Managerial Control Process
Managerial Control Process
A process is broadly defined as an operation which uses resources to transform inputs into outputs. It is the resource which provides the needed energy to the process for the transformation to occur. In an organization there are two types of processes. The first type of processes are those processes which create, produce, and deliver products and services while the second type of processes are those processes which do not produce outputs bur are still necessary in the functioning of the organization. The first group of the processes can be called work processes while the second type of the processes can be called administrative processes. Both the types of the processes are important for the functioning of the organization and need adequate process control activities for their successful implementation.
In spite of the initial controversies and doubts, today the managerial control process persists as an indispensable tool for managing performances in the present day organizations. The reason for this lies in the fact that the managerial control process deals with the issues which are up-to-date for all times, that is, to ensure that managers and employees perform in the interest of the organization. The initial focus of the managerial control process was at the large, decentralized organizations and the application of the accounting-based performance indicators. Changes in the environment, then in the internal structure of the organizations, and increasing unethical behaviour of managers have resulted into a number of doubts about the ability of the managerial control process with this focus to respond to its basic task.
The managerial control process is an approach which enables the organization to produce the desired results (normally expressed in terms of ‘performance’) by taking action to achieve those results and by dealing with the dangers brought on by external difficulties (particularly those related to the market, competitors and the economic or political context) and the internal difficulties of the organization. In other words, the managerial control process can be defined as the process whereby the organization sets its performance objectives and strives to achieve them as best it can over time. It is a method for managing the performance of the organization.
The managerial control process is an approach which is pursued over time. There are two stages. The first stage is before the action takes place and it is known as the planning stage. The second stage is when the action is taking place or has taken place and it is known as monitoring and analysis of the results stage. Hence, the approach is progressive, and that is why, it is known as a control process.
The managerial control process represents a process through which managers ensure that resources are procured and used efficiently and effectively to meet the goals of the organization. It is a dynamic function inter-related with the other management functions, and it plays a role of critical determinant in achieving the organizational success. It is a process in which organization strives to achieve the planned or desired results, or ‘performances’. In doing so, organizations can take various actions to minimize the negative effects arising from the external and internal environment.
The individual management functions provide a useful framework for organizing managerial knowledge. The managerial control process involves tracking, measuring, and correcting activities to ensure a compliance of actual development with the planned one. Effective managerial control process needs the existence of plans, since planning provides the necessary performance standards or objectives. The managerial control process also needs a clear understanding of where responsibility for deviations from standards lies.
The managerial control process cannot be reduced to a simple exercise of ‘verification’, since then the process is operating ‘after the fact’, once the decisions and action has already been undertaken. In such a case the scope of control is to be confined to reactions rather than fully effective action. In seeking to control the attainment of desired outcomes and results, it is essential to prepare the action, to organize it, to perform simulations, and to anticipate its consequences. Hence, the planning stage is crucial part of the managerial control process.
The main task of the managerial control process is to support the achievement of the corporate strategy by controlling its performance and ensuring its sound management through the implementation of different management tools. The purpose of such tools is to measure the achievement of the organizational goals and objectives by analyzing the results achieved compared to the forecasts, but also to the past performance.
The managerial control process represents a process for managing the performance of the organization. The task of the managerial control process is to help managers of the organization to formulate key strategic objectives and plans and monitor their execution. In general, managerial control process is an internal process. The techniques and tools used by managerial control process are specifics to the organization and are not subjected to any normally accepted standards.
The managerial control process cannot be systematically associated with an objective of profit maximization, nor can it be assimilated to a cost-reduction objective, as is sometimes thought. Broadly speaking, the activity of the organization generates both consumption (in raw materials, time, energy, etc.), which results in costs, as well as more positive aspects of performance which makes it attractive to the customers (product quality, diversity of services, image, etc.). Hence, the notion of performance cannot be reduced to its ‘negative’ side (costs), it also encompasses elements of value creation.
Two types of qualities are needed to make a good measure. These are (i) intrinsic qualities, and (ii) suitability to purpose. The intrinsic qualities are (i) reliability, which means that the measure is to capture the phenomenon to be measured with a satisfactory level of precision, while limiting the ‘noise’, and (ii) validity which means that the measure is to be suited to the phenomenon which is to be measured. The ‘suitability to purpose’ qualities are (i) relevance which means that the measure chosen has to be suitable in terms of the type of decision to be taken, (ii) cost which means that producing a measure costs money, since data has to be collected, verified, processed and interpreted, which generates costs in terms of time spent and IT systems and hence the information delivered by the measure has to be sufficiently useful to justify these costs, (iii) time which means that the information which is delivered ‘too late’ is of little use, and (iv) legibility which is important since a measure is an instrument for information which means users are to be able to read and understand it without difficulty. Certain measurement systems are to be rejected by the management since they are too slow or too cumbersome and not suited to the context of quick management decision making.
Difficulties also emerge in terms of the list of indicators which are selected for monitoring of the performance. The natural tendency is to use measures which are readily available, and information generated directly by production or sales processes. The construction of measurement systems is required to have more demanding requirements. All the data available are not necessarily relevant and it can be necessary to construct indicators specifically for the needs of performance management.
In the managerial control process, two types of variable exist. First is the manipulated variables which can be adjusted and the second is the controlled variables which are affected by the adjustments. The managerial control process is an important function of the management of the organization. Through this function, it is ensured that the activities are under control and are giving the desired results. The managerial control process determines that all the management activities are controllable processes which behave in a predictable manner. It shows that for a given change in the manipulated variable, the process variable responds in a predictable and consistent manner.
The managerial control process refers to the methods which are employed for controlling the variables of the management process. It is the control process through which managers assure that actual activities conform to the planned activities. The managerial control process finds out the deviations between the actual performance and the standard performance for taking the necessary steps to prevent such variances in future. It also measures the present performance and guides it towards some pre-determined objectives. It envisages a system which not only provides a historical record of what has happened to the process as a whole but also pinpoints the reasons why it has happened and provides data which enable the managers to take corrective actions, if they find that something has gone wrong.
Managerial control process concept
Development of managerial control process as a theoretical discipline is linked to an important study entitled ‘Planning and Control System’, which was published by Robert Anthony in 1965. The study defined managerial control as a function which links strategic planning with operational control.
The managerial control process was originally conceived as a solution to the managerial problems of large, decentralized organizations. Managers had the problem of how to coordinate and control the work of subordinate organizational departments / divisions within the organization. The task was to comply the activities of such departments / divisions with the overall objectives of the organization. In addition, it was necessary to provide information to help managers to be able to correct any deviations from the approved plans.
The classical theory of the managerial control process has offered a solution through the formation of so-called responsibility centres. These are cost centres, revenue centres, profit and investment centres etc. A special branch of management accounting, called responsibility accounting, was created on this basis.
The so-called ‘Agency theory’ developed during the eighties is very responsible for the formation of the classical theory of managerial control process. Agency theory is based on the idea of a world in which operates a number of explicit and implicit contracts between two persons, management and the employees. In this world, both sides are behaving in a rational way and are motivated solely by self-interests. The agency relationship is reflected in the fact that the top management delegates decision-making authority to the manager (or agent) which executes orders on behalf of the top management.
Because of maximizing their personal utility, managers as an agents do not always act in the best interest of the top management. Hence, the top management needs accounting and other control methods for controlling the behaviour of the managers. In addition to self-interests, the agency relationship between top management and managers is also influenced by other factors such as adverse selection, moral hazard, asymmetric information, and the like.
Since the creation of the classical theory of management control in the 1960s until the present day, it has been more than half a century. During this period, major changes in the working environment of the organizations have taken place. Globalization, deregulation, the rise of powerful emerging economies, diffusion of new technologies, digitization of information, etc., are a few examples of such changes. It raised doubts among managements, managers and other stakeholders that the present system of managerial control process has become irrelevant for doing business in changed conditions.
Doubts were further intensified by other reasons. Series of collapses of organizations and financial scandals have highlighted the weaknesses of the external regulations and internal controls. More than ever, the managers of the organizations were forced to take into account the interests of shareholders and other stakeholders. The position of managers in the present day organizations became delicate and as internal stakeholders, they are the bearers of the control authority.
Balancing the ethical role to do good for others, and equally for all, managers frequently face obstacles in the form of information and other interests of the dominant groups of stakeholders. Their single interests are not always aligned with the goals of the organization. In addition, there are personal interests of managers such as bonuses, the desire for power, self-aggrandizement and the like. For all these reasons it is understandable why the motives for the unethical behaviour of a manager in organization is growing. In practice, this behaviour is normally realized through contracting easily attainable planned objectives and by manipulation of data.
In several ways the nature of the changes itself has changed. They have become pervasive and nonlinear, discontinuous and abrupt. Present day managers are forced to work in new kinds of business models such as alliances, clusters, partnerships, outsourcing and offshoring organizations, e-commerce, and the like. Some of the studies emphasize the potential of virtual organizations and the role of critical competencies of managers and team members for the organizational success. In addition, enterprises and entrepreneurs are inspired by open innovation as an emerging paradigm for creating new business models for the effective commercialization of new products, or services. Any such business model is a challenge to the existing system of managerial control process.
Hence, there is a strong need for the existing framework of managerial control process to be supplemented with new knowledge, in order to respond to the challenges arising from the changing environment. This does not mean that the present framework has now become irrelevant. Construction of a new framework for managerial control process is a long term process, but its basic elements are still valid.
The main issue of the managerial control process is that it deals with a process to ensure that managers and employees work in the interest of the organization. The recent development of the managerial control process has shown that there are two aspects of this issue. One aspect includes information systems and accountability. Another aspect involves the behaviour and motivation of the employees in organizations.
The classical theory of the managerial control process puts the emphasis on information systems and accountability. This theory has experienced a number of criticisms in recent decades. The main complaint is that it has too narrow a focus of observation, which is almost exclusively based on accounting-based information. It is even criticized the concept of responsibility centres, since the assumption of their mutual independence has not been confirmed in practice. Namely, it is asked from responsibility centre managers to be accountable not only for activities which are under their control, but also from the activities which are outside their control. The issue with excessive reliance on accounting information was partially offset by the introduction of combined performance measures in the form of the Balanced Scorecard. However, several issues still remained.
Lasting issue related to the aspect of information and accountability is the issue of the performance measurement. Performance measurement is a powerful mechanism for influencing the behaviour of the employees in the organizations. It is said that ‘what gets measured, gets done’. The issue is that what is not measured, gets less attention. Since some performance measures are more difficult to quantify, present day managerial control process shows signs of myopia in practice.
Another aspect of the managerial control process is that it relates to the behaviour and motivation of the employees which has been developed under the influence of inter-disciplinary and multi-disciplinary studies in the fields such as anthropology, social theory, organizational theory and the like. One of the studies has presented the idea of two types of control. The first type of control is called ‘belief systems’ and is implemented through adoption of the vision and values, as well as the organizational culture of the employees. Another type of control is called ‘systems boundaries’ and is based on the authority and discretion of the managers. Organizations can combine both the systems in their operations, creating a wide range of possible controls.
Several studies criticize the excessive reliance of the theory of managerial control on agency theory. The basis in these studies is that between managements and managers / employees there is only rational relationship based on self-interests is excessive simplification of reality. What is ignored in this relationship is the factor of national culture, as an important context in which managerial control process is implemented.
Large, diversified organizations, in which the decision-making power is divided between the various entities and hierarchical levels within the organization, are faced with the issues of the levels and the ways of implementation of the managerial control process. In order to preserve the benefits of decentralization, managers of these organizations need to have the freedom to implement an autonomous managerial control process at their delegated levels. There are several reasons for this. First, if there were no autonomous control at the entity level, the responsibility of the managers is no longer be ‘visible’. The managerial control process is also to be realized at higher levels, such as senior managers. Such a practice is inconsistent with previously performed decentralization of decision-making. Second, the senior managers become overloaded because of large quantities of detailed information which is not relevant to their hierarchical level.
The managerial control process at the level of individual entities is not, however, sufficient for effective control at the level of organization as a whole. This is since the performances of the entity do not ensure that the corporation as a whole achieves the planned performances. What is needed is to ensure good vertical coordination in the managerial control process, top-down and bottom-top. This process is called strategic alignment. Agency risks which can arise in terms of vertical coordination are solved by using different incentive schemes. These incentive schemes can be formal, such as indexing earnings of managers and employees to the performances achieved, and / or informal in the various forms of reward or punishment.
The managerial control process in the large corporations is shown in Fig 1. This figure shows the three fundamental functions of performance management at the level of large organizations such as horizontal coordination, strategic alignment, and motivational incentives for the managers and the employees. With this in mind, it follows that the main role of senior managers in the managerial control process is to guide behaviour and to motivate the employees.
Fig 1 The managerial control process in a decentralized organization
Responsibility centres are a key mechanism for the realization of this triple function of senior managers in large corporations. Responsibility centre is the entity in the organization which has substantial authority to make decisions. Responsibility centres are functioning somewhat like small organizations. They have to be directed to their own objectives, which are defined as a contribution to the normal objectives of the organization. Hence, it is necessary for large organizations to create decentralized systems for measuring performances, not only for the organization as a whole, but also for the responsibility centres.
Elements of managerial process control
The managerial process control can be represented by a planning and control cycle consisting of seven elements (steps) as in Fig 2. The cycle consists of seven steps, of which the first five steps cover the planning process, and the last two elements are related to the control process. Planning is primarily a decision-making process. Control is implemented by means of measuring and correcting the results achieved, to ensure the realization of the plans.
Fig 2 Elements of managerial process control
The purpose of the planning is to prepare managers of the organizations for action. The first step is to define the objectives. With regards to the objectives, managers need to define two components, namely (i) the type of objectives and (ii) the level of the desired goals. Hence, the first role of planning is to determine so-called targeted objectives. The second role of planning is to predict how the organization can achieve the assigned targets. In second to fourth steps in Fig 1, the managers consider different strategies for achieving the planned goals, evaluate their effects and choose the best alternative. A time-decomposing of selected long-term plans into annual plans or budgets is performed in step 5.
The control includes the steps 6 to 7 in Fig 2. The measurement and comparison of achieved results with the original plan are performed in the first of these two steps. In the second step, corrective action is taken in order to achieve the desired objectives, or to correct the plan. Control without planning is impossible, and vice versa planning without control serves no purpose.
The process of control is not a linear process. The essence of control is not to ‘evaluate’ whether the planned objectives have been achieved or not, but to monitor progress in achieving objectives. This progress is not determined at the end of the planning period, but rather during the implementation of the organizational plans. A feedback mechanism as described in Fig 3 serves for this purpose.
The feedback can have a dual role. First, due to the deviation of the achieved results from the planned targets, it can result into the action plans, i.e. strategy to be reviewed. Second, for the same reason it is possible to re-examine the objectives themselves. Performance measurement is a very important issue in the managerial control process.
Fig 3 Feedback loop control
Present day managerial control process uses three groups of indicators for monitoring performances namely (i) financial, (ii) non-financial and (iii) the combined (financial and non-financial). Financial performance indicators are those relating to the measurement of profitability, risk, and liquidity. When it comes to non-financial indicators, there are a number of reasons in favour of their use in practice. The normal argument is that using only financial indicators focuses management action on a too narrow path of variables which are important for the organizational success. While, the non-financial indicators focus on the contributions of those factors which can be equally important for the organizational performance.
Balanced Scorecard is now one popular approach when it comes to the combined indicators for monitoring performances. The basic idea is that exclusive reliance on financial indicators leads to strategic myopia, since managers sacrifice long-term gains at the expense of short-term gains. The great weakness of traditional financial performance indicators is that they are so-called lag indicators. They talk about the performances which are a consequence of previous strategies and plans, and have nothing to do with the drivers of future performances, or lead indicators.
Essential steps in the managerial control process
The managerial control process involves following four basic but essential steps namely (i) establishment of the targeted parameters, (ii) measurement of actual performance, (iii) comparison of the results of the measured data with the targeted parameters, and (iv) taking of the corrective measures for keeping the process under control. These four essential steps are shown in Fig 4.
Fig 4 Essential steps in managerial control process
First step is the establishment of the targeted parameters for the process. Every process which is to be controlled needs to have standards or parameters against which the process performance is to be measured. These parameters are to be clear and intelligible and are to be defined in precise quantitative terms and not in general terms. These parameters are to be flexible which can be adjusted in case there is a change in the process environmental conditions. The parameters are to be realistic and workable and are to be well understood by the persons involved in the process.
Second step consists of the measurement of actual performance of the process. Measurement of performance can be done by visual observation, by monitoring reports, and through charts and statements. Measurements are to be accurate since without accurate measurement correct evaluation of the process cannot be done. Measurement during the managerial control process activities is to be organized in such a way so that the quick comparison of the measurement data with the targeted parameters is feasible.
Third step consists of the comparison of the results of the measured data with the targeted parameters. The comparison of the actual performance with the targeted performance establishes whether there is a need of corrective action. While comparing the actual performance with the parameters fixed, the manager has to find out not only the extent of variations but also the causes of variations. This is necessary, since some of the variations can be not important, while others can be important and need immediate corrective action by the manager.
The fourth step consists of taking of the corrective measures for keeping the process under control. Corrective actions are taken to correct the deviations found when the actual performance is compared with the targeted parameters. For this, it is necessary to determine the correct cause for deviation. Both internal and external factors need to be examined for the cause of deviations. In case, there are some external factors where corrective actions cannot be applied then the targeted parameters need revision.
Normally there are three types of control actions while managing the managerial control processes in the organization. These are (i) pre-control or forward control (ii) mid-process control or concurrent control, and (iii) feedback control. These control actions nd are described below.
Pre-control or feed forward control are those control actions which are provided in the processes based on the deviations emerged during comparison of the results and targeted parameters of similar processes within the organization or in any other organization. These controls are exercised based on experience and are aimed at to prevent anticipated problems.
Mid-process control or concurrent control are those control actions (also known as corrective actions) which are taken midway of a process based on the under-performance noticed during the process measurement
Feedback control refers to the process control actions based on the comparison data of the measurements of the process parameters and targeted parameters after the process is completed. These corrective actions are applied while planning future similar process in the organization
Essentials of effective managerial control process
The important points which are the essential for the managerial control process activities to succeed in the organization are described below.
The organization is required to have a control process which is suitable to meet the nature and needs of the managerial control process in the organization. The organization structure is to allow accurate measurement of the process parameters and its analysis. Further proper record-keeping and its accessibility to the process owners are to be part of the organization systems. Further managers are to be properly trained in all the aspects of the managerial control process.
The control process in the managerial control process is not an automatic phenomenon but is to be created deliberately. Though the organization can design the control process as its unique and special characteristics or conditions, yet in designing a good and effective control process there are certain basic requirements which are to be kept in view. These basic requirements are described below.
Focus on objectives and needs of the organization – The effective control process emphasizes on the achievement of the organizational objectives. It is to function in harmony with the needs of the organization. The control process is to be tailored to plans and positions.
Immediate warning and timely action – Quick reporting of variations is at the core of the control process. An ideal control process can detect and report important variations from the planned action very quickly so that necessary corrective action can be taken well in time
Indicative, suggestive as well as corrective – Control process is not only to point the variations but it is also to suggest corrective action which is supposed to check the recurrence of variations or problems in future. Control process is effective if the indicated or experienced variations from plans are corrected through appropriate planning, organizing, staffing and directing. Control process is also to lead in making valuable forecasts to the managers so that they become aware of the issues which are likely to confront them in the coming future.
Understandable, objective, and economical – The control process is to be simple and easy to understand. The standards of performance are quantified to appear unbiased, and specific tools and techniques used are to be comprehensive, understandable, and economical for the managers. Also, the benefits of control process is to outweigh the costs.
Focus on functions and factors – The control process is to emphasize the functions, such as production, marketing, finance, human resources etc. and focus on four factors namely quality, quantity, timely use, and costs. The control process can need multiple controls.
Control of strategic points – The control process is to be selective and concentrate on the objectives of the organization. It is not necessary to control every detail in order to save time, cost, and efforts. Certain strategic, critical, or crucial points are to be identified along with the expectations at those points where failures cannot be tolerated and appropriate controls are to be designed and exercised at those points.
Flexibility – The control process is nor to become ends in themselves. It is to be environment friendly and it is to be possible to be able to make modifications or revisions necessitated by the rapidly changing and complex business environment. Flexibility in the control process is normally achieved by the use of alternative plans or flexible budgets.
Attention to human factors – The control process is not to arouse negative reactions but positive feelings among the employees through focus on work and not on people. The aim of the control process is to create self-control and creativity among the employees through enmeshing it in the organizational culture. Employees’ involvement in the design of controls can increase acceptance.
Suitability – The control process is to be consistent with the organizational structure, where the responsibility for action, position, competence, and needs of the individuals who have to interpret the control measures and exercise control are clearly defined. The higher is the defined clarity, the lesser is the need for indirect controls.
The managerial control process reports are to be directed more towards the actions to be taken for the future processes. This gives opportunity to the managers for proper planning of the processes and hence improving the performance of the organization.
The managerial control process activities are required to lead to corrective action. An adequate managerial control process activity discloses where failure is occurring, who is responsible for the failures and what is required to be done about the failures. The managerial control process activities are required to generate the solution to the issue responsible for deviations from the targeted parameters.
A good and sound managerial control process not only points out the deviations but also pinpoints where they are important or strategic to the organization. The process is also to be workable even when there is change in the environment in which the organization operates. Also, in designing the managerial control process strategies, the dynamic behaviour of the process is to be considered which is very important. Hence knowledge of process dynamics is an important issue.