MANAGING THE CONTROL SYSTEM

To enforce discipline in business, control systems are in place across the industries. Signature verification in banks, closed-circuit TVs with camera attachments in airports, metal detectors outside 5-star hotels, security systems in industrial manufacturing units, billing machines at shopping malls and call log books in call centres are example of good management control systems. Management brings efficiency in all functions of business, be it accounting, finance, marketing, operation, supply chain, human resource, infrastructure, technology or banking. According to textbooks, the role of a good executive is to get the work done through others. Executives perform a lot of responsibilities simultaneously such as planning, directing, organising, staffing and controlling. Many responsibilities of the managers require a control system in the organisation.

CONTROL PROCESS: Corporate organisations, especially multinational companies, have got a multidisciplinary control system developed, which is managed by thousands of managerial staff. The aim of this paper is to focus on the multi-dimensional aspects of control mechanisms in the competitive corporate environment. In the contemporary corporate setting, control can be considered to ensure that activities are producing the desired results. Control in this sense is limited to monitoring the outcome of activities, reviewing feedback information about the outcome, and; if necessary, taking corrective action. In a different context, controlling is determination, evaluation of performance and application of corrective measures so that the performance takes place according to plans.

HISTORICAL ASPECTS OF CONTROL: An evolution of control systems vis--vis management innovation can be understood from the pages of history. The foundation of a city-based civilisation in the Indus valley, the building of the great pyramids of Egypt, the conceptualisation of the Sun Temple at Konark, the construction of the Great Wall of China, the spread of Buddhism by emperor Ashoka to Cyprus, Egypt, China, Japan and Srilanka, the trade between the Cholas, Chalukyas and Pandyas with the nations of Bali, Borneo,, Sumatra, Siam (todays Thailand and Indonesia) we find the application of management everywhere. Management principles were earlier developed and taught under philosophy. We find the formal theorisation of management in the west during the first half of the 20th century.

SCIENTIFIC MANAGEMENT BY TAYLOR: Frederick Winslow Taylor of USA, known as the father of management, wrote and published his first book on management entitled Shop Management in 1911. The book identified several management functions and described management cultures in detail. He described his theory as scientific management. He emphasised on control mechanism and defined a good factory management or scientific management. Taylor prioritised on solving managerial problems in a logical and scientific way. Therefore, in certain quarters, he is called the father of scientific management. The crucial pillars of scientific management areseparation of planning and doing, functional foremanship, job analysis, standardisation, scientific selection and training of workers, financial incentives, economy and mental revolution. Taylor emphasised on the separation of the planning aspect from actually doing the work. He evolved the concept of functional foremanship based on the specialisation of function. Job analysis covers time study, motion study and fatigue study. Taylor was proponent of standardisation of instruments, tools, period and amount of work, working conditions, cost of production etc., Taylor was the proponent of standardisation of instruments, tools, period and amount of work, working conditions, cost of production etc., Taylors revolutionary invention was financial incentive which is known as the Differential Piece Approach to expedite the volume of production and the speed of delivery. Taylors system of scientific management called for the multiplicity of control. For every level of production or management, a control system was devised. Measurement of work, time and bonus, and payment of equitable wages were the major control systems prevalent at that time.

FAYOLS CONTRIBUTION: Taylors principles were popular in countries such as the United States and England. French industrialist Henry FayolFredrick Taylors contemporaryalso researched in the domain of management control. His work was more known in the French-speaking nations. Fayol introduced 14 principles of management: Division of work, authority and responsibility, discipline, unity of command, unity of direction, subordination of individual to general interest, remuneration of personnel, centralisation, scalar chain, order, equity, stability of tenure, initiative and esprit de corps (the morale of a group). In order to initiate management control, Fayol suggested there should be the scalar chain of authority and of communication, ranging from the highest to the lowest. Scientific management is concerned with knowing exactly what you want your men to do, and then seeing that they follow the best and the low-cost way.

According to the monastic approach, financial incentive can motivate the worker to put in the maximum effort. If provisions exist to earn higher wages by putting in extra effort, workers will be motivated to work more. According to this scheme, a worker who completes the normal work gets wages at a higher rate per piece and one who fails to complete gets a lower rate. Considerable difference in wages between those who complete the work and those who do not compel the under-performing worker to enhance his productivity so that he can bypass the penal deduction in the wage. Division of work provides the opportunity for specialisation and division of labour, which can be used as a cost-control mechanism as it produces pure economies of scale, as more and more units of an output are produced, input requirement per unit of the output falls. Authority can be decomposed into personal authority and official authority. Official authority is derived from the managers position, designation and job profile, while personal authority is derived from personal qualities such as intelligence, experience , ethics and previous assignments. Responsibility arises from activity. Assigning appropriate job to a suitable candidate is not easy. Fayol recommended striking a balance between centralisation of authority and decentralisation of roles and responsibilities. Unity of command means a person should get command and instructions from only one superior. The principle of unity of directions says each group of activity with the same objective must have one head and one plan. All of these are aimed at achieving a better control system in the organisation. Order can be of two types: material order and social order. In material order, there should be a place for everything and everything should be in its place. Social order is saying that there should be the right man at the right place. Equity in treatment, behaviour and reasonable security of job are necessary factors to boost the confidence and motivational level of the employee. All these are aimed at establishing a sound control mechanism in the organisation to avoid possible internal conflict and external threats. In the post Fayol period, the management would experience a sea change in control systems. The Hawthorne experiment, popularly known as the human relations school, derived some control systems that touched the heart of workers. Providing fringe benefits and pumping stereo music were some human-oriented control systems.

CONTROL DIMENSION BY WEBER AND PETER DRUCKER: Max Weber of Germany introduced a system of continuous check a process of internal control and validation. The system was known as bureaucracy. Bureaucracy provides a system of constant checks and balances to validate each and every management step.

Management guru Peter Drucker had varied experiences and a background which included psychology, sociology, law and journalism. Drucker is one of the brightest stars in the management galaxy and he will be remembered for his valuable contributions in the areas of nature of management and its functions, organisational structure, federalism and management by objectives. INNOVATIONS OF PETER DRUCKER: Drucker was against the bureaucratic management and his focus was on management with innovative characteristics. Innovation includes development of new ideas, combining old and new ideas, adaptation of new ideas from other fields and using them as a catalyst and encouraging others to carry out innovation. He believed that management is the organ of the institution. It has no function in itself and no existence in task. A manager has to act as an administrator where he has to improve upon what already exists. And he has to act as an entrepreneur in redirecting the resources from the area of low or diminishing results to areas of high and increasing results. As such, Drucker believed that a good control system should be self-discretionary. Drucker advocated the concept of federalism. Management by objectives (MBO) is regarded as one of the most important contributions of Drucker to the discipline of management. MBO is a system of achieving organisational objectives and enhancement of employee satisfaction and participation. It consists of certain sequential steps such as setting the organisational purposes and objectives, identifying the key result areas for the organisation, setting the objectives of subordinates, matching the financial and physical sources of the organisation with the objective set, on-going appraisals to find out the loopholes in the system, if any, and using the outcome of the appraisals as the basic input for recycling of the organisations objective, strategy and policy. The concept of MBO can be seen as a milestone in the path of designing an effective control system for the organisation. Federalism refers to centralised control in a decentralised structure. Decentralised structure goes far beyond the delegation of authority which creates a new constitution and a new ordering principle. The emphasis was on the close link between the decisions adopted by the top management on one hand and those by the autonomous unit on the other.

SYSTEMS APPROACH: The systems approach has attracted the maximum attention of thinkers in the sphere of management starting from late 1950s. the basic idea of this approach is that any object must rely on a method of analysis involving variations of mutually dependent variables. Closed systems are those that have no interaction with the environment, that is, no outside system impinges on those or for which no outside systems are to be considered. Closed systems are those that interact with their environment, that is, they have systems

with which they relate, exchange and communicate. Open systems interact with the environment and in this interaction, they import energy and export output. Systems approach was the brainchild of professor Herbert Simon. He was influenced by a number of researchers in the field of cybernetic paradigm. Cybernetic paradigm was the first interface of management control in the first generation of information technology. CONTINGENCY THEORY: Contingency theory is an important addition to the paradigm of theory and approach. The contingency approach was presented by quoting Tosi and Hammer, when a subsystem in an organisation behaves in esponse to another system, we say that response is contingent on the environment. Hence, a contingency approach is an approach where the behaviour of one sub-unit is dependent on its environmental relationship to the other units or sub-units that have control over the consequences desired by the sub-unit. The bottom line of the contingency theory is that no action can be universal because of the specific organisation-environment relationship. MANAGEMENT BY EXCEPTION: In the present competitive era, an organisation has to strive for efficiency as it has to perform the work at the least possible cost to enhance the profit margin. Simultaneously, it has to achieve effectiveness by choosing the right way to do so as everybody knows compromising with quality for the sake of quantity is not a wise decision. Corporate houses have to strike a balance between efficiency and effectiveness. One of the most important ways of tailoring the controls for efficiency and effectiveness is to make sure that they are designed to point out exception. Therefore, management by exception is a system of identification communication that directs the manager to wherever his attention is needed. Management by exception has six basic ingredients, which are: Measurement of past and present performance, projection of useful measurements to achieve the future goals and expectations, selection criteria of the performance benchmark of the organisation, observation of the current state of affairs, comparison between actual and planned performance, and decision-making regarding the action plan to bring the performance back in control. Superiors attention is drawn only in case of exceptional, unanticipated or abnormal deviation between actual standard performances. In the other cases, decisions are taken by the subordinated managers.

BASIC ELEMENTS OF CONTROL SYSTEM: Every organisation has to be controlled, that is, devices must be in their place to ensure that goals are achieved. Every control system has 4 elements such as sensor/detector, assessor, effectors and communication network. A detector is a device that

measures what is actually happening in the process is being controlled. An assessor is a device that determines the significance of what is actually happening by comparing it with some standard or expectation of what should happen. An effector is a device that alters the behaviour to reduce the gap between the actual outcome and expected outcome. Communication networks are devices that transmit the information between the detector and the assessor and between the assessor and the effector.

ENVIRONMENTAL SCANNING: In order to strengthen the control system, every organisations is required to scan the external environment to identify the potential opportunities and threats, and scan the internal environment to locate the internal strengths and weaknesses. External environment takes into account both the social factors and task factors. Societal factors are those which affect the long-term strategic decision making of the organisation. Societal factor evaluation implies PEST analysis, that is, analysis of political, legal, economical, socio-cultural and technological environment. Task analysis includes the factors which are affecting the short-term decision making policy of the company including tactical and operational plans. Task analysis involves performance evaluation of stakeholders, which includes customers, creditors, employees, competitors, suppliers, trade unions, government and the community as a whole. Constituents of internal environment are structure, culture and resources of the organisation. When an organisation wants to expand beyond the geographical boundary of the nation, a scenario analysis has to be done to make the expansion plan successful. Scenario analysis is almost very close to PEST where the former includes technological and socio-cultural factors, economic factors, political/legal aspects and environmental perspectives. Management control system for multi-national corporations calls for scenario planning. To run a subsidiary in the soil of a foreign nation, the organisation has to be much more adaptable/ flexible to avoid any poetentail cultural conflict with the host country.

STAGES OF CONTROL: Depending on the stages at which control is exercised, control mechanism can be categorised into three groups. FEED FORWARD CONTROL: Feed forward control involves evaluation of inputs and taking corrective action before a particular sequence of operation is completed. Thus, it attempts to remove the limitatins of time lag in taking corrective actions. Feed forward control monitors inputs into a process to determine whether the inputs are as planned otherwise corrective action is

taken. A hunter will always aim ahead of a ducks flight for the time lag between a shot and hope for a hit. CONCURRENT CONTROL: Concurrent control is exercised during the operation of a programme. It provides measures for taking the corrective action or making adjustments while the programme is still in operation and before any major damage is done. FEEDBACK CONTROL: Feedback control is based on the measurements of the results of actions. Based on this measurement, if any deviation is found between actual performance and standard performance, the corrective action is undertaken. SPAN OF CONTROL/ SPAN OF MANAGEMENT: Span of management refers to the number of subordinates who can be managed effectively by a superior. The basic idea behind limiting the span of management is to enable a manager to manage and control his subordinates effectively and efficiently. Certain factors play a crucial role as the determinants of span of management such as capacity of superior, capacity of subordinates, nature of work, degree of decentralisation, degree of planning, communication techniques, use of staff assistance, supervision from others etc., a tall structure fosters a narrow span of control, more management levels and more centralised decision-making. The advantages of tall structure are close supervision, control of subordinate activities and a fast communication between the superior and subordinates. A flat structure is the one that reduces the levels of management, widens the span of control of managers at various levels of the organisation and is often more decentralised with regard to a decision-making autonomy.

MANAGEMENT INFORMATION SYSTEM AS A CONTROL TOOL: Information is the life blood of an organisation. Information can be defined as the knowledge communicated by others or obtained from investigation or study. Management information system is quite helpful in planning and controlling of organisational processes. Fuzzy logic is a problem solving control system methodology that can be implemented in systems ranging from simple, small, embedded micro controllers to large, networked, multichannel PC or workstation-based data acquisition. It can be implemented in hardware, software or a combination of both. Fuzzy logic requires some numerical parameters in order to operate such as what is considered as a significant error and significant change of error but exact values of these numbers are usually not critical unless a responsive performance is required.

STATISTICAL QUALITY CONTROL: Statistically, process control is used to detect and eliminate random variations as they arise while the process is operating. Different types of control charts are constructed by applying the concept of probability distribution. These charts are used as a control check for the materials or finished products. Using the statistical law, upper control limit (UCL), control limit (CL) and lower control limit (LCL) are derived. After that plotted points in the control chart are compared against the UCL, CL, LCL. When the plotted point lies between UCL & LCL, the quality of the product is ensured. If the plotted point falls either above the UCL or below the LCL, the product fails to achieve the condition of quality conformance.

RESPONSIBILITY ACCOUNTING AS A CONTROL TOOL: There is a common proverb that success has many fathers but failure is an orphan. Whenever an organisation shows excellent performance, everybody tries to claim the credit for it. But when the organisation does dismal performance, everybody tries to escape from accepting the responsibility for it. That is where the concept of responsibility accounting comes into the picture. Using this tool, the top management of the company can locate the responsible department or personnel for the poor performance of the organisation. Standard costing is used to identify the difference between the actual and the expected, which is known as variance. Depending on the magnitude and direction of the variance, managers are able to check whether an individual department is performing at the desired level or not. Adverse material variance indicated if the material department or purchase department of the organisation is working inefficiently until the organisation is exposed to market risks like high inflation rate. Adverse sales variance shows whether the sales promotion strategy, branding, packaging or advertising cells are not able to discharge their responsibilities to the fullest extent. There may be a chance that the organisation is suffering from marketing myopia/ better mousetrap fallacy as it has not conducted adequate market research to identify the needs and wants of the customer. TOOLS OF FINANCIAL CONTROL METHODOLOGY: When a company has several strategic business units (SBU), it becomes difficult for the company to compare the financial performance of the different SBUs. Comparing their financial performance on the basis of absolute figure of profit will not work as a reliable tool. Return on investment can be seen as a key performance into where ROI = PBIT/ total capital employed. (PBIT = profit before interest and tax). Another parameter of judging the financial performance is economic value added (EVA). EVA can be described as followsEVA = {(NOPLAT/ total capital) WACC} X total capital, where NOPLAT = Net operating profit less adjusted tax

WACC = weighted average cost of capital WACC = {BOOK value of debt/ total book value} X cost of debt X (1-t) + book value of equity/ total book value} X cost of equity. Positive EVA ensures that if sales is increased by rupee one, it will increase the total revenue more than total cost. In other words, positive EVA implies return is greater than the cost of capital. If two or more profit centers are jointly responsible for product development, manufacturing and marketing, each should share the revenue generated when the product is finally sold. Transfer proice is the mechanism to distribute this revenue. Transfer price aims to formulate goal congruent decisions and create a yardstick to measure the economic performances of the individual business units. Since the objective of all organisation is the maximisation of the shareholders wealth, therefore, the company should emphasise on the free cash flow to equity (FCFE) figure rather than the net profit. Cash profit is determined when depreciation is added back to net profit. When working capital requirement is subtracted form cash profit, free cash flow from operation is derived. After subtracting the capital expenditure from free cash from operation, free cash flow to equity is derived. It has been seen that some companies are earning extraordinary cash profit but their cash flow from operation is significantly low as they are unable to ensure a sound working capital management for the organisation. Similarly, if CAPEX is very high for some company, free cash flow available to the shareholder is bound to go down even if free cash flow from operation is high. Therefore, FCFE is the most suitable and reliable method to evaluate the financial performance of the organisation. External and quantitative control are necessary to run the organisation. But too much dependence on external control crates an unhealthy, suffocating environment in the organisation. Therefore, an ideal organisation should strike a balance between external and internal control. Internal control aims at participative management. When an employee is unable to produce the desired level of output, subordinates and managers meet to identify the reasons for the dismal performance and try to develop appropriate solutions. Instead of practising the blame game, management should motivate the employee so that he will be able to give his best the next time. Management does not criticise or punish the employee for his past performance but extends the cordial support to him for improving the performance in future. When an employee starts to believe that the management is his well- wisher, it will act as a stimulator and motivator for him, which will accelerate his performance. A sound control mechanism has to be ensured in the organisation but simultaneously, a corporate house should not lose it human face.