Techniques of Management Control21/12/2020
Control is essential for monitoring the output of systems and is exercised by means of control loops. It is necessary for monitoring the desired output of a system with the actual output so that the performance of the system can be measured and corrective action taken if required. Schoderbek, 1985 mentions four elements required for effective control:
- A control variable is the variable whose value would determine the degree of performance of the system.
- A detector is to monitor the output of the system by measuring the control variable parameters.
- A comparator is to compare the actual and planned output of the system.
- An effecter is to make suitable changes.
Kinds of Control System
Control mechanisms can be of two types: feedback control and feed forward control.
When we have a control structure in which the output is used to directly alter the inputs we call that as a feedback control mechanism. Feedback control can itself be of two types, i.e. positive feedback and negative feedback. Positive feedback is when the output of a system is positively correlated with the input, i.e., more output prompts more input or less output prompts less input. For example, stock market sometimes exhibit positive feedback. Positive feedback generally indicates an instable system unless there is an outside mechanism to stop the process beyond a point. Negative feedback on the other hand is the opposite of positive feedback in the sense that in negative feedback the relationship between output and input is negative. The refrigerator example given earlier is an example of negative feedback.
Feedback control systems particularly the ones with negative feedback have a tendency to oscillate around the desired values of control variables. For example, take the example of a driver driving a vehicle and wanting to keep a speed of around sixty km per hour. He will apply brakes when he is beyond sixty km per hour and as a result the vehicle speed will come back, to let us say, fifty-five km per hour at which time he will again press the accelerator and push the speed to near sixty km per hour and this will again result in the speed crossing sixty km per hour alerting him to press brakes and slow down. Thus vehicle speed will oscillate around sixty km per hour, which happens as control mechanisms are not designed to work in a step wise manner, instead they have a steady effect on the system. This means that system oscillation happens when control mechanisms might take some time to react to an alert or may also take a finite time to take effect or both. This can also happen if the control mechanism overcompensates for the deviation from a stable state.
Feed Forward Control
This is a type of control mechanism to address the problem of system oscillation. In this type of control mechanism, the control is exercised after predicting the output and if the prediction about the output is that it will cross the stable limit or the target then control mechanisms are applied even before the target value or control value of the control variable is attained bringing down the system automatically below the danger limit.
For example, if in our driver example, if the vehicle had an intelligent braking system controlled by computer aided automatic brake controls then whenever the vehicle would go over fifty-eight km per hour, automatic brakes would be applied irrespective of whether the driver applies brakes or not bringing down the speed to the desired level. This is called feed forward system and it works on a proactive philosophy rather that the reactive philosophies of a feedback control mechanism. However, to apply feed forward control mechanism we need to have complete understanding of the system.
Traditional Techniques of Managerial Control
Traditional techniques are those which have been used by the companies for a long time now. These include:
- Personal observation
- Statistical reports
- Break-even analysis
- Budgetary control
1. Personal Observation
This is the most traditional method of control. Personal observation is one of those techniques which enables the manager to collect the information as first-hand information.
It also creates a phenomenon of psychological pressure on the employees to perform in such a manner so as to achieve well their objectives as they are aware that they are being observed personally on their job. However, it is a very time-consuming exercise & cannot effectively be used for all kinds of jobs.
2. Statistical Reports
Statistical reports can be defined as an overall analysis of reports and data which is used in the form of averages, percentage, ratios, correlation, etc., present useful information to the managers regarding the performance of the organization in various areas.
This type of useful information when presented in the various forms like charts, graphs, tables, etc., enables the managers to read them more easily & allow a comparison to be made with performance in previous periods & also with the benchmarks.
3. Break-even Analysis
Breakeven analysis is a technique used by managers to study the relationship between costs, volume & profits. It determines the overall picture of probable profit & losses at different levels of activity while analyzing the overall position.
The sales volume at which there is no profit, no loss is known as the breakeven point. There is no profit or no loss. Breakeven point can be calculated with the help of the following formula:
Breakeven point = Fixed Costs/Selling price per unit variable costs per unit
4. Budgetary Control
Budgetary control can be defined as such technique of managerial control in which all operations which are necessary to be performed are executed in such a manner so as to perform and plan in advance in the form of budgets & actual results are compared with budgetary standards.
Therefore, the budget can be defined as a quantitative statement prepared for a definite future period of time for the purpose of obtaining a given objective. It is also a statement which reflects the policy of that particular period. The common types of budgets used by an organization.
Some of the types of budgets prepared by an organisation are as follows,
- Sales budget: A statement of what an organization expects to sell in terms of quantity as well as value
- Production budget: A statement of what an organization plans to produce in the budgeted period
- Material budget: A statement of estimated quantity & cost of materials required for production
- Cash budget: Anticipated cash inflows & outflows for the budgeted period
- Capital budget: Estimated spending on major long-term assets like a new factory or major equipment
- Research & development budget: Estimated spending for the development or refinement of products & processes
Modern Techniques of Managerial Control
Modern techniques of controlling are those which are of recent origin & are comparatively new in management literature. These techniques provide a refreshingly new thinking on the ways in which various aspects of an organization can be controlled. These include:
- Return on investment
- Ratio analysis
- Responsibility accounting
- Management audit
- PERT & CPM
1. Return on Investment
Return on investment (ROI) can be defined as one of the important and useful techniques. It provides the basics and guides for measuring whether or not invested capital has been used effectively for generating a reasonable amount of return. ROI can be used to measure the overall performance of an organization or of its individual departments or divisions. It can be calculated as under-
Net income before or after tax may be used for making comparisons. Total investment includes both working as well as fixed capital invested in the business.
2. Ratio Analysis
The most commonly used ratios used by organizations can be classified into the following categories:
- Liquidity ratios
- Solvency ratios
- Profitability ratios
- Turnover ratios
3. Responsibility Accounting
Responsibility accounting can be defined as a system of accounting in which overall involvement of different sections, divisions & departments of an organization are set up as ‘Responsibility centers’. The head of the center is responsible for achieving the target set for his center. Responsibility centers may be of the following types:
- Cost center
- Revenue center
- Profit center
- Investment center
4. Management Audit
Management audit refers to a systematic appraisal of the overall performance of the management of an organization. The purpose is to review the efficiency &n effectiveness of management & to improve its performance in future periods.
5. PERT & CPM
PERT (programmed evaluation & review technique) & CPM (critical path method) are important network techniques useful in planning & controlling. These techniques, therefore, help in performing various functions of management like planning; scheduling & implementing time-bound projects involving the performance of a variety of complex, diverse & interrelated activities.
Therefore, these techniques are so interrelated and deal with such factors as time scheduling & resources allocation for these activities.