the conditions assumed when the plan was framed rarely hold unchanged through the whole period of execution. Material arrives late, a machine loses accuracy, a market softens, and the results drift away from the targets without anybody being formally told.
The organisation therefore needs a device that reports the difference between what was intended and what has actually occurred, and that acts on that difference before it grows. That device is the controlling function of management.
What Controlling Means
Controlling is the process of measuring actual performance, comparing it with planned performance, and taking corrective action wherever the two do not agree. It begins from the plan, because the plan supplies the yardstick, and it ends in action, because a difference that is merely reported changes nothing.
The yardstick itself is called a standard — the level of performance that is expected, stated as far as possible in measurable terms such as units produced, cost per unit or days taken to deliver. The difference between actual performance and the standard is called a deviation.
Controlling serves two purposes that follow from this. It detects errors, wastage and shortfalls while the work is still in progress, so that they can be put right rather than merely regretted. It also keeps effort pointed in the direction the plan laid down, because employees who know that performance will be measured against a standard tend to work towards that standard.
The working of the function is easiest to see in a small case. A salesman is expected to sell fifty units of a product in a week; this is the standard. At the end of the week his actual sales are compared with fifty. If they fall short, his superior finds out why — poor territory coverage, an unattractive price, inadequate product knowledge — and acts on the cause. Controlling thus locates a deficiency and removes it so that it does not recur.
Characteristics Of Controlling
The nature of the function follows from what it is required to do.
Function of management — controlling is one of the functions every manager performs, and it is a follow-up action to the others. The management cycle is incomplete without it, since a plan that is never checked is only an intention.
Pervasive function — control is exercised at every level of management, because every level works to a target. Only the nature and extent differ: top management controls broad results such as profitability, while a supervisor controls the day’s output.
Continuous process — performance keeps changing as work proceeds, so a single check is of little use. Control is exercised repeatedly through the life of a plan, in the way a navigator takes readings throughout a voyage rather than once at the start.
Dynamic process — a review may reveal that the standard itself was unrealistic or that conditions have changed. The standard is then revised, so controlling feeds back into planning and into the other functions instead of standing apart from them.
Forward-looking — the past cannot be altered. Past performance is measured only because it indicates what is likely to go wrong next, and the whole value of the exercise lies in preventing a recurrence.
Action-oriented — a control system that stops at reporting a deviation achieves nothing. The essence of control lies in the corrective action that closes the gap between the standard and actual performance.
Based on measurement — a deviation can be established only where performance can be measured and compared. This is why standards are stated in quantitative terms wherever the work permits it, and why control is harder in areas such as employee morale.
Goal-oriented — every check is directed at the accomplishment of organisational goals. An activity that does not affect goal achievement does not justify the time and expense of controlling it.
12.2 Importance of Controlling
No manager completes the job of managing without control. Plans are made, duties are assigned and work begins, but nothing so far guarantees that the work will produce the intended result. Control is the stage at which the organisation finds out whether it is on course, and it is for this reason that controlling is treated as indispensable to effective management.
Advantages Of A Sound Control System
Achievement of organisational goals — control keeps a constant watch on performance, so that errors and delays are detected and corrected while the plan can still be saved. Without it, activities drift, targets are missed and the goals set out in the plan are simply not reached.
Optimum utilisation of resources — every activity is carried out against a predetermined standard of cost, quality and time. Misuse and wastage of men, material and money show up as a deviation, which is why control brings down the cost of operations and improves quality.
Decentralisation of authority — a superior can pass decision-making down to lower levels only if there is a reliable way of knowing what was decided and with what result. Feedback from the control system supplies that assurance, so control makes delegation safe rather than restricting it.
Means of coordination — control lays down standards of performance for every department, and all departments are then working towards figures that have been fitted together in advance. Overlapping and duplication of effort are avoided and the parts of the organisation stay in harmony.
Better employee morale — employees know in advance what is expected of them and against what standard their work will be judged. Performance measured against a known standard is seen as fair, and evaluation of that kind induces employees to perform well and earn the rewards attached to it.
Simplified supervision — a control system produces regular reports on performance, so a supervisor is not required to watch every worker continuously. The reports identify the gaps, and problems are detected and settled before they become unmanageable.
Better planning — control reveals whether the standards laid down were accurate and achievable, and why they were missed. Information of this kind is exactly what the next round of planning needs, so realistic plans depend on the control data of the previous period.
Coping with change and complexity — the environment in which a business operates keeps changing, and a growing firm handles more products, markets and departments than before. A control system tells management, early and in figures, how these changes are affecting results.
Limitations Of Controlling
Difficulty in setting standards — control works well only where the standard can be stated in quantitative terms. Areas such as employee morale, job satisfaction and human behaviour cannot be reduced to figures, so measurement and comparison in these areas remain a matter of judgement.
Costly and time consuming — reporting systems, inspection, records and the managerial time spent on review all involve expenditure. A small firm may find that an elaborate control system costs more than the wastage it is meant to prevent.
Resistance from employees — employees frequently regard control as a restriction on their freedom rather than as a check on work. Resistance of this kind weakens the system, because information that is unwillingly supplied is often incomplete or delayed.
Little control over external forces — competition, technological change, government policy and market conditions lie outside the organisation. Control can detect their effect on results and help the firm adjust to them, but it cannot remove the cause.
12.3 Relationship between Planning and Controlling
Planning and controlling are so closely tied that neither works without the other. Each supplies something the other cannot produce for itself, and a manager who performs one of them well and the other carelessly gets very little out of either. The two are, for this reason, described as the inseparable twins of management.
Planning Is The Basis Of Control
Control operates by comparison, and a comparison needs a yardstick. That yardstick is the standard, and standards are laid down in the course of planning — the output expected, the cost permitted, the time allowed. Where no plan has been made, actual performance can be recorded but cannot be judged, because there is nothing it can be judged against. Planning is therefore a prerequisite for controlling, and without planning control is blind.
Control Gives Planning Its Effect
The dependence runs the other way as well. Planning sets the course, but a plan does not carry itself out; once it is put into operation, only control tells the organisation whether the planned results are actually being achieved and initiates action where they are not. A plan that is never checked has no consequences for anybody, and planning without control is meaningless.
Control also improves the plans that follow. Deviations reveal whether the standards were realistic, where capacity was overestimated and which assumptions failed, and this information goes back into the next round of planning. The cycle is summarised in FC 12.1.
Flowchart
FC 12.1 — The Planning And Control Cycle Planning sets standards → actions are carried out under the plan → controlling measures actual results against the standards → deviations and their causes are reported → corrective action is taken and the standards are revised → planning for the next period
Looking Ahead And Looking Back
It is often said that planning is looking ahead and controlling is looking back. The statement is only partly correct. Planning does look ahead, since every plan is prepared for a future period; but it is built on past experience and past figures, so it also looks back. Controlling does look back, since it measures performance that has already taken place; but the corrective action it initiates is meant to improve future results and to revise future plans, so it also looks forward. Both functions, in truth, look in both directions.
The differences that remain between them are set out in Table 12.1.
12.4 Steps in the Process of Controlling
Controlling is not a single act of inspection. It is a sequence in which each step depends on the one before it: nothing can be measured until it is known what was expected, nothing can be compared until it has been measured, and no corrective action can be chosen until the cause of the difference is known. The sequence is summarised in FC 12.2.
Flowchart
FC 12.2 — Steps In The Process Of Controlling Setting performance standards → measuring actual performance → comparing actual performance with standards → analysing deviations and their causes → taking corrective action
Setting Performance Standards
The first step is to fix the criterion against which actual results will be judged. Standards may be physical, such as units produced per shift or man-hours per job; monetary, such as sales revenue, cost per unit or expenses of a department; or intangible, such as the reputation of the firm and the quality of customer service. Intangible standards are the hardest to work with, because performance against them cannot be read off a record.
Standards reflect the performance the organisation desires, and they are fixed in the light of its overall goals. Since everything that follows rests on them, they must satisfy certain requirements.
Simple and clear — a standard that different people read differently cannot settle whether performance was adequate, so the wording must leave no room for interpretation.
Capable of achievement — a standard that cannot be met with reasonable effort and time is soon disregarded, and the deviations it produces carry no information.
Flexible, not rigid — conditions change during the period of the plan, so the standard must be capable of being modified when circumstances make the original figure meaningless.
Consistent with overall objectives — a departmental standard that pulls against the objectives of the organisation makes the department efficient and the firm no better off.
Objectively set — standards arrived at scientifically, with the help of time and motion study where the work permits, carry authority that a figure fixed by personal opinion does not.
Set in consultation — those who must achieve a standard accept it far more readily when they have been consulted while it was being framed.
Stated in measurable terms — a target expressed in units, rupees or days can be compared with an actual figure, which is what makes control possible at the later steps.
Measuring Actual Performance
Once standards are fixed, actual performance is measured. It must be measured in the same units in which the standard was stated, otherwise the comparison at the next step cannot be made: if the standard for a factory is five hundred tonnes a month, output has to be recorded in tonnes.
Performance may be measured by personal observation, by sample checking, or through oral and written reports, and accurate measurement depends on a reliable system of reporting. Measurement is easier at lower levels, where output is visible and countable, than at higher levels, where the results of managerial work appear only indirectly and over a longer period.
As far as possible, measurement should be taken while the activity is still in progress rather than only after it is complete, because a deviation reported after the work is finished can no longer be prevented.
Comparing Performance With Standards
Actual performance is then set against the standard, and the comparison shows the extent to which performance has deviated. Where the two agree, the activity may be taken to be under control and no further action is called for. Where actual performance falls short, the size of the deviation is established, since the size determines whether the matter is worth pursuing and how urgently.
Analysing Deviations
Some deviation occurs in almost every activity, and it is neither practicable nor economical to investigate all of them. The organisation therefore fixes an acceptable range within which a deviation is treated as normal, and concentrates attention on what lies outside that range.
Attention is also concentrated by area. Under critical point control, control effort is directed at the Key Result Areas of the business — the points at which failure would damage the organisation as a whole. A rise of five per cent in labour cost matters far more than a rise of the same proportion in postal charges, and the two do not deserve equal managerial attention. The second technique used for this purpose is taken up in the following section.
Once a significant deviation has been identified, its cause is examined. Deviations arise from errors in planning, from defective implementation, from careless performance, or from changes in the environment that no one inside the firm could prevent. The cause decides the remedy, which is why this step cannot be skipped.
Taking Corrective Action
The process is incomplete until something is done. Corrective action is chosen on the basis of the cause established at the previous step, and it varies accordingly.
Defective material — the quality specification is revised or the supplier is changed.
Defective or obsolete machinery — the machine is repaired, replaced or upgraded to current technology.
Inadequate skill — employees are given training, or additional workers are assigned to the operation.
Poor working conditions — lighting, layout, supervision or incentives are improved so that the standard becomes attainable.
An unrealistic standard — where performance cannot be improved by any of these means, and the shortfall is due to reasons beyond the control of managers, the standard itself is revised.
12.5 Management by Exception
A large enterprise carries out so many activities that no senior manager can examine all of them. If every small variation were reported upward, the reports alone would consume the working day, and the matters that really mattered would be buried among the ones that did not. Control has therefore to be selective, and the principle that makes it selective is management by exception, also called control by exception.
What The Principle Requires
Under this principle, only those deviations which are extraordinary or exceptional are placed before higher management for action. Deviations that fall within the acceptable range fixed in advance are dealt with at the level at which they arise, and are not carried further. A firm may decide, for example, that no corrective action is required so long as actual output stays within five per cent of the standard; anything beyond that limit is reported.
The rationale is the pressure on managerial time. Managers are busy people whose attention is a scarce resource, and it is wasted when spent on trivial matters. If five employees out of a hundred are performing below standard, effort is directed at those five; applying the same measures to all hundred would be a sheer waste of time, money and effort. An attempt to control everything, as the saying goes, ends in controlling nothing.
Benefits Of Control By Exception
Saving of executive time — the manager reads only what departs from plan, and the hours released are available for planning and for decisions that no one else can take.
Better use of managerial talent — senior ability is applied to the problems that carry the greatest consequences, instead of being spread thinly over routine matters.
Easier delegation — routine deviations are settled by subordinates as a matter of course, so authority can be passed down without the superior losing sight of anything important.
Faster decisions — fewer matters travel up the hierarchy, so the queue of decisions waiting at higher levels is shorter and each is dealt with sooner.
Higher morale of subordinates — being trusted to handle ordinary variations gives subordinates room to exercise judgement and to learn from the results of their own decisions.
Clearer relationships — every manager knows which matters fall within his jurisdiction and which must be referred upward, which removes a common source of confusion.
Cautions In Applying It
The principle is not free of risk. An area that appears non-critical may prove crucial, and by the time the deviation is large enough to be reported the damage may already be done. Managers should also not assume that no news is good news, since inconvenient information is exactly what subordinates are least willing to pass upward. The permissive atmosphere the principle creates can itself be misused where supervision is weak.
Critical point control and management by exception work together and are easily confused. Their difference is set out in Table 12.2.
12.6 Summary
Controlling is the process of measuring actual performance, comparing it with planned performance and taking corrective action wherever the two do not agree. It begins from the plan, which supplies the yardstick, and ends in action.
A standard is the level of performance expected, stated as far as possible in measurable terms, and a deviation is the difference between actual performance and the standard.
Controlling serves two purposes: it detects errors and wastage while the work is still in progress, and it keeps effort directed towards the results the plan laid down.
Controlling is a function of management that is pervasive across levels, continuous through the life of a plan, dynamic, forward-looking, action-oriented, based on measurement and directed at organisational goals. It is exercised over performance, not over the personal rights of employees.
A sound control system helps the organisation achieve its goals, use its resources economically, decentralise authority safely, coordinate departments, maintain employee morale, simplify supervision, improve future planning and cope with change and complexity.
Controlling has limits. Standards are hard to set for qualitative areas, the system costs time and money, employees often resist it as a restriction on their freedom, and external forces such as competition and government policy lie outside its reach.
Planning and controlling are interdependent and are called the inseparable twins of management:
- Planning supplies the standards without which control has nothing to compare against, so without planning control is blind.
- Control ensures that planned results are actually achieved, so without control planning is meaningless.
- Deviations reported by control feed into the next round of planning and make future plans more realistic.
- Both functions look backward and forward, so the saying that planning looks ahead and controlling looks back is only partly correct.
- The control process runs through five steps in a fixed order, each depending on the one before it:
- Setting performance standards, which may be physical, monetary or intangible, and which should be clear, achievable, flexible, consistent with objectives, objectively set, framed in consultation and measurable.
- Measuring actual performance in the same units as the standard, and as far as possible while the work is still in progress.
- Comparing actual performance with the standard to establish the extent of the deviation.
- Analysing deviations that fall outside the acceptable range and identifying their causes.
- Taking corrective action suited to the cause, or revising the standard where performance cannot be improved.
Critical point control directs control effort at the key result areas of the business, the points at which failure would damage overall performance.
Management by exception requires that only extraordinary deviations reach higher management, routine variations being settled where they arise. It saves executive time, uses managerial talent better, eases delegation, speeds up decisions and raises the morale of subordinates, but managers must not assume that no news is good news.
Flowchart
FC 12.3 — The Control Process In Brief Setting performance standards → measuring actual performance → comparing actual performance with standards → analysing deviations and their causes → taking corrective action or revising the standard
12.7 Points to Ponder
The benefit of a control system is a loss that never occurs, while its cost appears in the accounts every month. On what basis should a small manufacturer decide how much control is worth paying for?
Standards for areas such as employee morale and job satisfaction cannot be reduced to figures. Is it better for a manager to work with a rough qualitative standard in such areas, or to leave them outside the control system altogether?
Management by exception treats deviations within the acceptable range as not worth reporting. In what circumstances might a small deviation that repeats month after month prove more damaging than a single large one?
Employees frequently experience monitoring as a sign of distrust, while managers regard the same monitoring as ordinary coordination. Where should the line be drawn between control that is legitimate and control that is intrusive?
When analysis of a deviation shows that the standard itself was unrealistic, revising the standard removes the deviation without improving performance. Is such a revision an honest correction or an admission that the planning was weak?
Modern reporting systems make it possible to measure almost every activity continuously and at low cost. Does this strengthen the case for management by exception, or does it weaken the argument on which the principle rests?
12.8 Objective Questions
- A works manager finds that a batch has a rejection rate of eight per cent against a set standard of three per cent, and traces the difference to an untrained operator. This action forms part of which step of the control process? [1]
- Setting performance standards
- Measuring actual performance
- Analysing deviations
- Taking corrective action
- Which of the following is not a limitation of controlling? [1]
- Standards are difficult to set for qualitative areas
- Employees may resist it as a restriction on their freedom
- It reveals whether the standards laid down were realistic
- It involves considerable expenditure of time and money
- Assertion (A): Controlling is described as a forward-looking function. [1] Reason (R): The corrective action initiated under controlling is intended to prevent a shortfall from recurring in later periods.
- Both (A) and (R) are true, and (R) is the correct explanation of (A)
- Both (A) and (R) are true, but (R) is not the correct explanation of (A)
- is true, but (R) is false
- is false, but (R) is true
- Fill in the blank: The principle under which only extraordinary deviations are reported to higher management is known as ____________. [1]
- State whether the following statement is true or false: A control system can measure the effect of a change in government policy on the results of a firm, but it cannot remove that change. [1]
12.9 Check Your Concepts
- What is meant by a deviation? Name the two techniques used to decide which deviations deserve managerial attention. [2]
- State any three requirements that a good performance standard should satisfy, giving the reason for each. [3]
- ‘Without planning, control is blind; without control, planning is meaningless.’ Explain this statement. [3]
- The owner of a small firm complains that an elaborate control system was installed a year ago and results have still not improved. Explain any four limitations of controlling that could account for this. [4]
- Explain the five steps involved in the process of controlling, and state why each step depends on the one before it. [6]
12.10 Case-Based Questions
- Meridian Foods has fixed a rejection standard of two per cent for its packaged snacks line, and has instructed the plant that no report need be sent to the general manager so long as rejection stays within that limit. In March the rejection rate reached nine per cent and the report reached him in the same week. On examining the cause, the plant head found that a sealing machine had been running at the wrong temperature since the beginning of the month.
- Identify the principle of control that Meridian Foods follows in its reporting arrangement, and state one benefit it gives the general manager. [2]
- Name the step of the control process at which the faulty sealing machine was identified, and state the corrective action suited to that cause. [2]