Lesson 9. Controlling
Simply put, organizational control is the process of assigning, evaluating, and regulating resources on an ongoing basis to accomplish an organization's goals. To successfully control an organization, managers need to not only know what the performance standards are, but also figure out how to share that information with employees.
9.2 MEANING OF CONTROL
Control can be defined narrowly as the process a manager takes to assure that actual performance conforms to the organization's plan, or more broadly as anything that regulates the process or activity of an organization. The following content follows the general interpretation by defining managerial control as monitoring performance against a plan and then making adjustments either in the plan or in operations as necessary.
The six major purposes of controls are as follows:
Controls make plans effective. Managers need to measure progress, offer feedback, and direct their teams if they want to succeed.
Controls make sure that organizational activities are consistent. Policies and procedures help ensure that efforts are integrated.
Controls make organizations effective. Organizations need controls in place if they want to achieve and accomplish their objectives.
Controls make organizations efficient. Efficiency probably depends more on controls than any other management function.
Controls provide feedback on project status. Not only do they measure progress, but controls also provide feedback to participants as well. Feedback influences behavior and is an essential ingredient in the control process.
Controls aid in decision making. The ultimate purpose of controls is to help managers make better decisions. Controls make managers aware of problems and give them information that is necessary for decision making.
Many people assert that as the nature of organizations has changed, so must the nature of management controls. New forms of organizations, such as self-organizing organizations, self-managed teams, and network organizations, allow organizations to be more responsive and adaptable in today's rapidly changing world. These forms also cultivate empowerment among employees, much more so than the hierarchical organizations of the past.
Some people even claim that management shouldn't exercise any form of control whatsoever, and should only support employee efforts to be fully productive members of organizations and communities. Along those same lines, some experts even use the word “coordinating” in place of “controlling” to avoid sounding coercive. However, some forms of controls must exist for an organization to exist. For an organization to exist, it needs some goal or purpose, or it isn't an organization at all. Individual behaviors, group behaviors, and all organizational performance must be in line with the strategic focus of the organization.
9.3 THE ORGANIZATIONAL CONTROL PROCESS
The control process involves carefully collecting information about a system, process, person, or group of people in order to make necessary decisions about each. Managers set up control systems that consist of four key steps:
Establish standards to measure performance. Within an organization's overall strategic plan, managers define goals for organizational departments in specific, operational terms that include standards of performance to compare with organizational activities.
Measure actual performance. Most organizations prepare formal reports of performance measurements that managers review regularly. These measurements should be related to the standards set in the first step of the control process. For example, if sales growth is a target, the organization should have a means of gathering and reporting sales data.
Compare performance with the standards. This step compares actual activities to performance standards. When managers read computer reports or walk through their plants, they identify whether actual performance meets, exceeds, or falls short of standards. Typically, performance reports simplify such comparison by placing the performance standards for the reporting period alongside the actual performance for the same period and by computing the variance—that is, the difference between each actual amount and the associated standard.
Take corrective actions. When performance deviates from standards, managers must determine what changes, if any, are necessary and how to apply them. In the productivity and quality-centered environment, workers and managers are often empowered to evaluate their own work. After the evaluator determines the cause or causes of deviation, he or she can take the fourth step—corrective action. The most effective course may be prescribed by policies or may be best left up to employees' judgment and initiative.
These steps must be repeated periodically until the organizational goal is achieved.
9.4 CHARACTERISTICS OF EFFECTIVE ORGANIZATIONAL CONTROL SYSTEMS
The management of any organization must develop a control system tailored to its organization's goals and resources. Effective control systems share several common characteristics. These characteristics are as follows:
A focus on critical points. For example, controls are applied where failure cannot be tolerated or where costs cannot exceed a certain amount. The critical points include all the areas of an organization's operations that directly affect the success of its key operations.
Integration into established processes. Controls must function harmoniously within these processes and should not bottleneck operations.
Acceptance by employees. Employee involvement in the design of controls can increase acceptance.
Availability of information when needed. Deadlines, time needed to complete the project, costs associated with the project, and priority needs are apparent in these criteria. Costs are frequently attributed to time shortcomings or failures.
Economic feasibility. Effective control systems answer questions such as, “How much does it cost?” “What will it save?” or “What are the returns on the investment?” In short, comparison of the costs to the benefits ensures that the benefits of controls outweigh the costs.
Accuracy. Effective control systems provide factual information that's useful, reliable, valid, and consistent.
Comprehensibility. Controls must be simple and easy to understand.
9.5 ORGANIZATIONAL CONTROL TECHNIQUES
Control techniques provide managers with the type and amount of information they need to measure and monitor performance. The information from various controls must be tailored to a specific management level, department, unit, or operation.
To ensure complete and consistent information, organizations often use standardized documents such as financial, status, and project reports. Each area within an organization, however, uses its own specific control techniques, described in the following sections.
9.5.1 Financial controls
After the organization has strategies in place to reach its goals, funds are set aside for the necessary resources and labor. As money is spent, statements are updated to reflect how much was spent, how it was spent, and what it obtained. Managers use these financial statements, such as an income statement or balance sheet, to monitor the progress of programs and plans. Financial statements provide management with information to monitor financial resources and activities. The income statement shows the results of the organization's operations over a period of time, such as revenues, expenses, and profit or loss. The balance sheetshows what the organization is worth (assets) at a single point in time, and the extent to which those assets were financed through debt (liabilities) or owner's investment (equity).
Financial audits, or formal investigations, are regularly conducted to ensure that financial management practices follow generally accepted procedures, policies, laws, and ethical guidelines. Audits may be conducted internally or externally. Financial ratio analysis examines the relationship between specific figures on the financial statements and helps explain the significance of those figures:
Liquidity ratios measure an organization's ability to generate cash.
Profitability ratios measure an organization's ability to generate profits.
Debt ratios measure an organization's ability to pay its debts.
Activity ratios measure an organization's efficiency in operations and use of assets.
In addition, financial responsibility centers require managers to account for a unit's progress toward financial goals within the scope of their influences. A manager's goals and responsibilities may focus on unit profits, costs, revenues, or investments.
9.5.2 Budget controls
A budget depicts how much an organization expects to spend (expenses) and earn (revenues) over a time period. Amounts are categorized according to the type of business activity or account, such as telephone costs or sales of catalogs. Budgets not only help managers plan their finances, but also help them keep track of their overall spending.
A budget, in reality, is both a planning tool and a control mechanism. Budget development processes vary among organizations according to who does the budgeting and how the financial resources are allocated.
Marketing controls help monitor progress toward goals for customer satisfaction with products and services, prices, and delivery. The following are examples of controls used to evaluate an organization's marketing functions:
Market research gathers data to assess customer needs—information critical to an organization's success. Ongoing market research reflects how well an organization is meeting customers' expectations and helps anticipate customer needs. It also helps identify competitors.
Test marketing is small-scale product marketing to assess customer acceptance. Using surveys and focus groups, test marketing goes beyond identifying general requirements and looks at what (or who) actually influences buying decisions.
Marketing statistics measure performance by compiling data and analyzing results. In most cases, competency with a computer spreadsheet program is all a manager needs. Managers look at marketing ratios, which measure profitability, activity, and market shares, as well as sales quotas, which measure progress toward sales goals and assist with inventory controls.
Unfortunately, scheduling a regular evaluation of an organization's marketing program is easier to recommend than to execute. Usually, only a crisis, such as increased competition or a sales drop, forces a company to take a closer look at its marketing program. However, more regular evaluations help minimize the number of marketing problems.
9.5.3 Human resource controls
Human resource controls help managers regulate the quality of newly hired personnel, as well as monitor current employees' developments and daily performances.
On a daily basis, managers can go a long way in helping to control workers' behaviors in organizations. They can help direct workers' performances toward goals by making sure those goals are clearly set and understood. Managers can also institute policies and procedures to help guide workers' actions. Finally, they can consider past experiences when developing future strategies, objectives, policies, and procedures.
Common control types include performance appraisals, disciplinary programs, observations, and training and development assessments. Because the quality of a firm's personnel, to a large degree, determines the firm's overall effectiveness, controlling this area is very crucial.
9.5.4 Computers and information controls
Almost all organizations have confidential and sensitive information that they don't want to become general knowledge. Controlling access to computer databases is the key to this area.
Increasingly, computers are being used to collect and store information for control purposes. Many organizations privately monitor each employee's computer usage to measure employee performance, among other things. Some people question the appropriateness of computer monitoring. Managers must carefully weigh the benefits against the costs—both human and financial—before investing in and implementing computerized control techniques.
Regardless of the control processes used, an effective system determines whether employees and various parts of an organization are on target in achieving organizational objectives.
9.6 PRODUCTIVITY AND QUALITY
After companies determine customer needs, they must concentrate on meeting those needs by yielding high quality products at an efficient rate. Companies can improve quality and productivity by securing the commitments of all three levels of management and employees as follows:
Top-level management: Implement sound management practices, use research and development effectively, adopt modern manufacturing techniques, and improve time management.
Middle management: Plan and coordinate quality and productivity efforts.
Low-level management: Work with employees to improve productivity through acceptance of change, commitment to quality, and continually improving all facets of their work.
Productivity is the relationship between a given amount of output and the amount of input needed to produce it. Profitability results when money is left over from sales after costs are paid. The expenditures made to ensure that the product or service meets quality specifications affect the final or overall cost of the products and/or services involved. Efficiency of costs will be an important consideration in all stages of the market system from manufacturing to consumption. Quality affects productivity. Both affect profitability. The drive for any one of the three must not interfere with the drive for the others. Efforts at improvement need to be coordinated and integrated. The real cost of quality is the cost of avoiding nonconformance and failure. Another cost is the cost of not having quality—of losing customers and wasting resources.
As long as companies continually interact with their customers and various partners, and develop learning relationships between all levels of management and employees, the levels of productivity and quality should remain high.