10.

2 The Purpose of Control

1. Control supports the full management process

o Control is interconnected with planning, organising, and leading.

o Without control, planning has little value, as it cannot be enforced or adjusted.
o Control ensures feedback is provided to improve future planning and decision-
making.
2. Control enables adaptation to environmental change
o The business environment is unpredictable and constantly changing.
o Control systems help organisations detect changes in external conditions early.
o This enables timely adjustments in plans and operations to maintain strategic
alignment.
3. Control limits the accumulation of errors
o Errors in judgement and decision-making are inevitable.
o An effective control system identifies errors early before they escalate.
o This allows for timely corrections and prevents minor issues from becoming major
problems.
4. Control supports management of organisational complexity
o As an organisation grows, it becomes more complex and decentralised.
o Control helps monitor various departments and activities across different levels.
o This ensures accountability and consistent performance throughout the
organisation.
5. Control helps reduce costs and improve efficiency
o Control allows for better use of resources by identifying and eliminating waste.
o It ensures processes are efficient and contribute to the organisation’s goals.
o Effective control increases productivity and improves output quality.

10.3 The Control Process

10.3.1 Step 1: Establish Standards

• Control begins during the planning stage by setting performance standards aligned with
organisational goals.
• Standards serve as targets for evaluating performance and must be relevant, measurable,
attainable, and realistic.
• Standards are derived from strategic plans and goals to guide performance expectations.
• Management uses these standards to differentiate acceptable from unacceptable
performance and to monitor strategic alignment.
• Customer feedback and benchmarking are important tools for determining appropriate
standards.
Opinion: How crises and scandals influence the control process of organisations

• Crises and scandals highlight weaknesses in current control systems, forcing

organisations to revise or strengthen them.
• They increase the need for transparency, accountability, and regular monitoring of
performance and ethical conduct.
• Organisations may adjust or tighten standards to ensure more precise measurement of
performance and behaviour.
• Greater emphasis is placed on early detection of deviations, promoting a more proactive
and responsive control culture.
• The need for flexibility in control systems becomes clearer, as rigid controls may fail in
volatile environments.
• Scandals often prompt organisations to improve accuracy and timeliness in reporting and
auditing to restore stakeholder trust.
• Overall, such events push management to integrate control more closely with risk
management and ethical governance.

10.3.2 Step 2: Measure Actual Performance

• Measuring actual performance is a continuous process that requires accurate and

quantifiable data to allow valid comparisons with performance standards.
• Reports must be completely reliable; any inaccuracy can make the control process
ineffective.
• Measurement and observation must occur at strategic control points aligned with the
standards established in the control system.
• It is important to decide:
o What information should be collected
o How much information is necessary
o Who should receive the feedback
• In small businesses or lower management levels, full awareness of activities is common,
so detailed reporting is less crucial.
• In larger businesses, as information flows to top management, control by exception is
used:
o Only significant deviations from expected performance are reported to upper
management
o Minor issues are handled by employees or middle managers
• Reports should:
o Clearly indicate gaps between actual and expected results
o Highlight problem areas for management focus
• The time between actual performance and its measurement should be as short as
possible to allow for early detection and correction of problems.

10.3.3 Step 3: Evaluate Deviations

 • This step involves identifying the performance gap between actual performance and the
standard.
• Understanding why performance meets, falls short of, or exceeds the standard is
important for future planning and improvement.
• Causes of deviations can vary; some are clear, while others are difficult to detect.
• It's essential to confirm that both the standard and performance measurement are
objective and reliable.
• If a standard is set unrealistically high, any deviation may not be meaningful and could
waste resources if investigated.
• Deviation limits should be defined—only deviations beyond these thresholds should
trigger further investigation.
• Once deviations are confirmed and significant, the underlying causes and responsible
activities must be identified.
• These findings guide decisions on what corrective actions should follow in the final step
of the control process.

10.3.4 Step 4: Take Corrective Action

The final step involves deciding and implementing corrective actions to address deviations and
prevent recurrence.

• No corrective action is needed if actual performance meets objectively set standards.

• If performance falls short, management can:
o Improve actual performance to meet standards,
o Revise strategies to achieve standards, or
o Adjust performance standards to be more realistic given current conditions.
• This step completes the control cycle and initiates the next management cycle.
• Control may be perceived negatively as limiting freedom, so a balance between control
and employee autonomy is important.
• Control efforts are limited by available time and resources.
• Control systems should be continuously adapted to changing conditions.

Types of Control

Areas of Control

• Management should identify key areas responsible for overall organisational

effectiveness.
• A small percentage of activities or individuals often account for a large part of outcomes;
focus should be on these strategic points.
• Ethical responsibilities are also strategic points, though harder to control.
• Organisations typically define control areas based on four main resource types:
o Physical resources: Includes inventory and quality control.
 o Human resources: Covers employee selection, training, development,
performance appraisal, and remuneration.
o Information resources: Involves market forecasting, environmental scanning, and
economic forecasting.
o Financial resources: Includes various types of capital and financial control tools
like statements and financial ratios.
• Financial resources are central as they relate to control measures across the other
resource types and are often quantified financially.

Control of Physical Resources

Physical resources include tangible assets like buildings, equipment, vehicles, machinery, stock,
raw materials, work-in-process, and finished products.

• Control systems for physical resources involve usage procedures, inspections,

stocktaking, and internal audits.
• Inventory control is vital and covers raw materials, work-in-process, components, and
finished products.
• Organisations keep inventory to:
o Meet customer needs
o Minimise production interruptions due to supply uncertainties
o Hedge against inflation
• Inventory control systems include:
o Economic Order Quantity (EOQ): Orders the most economical quantity, but can
lead to excess stock.
o Materials Requirements Planning (MRP): Orders inventory based on estimated
demand, reducing holding costs.
o Just-in-Time (JIT): Orders materials only when needed, minimizing inventory and
storage costs.
• Quality control is critical and increasingly emphasised through Total Quality Management
(TQM), which involves everyone in the organisation.
• TQM focuses on continuous improvement to meet customer quality expectations.
• Leadership commitment is key to embedding quality in organisational mission and
operations.
• Product quality is ultimately tested in the marketplace.
• Controlling physical resources is complex but essential to organisational success, with
many aspects expressed in financial terms.

Control of Financial Resources

• Financial resources are crucial and central to controlling all other organisational
resources.
• Financial control involves managing:
o Incoming funds (e.g., investment returns)
 o Funds held (e.g., working capital, cash)
o Outgoing funds (e.g., salaries, expenses)
• Control ensures revenues cover expenses and generate profit.
• Rigorous control is needed to prevent fraud and errors, especially for incoming and
outgoing funds.
• Key financial control instruments include budgetary control and financial analysis.

Budget and Budgetary Control:

• A budget is a formal financial plan allocating resources to departments or activities to

achieve goals.
• Budgets serve as benchmarks and standards for measuring and comparing performance.
• Benefits of budgets:
o Coordinate resources, departments, and projects
o Provide guidelines for resource application
o Set standards crucial for control
o Enable evaluation of resource allocation and performance
• Budgeting today often involves input from all management levels through a budget
committee.
• Types of budgets include cash-flow budgets, operational budgets, capital budgets, sales
budgets, production budgets, and non-financial budgets.
• Advantages of budgets: facilitate control, coordination, and performance tracking.
• Disadvantage: may limit flexibility.
• Financial analysis (ratio analysis) complements budgeting for financial control (to be
discussed further).

Control of Information Resources

• Management depends on accurate, relevant, and timely information for effective

planning, organizing, leading, and controlling.
• Timely feedback helps monitor progress and allows quick adjustments when needed.
• Faster access to information improves the effectiveness of control systems.
• Critical information must be identified, used properly, and communicated clearly during
management processes.
• Proper use of information is essential for decision-making and operational control.

Control of Human Resources

• Human resource control focuses on measuring employee and manager performance

against predetermined standards.
• Tasks are broken down into subtasks to develop performance criteria and measuring
tools.
• Performance standards are set to enable comparison between actual results and
expected outcomes for feedback and management action.
 • Additional control tools include ratio analyses related to labor turnover, absenteeism,
and workforce composition.
• Informal control occurs through social-control mechanisms within work groups, where
group norms influence behavior.
• Group norms, though unwritten, strongly guide member behavior and maintain social
control through peer approval or sanctions.
• Social control enhances group cohesion and assigns leadership roles within the group.

10.5 Management to Control Resources

10.5 Characteristics of an Effective Control System

10.5.1 Integration

• Control must be closely linked to planning.

• Deviations detected during control help review and revise plans/goals.
• Planning should involve setting quantifiable, measurable goals to be used as control
standards.
• Effective integration = better control outcomes.

10.5.2 Flexibility

• The system should adapt to changes in plans and objectives.

• Revised plans shouldn't be seen as errors but as part of dynamic management.
• Avoids the cost of building new control systems for every change.
• Supports agility in decision-making.

10.5.3 Accuracy

• Must give an objective, clear picture of the situation.

• Avoid concealing errors or manipulating data (e.g., hiding indirect costs).
• Reliable control data = better future planning and decision-making.
• Inaccurate data leads to misinformed corrections and actions.

10.5.4 Timeliness

• Information should be supplied regularly and promptly.

• Avoid rushed or delayed data—quality and timing must be balanced.
• Timely data ensures relevant, proactive responses to issues.

10.5.5 Simplicity

• Avoid overly complex systems that slow down managers and staff.
• Excessive control = demotivation and resistance.
• Too much irrelevant info = wasted time and resources.
• Control systems must be cost-effective and not outweigh their benefits.
• Avoid oversimplification that removes the value of control