CruxBusiness Organisation and Management

Directing is the function in which a manager instructs, guides, motivates and leads people and communicates with them so that the plan is carried out. Motivation is the part of directing that deals with the will to work.

Motivation is what gets a person moving towards a goal, points the effort in that direction and keeps it going. For a manager it means creating conditions in which employees want to give their best to the organisation's goals while meeting their own needs. Formal authority alone can get people to turn up; it cannot make them give their best.

Three words are used together and are easily mixed up:

Features of motivation

• It starts inside the person. Urges, wishes and needs are internal; a manager can only create conditions that work on them.
• It is aimed at goals. It produces behaviour directed at a result, such as a promotion or a target.
• It can be positive or negative. Positive motivation offers something wanted (a pay rise, praise, promotion). Negative motivation uses fear of loss (a stopped increment, a warning, a penalty).
• It is complex. People differ in what they want, how they see things and how they react, so one reward does not move everyone equally.
• It is continuous. As one need is met, another takes its place, so motivating is never finished.

The motivation process

An unmet need sets off a chain that ends when the need is met.

1. Unsatisfied need. A person lacks something: food, security, friendship, respect.
2. Tension. The unmet need makes the person restless.
3. Drive. The tension becomes a drive, a need with a direction (hunger is the drive that comes from the need for food).
4. Search behaviour. The person acts to find something that will meet the need.
5. Goal reached, need satisfied. The goal is whatever meets the need.
6. Tension falls. Then a new need comes forward and the cycle starts again.

Fred Luthans put the same cycle in three linked terms: needs, drives and goals.

Motivation, satisfaction and performance

• Satisfaction is the contentment a person feels once a want is met; motivation is the drive and effort to meet it. A person can be well satisfied with a job and still not be moved to work harder, and the reverse.
• Performance depends on the ability to do the work, the willingness to do it (motivation) and the resources and support to do it. Ability without willingness produces little.

Motivation turns what people can do into what they actually do. Its benefits:

"Motivation is the key to unlocking employees' potential"

This common exam statement is true. Performance rests on ability and willingness together. Ability is fixed in the short run; willingness can be raised or lowered by the manager every day. So a manager must learn what drives each person (pay, security, belonging, recognition or growth) and shape jobs, rewards and leadership to fit.

Motivation is shaped by four groups of factors: the person, the job, the organisation and the world outside it.

The individual

• Needs active at the time (survival, security, belonging, respect or growth) decide what will move a person.
• Values and attitudes: what the person thinks matters (money, security, recognition, service).
• Expectations: the belief that effort will lead to good performance and that good performance will bring a reward the person values.
• Personality, self-confidence, personal goals and the stage reached in a career.

The job

• Nature of the work: interesting, challenging and meaningful work motivates; dull, repetitive work does not.
• Job enrichment and autonomy: more responsibility and freedom to decide.
• Feedback on how well the work is going.
• Chances of achievement, growth and advancement.

The organisation

• Pay and financial incentives that are fair and linked to effort.
• Non-financial incentives: recognition, status, security, participation (sub-topic 8).
• Leadership and supervision: fair, supportive bosses raise motivation.
• Working conditions and safety.
• Culture and climate: trust, openness and teamwork.
• Fairness: people compare their rewards with others'; a sense of unfairness lowers effort (sub-topic 7).
• Communication: clear goals and information.
• Policies on appraisal, training, promotion and welfare: fair appraisal and promotion on merit show that effort is noticed.

The environment

• Economic conditions and the job market: when jobs are scarce, security and pay matter more.
• Social and cultural values, family expectations and peer groups.

Herzberg's research (sub-topic 5) sorts the job and organisation factors into two kinds: those in the job's surroundings, which only prevent dissatisfaction, and those in the work itself, which create positive motivation.

Abraham Maslow, a psychologist, set out in a paper of 1943 a theory of motivation built on human needs. He held that every person has five levels of need, arranged from the most basic to the highest, and that behaviour is an effort to meet them.

The first two are lower-order needs, met mainly by money and conditions from outside. The last three are higher-order needs, psychological and met largely from within.

Assumptions of the theory

1. People's behaviour is based on their needs, and meeting those needs shapes behaviour.
2. Needs come in an order, from basic to higher.
3. A need that has been satisfied no longer motivates; only the next higher need does.
4. A person moves up to the next level only when the lower need is reasonably satisfied.

How managers use it

1. Find each person's level. A trainee on a low wage is moved by pay and security; a senior professional by recognition and challenge.
2. Meet basic needs first: fair wages paid on time and decent hours.
3. Give security: clear contracts, safe work, health cover, retirement benefits.
4. Meet social needs: team work, mentoring, social events, a cooperative culture.
5. Meet esteem needs: praise, awards, titles, promotion, a say in decisions.
6. Allow self-actualisation: enriched jobs, training, creative assignments, autonomy, career growth.
7. Review as people move up: as lower needs are met, the incentives must change too.

Criticism

• No fixed order. Needs at different levels act together in one person; not everyone climbs in Maslow's order (an artist may seek self-fulfilment before security).
• Culture. Critics see it as a picture of American workers' attitudes. In other cultures the order may differ.
• Little evidence of a ladder above the lower needs. Research found that once lower needs are met, the higher needs do not follow a fixed sequence.
• Hard to measure. Needs cannot be observed directly.

Even so, the theory remains useful. Research supports its core: until survival needs are met, higher needs do not come into play. Koontz and O'Donnell drew the practical lesson that employees at every level have needs of all five kinds, in different forms, so a manager must apply the theory person by person. In India, where jobs are scarce, the two lower needs weigh heavily for many industrial workers.

Frederick Herzberg extended Maslow's work into a theory of work motivation. In the 1950s he studied about two hundred accountants and engineers working near Pittsburgh in the United States. He asked each to describe times when they had felt exceptionally good, and exceptionally bad, about their jobs (the critical incident method).

The answers fell into a pattern. Good feelings were linked to the content of the job: what the person did. Bad feelings were linked to the context: the surroundings of the job. Herzberg concluded that satisfaction and dissatisfaction are not two ends of one scale. Removing a cause of dissatisfaction does not by itself create satisfaction. Hence two sets of factors.

The line between the two is not rigid. A factor that only removes complaints for one person can motivate another. Pay merely keeps a well-paid engineer content, but it can drive a junior clerk saving for a home.

The split matches intrinsic rewards (felt while doing the work itself) and extrinsic rewards (given from outside, such as pay, retirement plans and insurance).

What it means for managers

1. Keep hygiene factors at an adequate level so that people are not dissatisfied: fair pay, decent conditions, sound policies.
2. To motivate, improve the job itself through job enrichment: more responsibility, autonomy, challenge, feedback and room to grow.
3. Recognition and a path for advancement do more for motivation than further pay rises alone.

Support and criticism

• Support. It showed managers that attention to pay and conditions alone gave poor results, and it turned attention to intrinsic factors. It has been applied widely to managerial, professional and senior white-collar staff. It led to job enrichment and the movement for a better quality of work life.
• One scale, not two. Many critics hold that motivation lies along a single continuum.
• Bound to its method. Herzberg's results come most easily from his own interview method; other methods often fail to repeat them. People tend to credit good events to themselves and blame bad ones on their surroundings.
• Pay and status underplayed. For many workers, especially lower-paid ones, pay, status and good relations do motivate.
• Small, narrow sample of professionals, and little on individual differences.

Maslow and Herzberg compared

The two agree on the main point: pay and security are basic, not inspiring, and lasting motivation comes from esteem and growth. Herzberg added that in a modern economy many workers' lower needs are largely met, so these factors mostly keep people where they are.

How a manager motivates depends on what the manager believes about people. Douglas McGregor, in The Human Side of Enterprise (1960), described two opposite sets of beliefs and called them Theory X and Theory Y. Before him, Elton Mayo had attacked the old belief that workers are a mass of selfish individuals who want maximum money for minimum work (Mayo's rabble hypothesis); McGregor's Theory X spells that belief out.

Theory X: the traditional view

Centralised decisions, a tall chain of command and close outside control of work all rest on these beliefs:

1. Most people dislike work and avoid it where they can.
2. Most have little ambition, shun responsibility and would rather be told what to do.
3. Most value security above everything.
4. Most care little about the organisation's needs and resist change.
5. Few have the creativity to solve the organisation's problems.
6. People are moved only at the physiological and safety levels: by money, fringe benefits and fear of punishment.
7. So they must be closely supervised and often forced to work towards goals.

Managers who hold these beliefs use strict rules, close supervision, centralised authority and reward-and-punishment ("carrot and stick").

Theory Y: the modern view

1. Work can be as natural as play, if the conditions are right.
2. People will direct and control themselves towards goals they are committed to.
3. People are moved at the social, esteem and self-actualisation levels as well as the lower ones.
4. Under the right conditions, ordinary people accept and even seek responsibility.
5. The ability to solve problems creatively is widely spread across the workforce.
6. Most organisations use only a fraction of what their people could give.

Managers who hold these beliefs delegate, invite participation, enrich jobs and rely on self-control.

What McGregor actually argued

McGregor drew on Maslow. His point was conditional: managing only by direction and control may not work for people whose physiological and safety needs are already reasonably met and whose social, esteem and self-actualisation needs are becoming the stronger ones. Theory X beliefs, applied to everyone, are often wrong.

Do not read the two as "X bad, Y good". No two people or situations are alike. A manager who holds Theory Y beliefs may still direct and supervise some people closely for a while, to help them grow until they can manage themselves. Beliefs also tend to prove themselves: people treated as lazy have little reason to show initiative. The ideas fed participative management, delegation, job enrichment and MBO.

(B.Com Prog only.) J. Stacy Adams' equity theory says that people are motivated by a sense of fairness. Each person compares what they put in and what they get out with what a chosen other person puts in and gets out.

• Inputs: what a person brings to the job (effort, time, skill, education, experience, loyalty).
• Outcomes: what the person receives (pay, bonus, recognition, promotion, status, interesting work).
• Referent: the person or group used for the comparison (a colleague, someone in another firm, one's own past position).

The comparison is about how things look to the employee, not about the true figures. A pay system the staff believe to be unfair does damage even if it is fair on paper.

Lessons for managers: link rewards clearly to contribution; keep pay and promotion rules open and consistent; explain differences in reward; watch for signs that people feel under-rewarded, since they react more strongly than those who feel over-rewarded.

(Named in the B.Com Prog syllabus line; the same ideas answer the B.Com Hons learning outcome on the motivation techniques leaders use.) An incentive is any measure used to motivate people to perform better. Incentives are financial (in money or measurable in money) or non-financial (giving psychological and social satisfaction). They may be given to individuals or to groups.

Financial incentives

Non-financial incentives

Not every need is met by money. Even where money is involved (a promotion brings a rise), the main pull is psychological.

Leadership is the process of influencing people so that they work willingly, and not merely under orders, towards the group's goals. A leader is the person who exercises that influence. A leader uses the authority of the post where there is one, but relies mainly on personal qualities (vision, knowledge, integrity, the ability to communicate) that make people want to follow.

Features

• It is the ability to influence others and to change how they behave.
• It is a relationship between a leader and followers. Followers make a leader by accepting the lead; without them there is no leadership.
• It works in a situation: the leader, the followers and the circumstances together decide what succeeds.
• It is aimed at shared goals of the group or organisation.
• It is a continuous process, not a single act.

Leadership and management

Management is wider: planning, organising, staffing, directing and controlling. Leadership is part of directing. A good leader need not be a good manager, but an effective manager needs many of a leader's qualities. A manager who relies only on formal authority gets compliance; a manager who also leads gets commitment.

Importance of leadership

"Leadership is the essence of management"

The statement is largely true. Plans, structures and controls achieve nothing until people act on them, and leadership is what makes them act willingly. It is the binding force that holds a group together and keeps it working towards its goals; the difference between a firm's success and failure is often its leadership. The statement needs one qualification: leadership without sound planning, organisation and control has no direction. The two are complementary, with leadership at the heart of management.

How well a person leads depends on three things: the leader, the followers and the situation. The same person may lead well in a crisis and badly in calm times, or well with experts and badly with trainees.

Qualities of a good leader

No one person has every quality, and having them does not guarantee success. But understanding them helps a manager build them through training and effort.

Are leaders born or made

• The trait view says leaders are born: a few people have inborn qualities that set them apart. Its weaknesses: no two lists of traits agree, skills are mistaken for traits, and it cannot say how much of each trait is needed.
• The situational view says leaders are made: anyone can lead if the circumstances let them do what the situation needs.
• A balanced answer: some qualities (energy, intelligence) are partly inborn, but most leadership skills (communication, judgement, handling people) can be learned through training, experience and practice. Leaders are partly born and largely made.

A leadership style is a leader's consistent way of behaving towards followers: how decisions are made, how much freedom is given and how people are moved. The most common classification is by how the leader uses authority, which gives three classic styles.

The three classic styles

An autocratic leader may hear everyone's views but still decides alone. Real leaders mix the styles: even a free-rein leader keeps some rules for the work, and a democratic leader may decide alone in an emergency.

Two more styles in the answers

• Paternalistic: the leader cares for followers like a parent, looks after their welfare and expects loyalty, but takes the decisions for them. It suits small family firms; it builds loyalty but can breed dependence.
• Bureaucratic: the leader manages by rules and procedures. It suits routine, regulated, safety-critical work (bank operations, hazardous plants); it is consistent but rigid.

Paternalistic and bureaucratic leadership vary how authority is used. Transactional and transformational leadership (sub-topic 4) describe something else: how the leader motivates.

Leadership as a continuum

Robert Tannenbaum and Warren Schmidt showed that styles are not three boxes but a range running from the boss deciding alone at one end to the group deciding freely at the other, with many steps between (the boss sells a decision, invites questions, presents a tentative plan, consults, allows the group to decide within limits).

Choosing a style

No style is best everywhere. Where a manager should sit on the range depends on:

1. The leader: beliefs about people, confidence in subordinates, comfort with sharing power, tolerance of uncertainty.
2. The followers: their knowledge and experience, need for independence, readiness to take responsibility, interest in the problem, and the expectations their culture and education give them.
3. The situation: the kind of task, urgency, size and unity of the group, the organisation's culture and policies, and whether conditions are stable or in crisis.

(Named in the B.Com Prog syllabus; B.Com Hons answers on leadership styles use the pair too.) These two ideas, introduced by James MacGregor Burns and developed by Bernard Bass, describe how a leader motivates, not how much authority the leader shares.

Transactional leadership rests on an exchange. The leader makes roles and targets clear; followers who meet them get rewards (pay, bonus, promotion), and those who do not face correction. It works through:

• Contingent reward: rewards clearly linked to performance.
• Management by exception: the leader steps in only when performance strays from the standard, either by watching actively for deviations or by acting only after problems arise.

It keeps the existing system running efficiently and suits stable, routine work.

Transformational leadership changes followers' values, beliefs and aims, so that they look beyond their own interest, commit to a shared vision and achieve more than they thought possible, growing in ability as they do. Its four parts (the four I's):

It suits change, crisis and innovation.

The two are complementary, not rivals. Transformational leadership builds on a base of fair, clear exchanges. Good leaders use exchanges for routine work and inspiration for change. One risk: a charismatic leader without sound values can lead followers the wrong way.

Thinking about leadership moved from who the leader is, to what the leader does, to where the leader is.

The situational view in more detail:

• Leadership differs from one situation to another; a person who leads well in one setting may fail in another.
• It does not deny traits, but looks past the leader's personality to the character of the group and the organisation.
• It holds that leaders are made: anyone can lead if the circumstances let them perform the functions the situation needs.
• The effective leader understands the forces in the situation and acts in keeping with them.

Paul Hersey and Ken Blanchard's situational leadership turns this into a guide. The leader adjusts the amount of direction and of support to the followers' readiness (their ability and willingness for the task):

Followership is the role and behaviour of people who work with and support a leader towards shared goals. It is not blind obedience. A good follower thinks independently, contributes actively, gives honest feedback and takes responsibility for results.

Why followership matters

• Most people spend more of their working lives as followers than as leaders.
• No leader succeeds without capable followers; success is often credited to the leader when followers did much of the work.
• Followers make a leader by accepting the lead, and they influence the leader in return.
• Effective followers are committed, competent, courageous enough to disagree, and self-managing.

Leader and follower compared

The two are roles, not kinds of people. The same manager leads subordinates and follows superiors, and good leaders are usually good followers.

Robert Kelley, named in the B.Com Hons guidelines and the B.Com Prog syllabus, classified followers on two dimensions:

• Thinking: from independent, critical thinking (thinks for oneself, offers constructive criticism and new ideas) to dependent, uncritical thinking (leaves the thinking to the leader).
• Engagement: from active (takes initiative, participates, goes beyond the job) to passive (needs constant supervision, does only what is asked).

Combining the two gives five styles of followership:

For managers: develop exemplary followers by inviting honest feedback, sharing information, giving responsibility and rewarding initiative. Win back alienated followers by listening to them and acting on their criticism.

Communication is the process of passing information, ideas, feelings and instructions from one person to another so that both reach a common understanding. The word comes from the Latin communis, "common". It succeeds only when the receiver understands the message as the sender meant it. It is a two-way, continuous process carried on at every level of management.

Elements of the process

The process runs: sender, encoding, channel, decoding, receiver, then feedback back to the sender, with noise able to interfere at every step.

Why communication matters so much in a modern organisation

This is why communication is called the lifeblood, or foundation, of management. When communication stops, organised activity stops: what remains is individuals each working alone. Chester Barnard called it the foundation of all group activity.

Formal communication

Formal communication follows the official channels set out in the organisation chart. It is planned, systematic and usually recorded. It flows in several directions:

Organisations allow horizontal and diagonal contact so that every message need not climb up and down the chain, which delays decisions.

Communication networks in a formal organisation:

Informal communication: the grapevine

Informal communication takes place outside the official lines. It is called the grapevine because it spreads through the organisation in every direction, ignoring levels of authority. It arises from people's need to exchange views that the formal channels do not carry: chat in the canteen about a new boss, talk of coming transfers.

Grapevine networks: single strand (each person tells the next, in sequence), gossip (one person tells everyone, without choosing), probability (a person tells others at random) and cluster (a person tells only those they trust, who each pass it on to their own trusted few). The cluster is the commonest in organisations.

The grapevine cannot be abolished. A wise manager uses it: listens to it to learn how people feel, sends information through it to test reactions, and corrects false rumours quickly with facts.

By form

• Oral: face to face, meetings, phone calls. Quick and personal, with instant feedback, but easily forgotten or distorted as it passes through people.
• Written: letters, memos, reports, e-mail. Precise and on record, but slower and more formal.
• Non-verbal: gestures, posture, expression, tone. It can support or contradict the words.

A barrier is anything that blocks, distorts, filters or delays a message, so that understanding is incomplete or wrong. Barriers can arise at any step: encoding, the channel, decoding or feedback.

The barriers

Semantic barriers (problems with words and meanings):

• Technical jargon used with people outside the specialism.
• Words or symbols with several meanings: the receiver picks a different one from the sender's.
• A badly expressed message: wrong words, missing words, poor vocabulary.
• Faulty translation into the receiver's language.
• Unclarified assumptions: the sender takes for granted something the receiver does not know.
• Body language that does not match the words.

Psychological barriers (states of mind):

• Distrust between sender and receiver, so the message is not believed.
• Inattention: a preoccupied receiver does not really hear.
• Premature evaluation: judging the message before the sender has finished.
• Loss in transmission and poor retention: each retelling loses some accuracy, especially when spoken, and inattentive people forget.
• Emotions such as anger, fear or worry, and filtering (passing on only what the receiver is thought to want).

Organisational barriers (the structure and its rules):

• Too many levels: messages are delayed and distorted at each filtering point.
• Status: a status-conscious superior keeps subordinates at a distance and they hesitate to speak.
• Rigid rules and procedures, and messages that must go through set channels.
• A policy, stated or not, that does not favour a free flow of information, as in a highly centralised firm.
• Lack of facilities: meetings, suggestion boxes, complaint boxes, social gatherings.

Personal barriers (the people at either end):

• A superior who fears a threat to authority holds back or suppresses information.
• A superior who lacks confidence in subordinates does not seek their views.
• Subordinates unwilling to communicate when it may hurt their interests.
• No incentive: if good suggestions are never rewarded, people stop offering them.

Physical and technical barriers: noise, distance, poor equipment, failed networks and too much information at once (information overload).

Measures to remove them

Information technology has changed how organisations communicate, inside and outside.

Inside the organisation

• E-mail and instant messaging carry messages at once across offices, cities and countries.
• Intranets and shared online workspaces keep policies, documents and notices where everyone can reach them.
• Video conferencing and online meetings bring dispersed teams together without travel and make remote and hybrid work possible.
• Collaboration tools let teams edit the same document, track tasks and discuss work in one place.
• Internal social networks and group chats let staff at all levels share ideas across departments, so communication runs sideways and diagonally, not only down the chain.
• Dashboards and mobile apps put live figures in managers' hands for quick decisions.

Outside the organisation

• Social media allows a firm to speak to customers directly, answer complaints in public, launch products, build its brand and recruit staff.
• Customers' reviews and posts are a fast source of feedback.
• Investors, suppliers and the public can be reached through websites and online announcements.

Benefits and risks

So firms need a communication policy: which channel to use for what, rules for social media use by staff, data security, and training. Technology speeds communication; it does not replace clear messages and good listening.

Controlling is the function of making sure that actual performance matches planned performance. The manager sets standards, measures what actually happened, compares the two, and corrects any significant gap, so that the organisation's goals are reached and its resources are used efficiently. Koontz and O'Donnell described managerial control as measuring achievement against the standard and correcting deviations so that objectives are met in line with plans.

Nature of control

• Goal-oriented: it exists so that objectives are achieved.
• Pervasive: every manager at every level controls the work under them, in a business, a hospital, a school or the army.
• Continuous: a constant cycle, not a single act.
• Linked to planning: plans supply the standards; without a plan there is nothing to control against.
• Looks both ways: it judges past results and uses them to improve future work.
• Action-oriented: it is complete only when a correction is made.
• Not the last function: it brings the management cycle back to planning, because what it finds shapes the next plan.

By timing, control is of three kinds: feedforward (before work starts, such as checking raw material), concurrent (while work is going on, such as checking parts during assembly) and feedback (after the work, such as reviewing last month's sales).

Importance of control

How control maintains order and discipline

1. Clear expectations: standards tell people what is required.
2. Watchfulness: people who know their work is measured take more care.
3. Answerability: deviations are traced to the person responsible.
4. Fair treatment: objective measures let good work be rewarded and poor work corrected consistently.
5. Checks against misuse: audits, stock checks and approvals deter theft and fraud.

Limitations of control

• Hard to set measurable standards for some areas (morale, job satisfaction, behaviour), and then control loses force.
• Little control over outside factors such as government policy, technology and competition.
• Resistance from employees, who may see close checks (for example, camera watching) as a curb on their freedom.
• Cost: a control system takes money, time and effort; a small firm may not be able to justify an elaborate one. Its cost must not exceed its benefit.

Control works in five steps. (Some texts compress them into three: set standards, measure performance, correct deviations.)

1. Set performance standards. A standard is the yardstick against which results will be judged. It may be quantitative (units produced, cost per unit, sales per month, delivery time) or qualitative (customer goodwill, staff morale). Make standards as precise and measurable as possible; even a qualitative aim can be broken into measurable pieces (a bank branch's customer service into minutes waited at the counter, days taken to open an account and complaints per thousand customers). Standards must also be flexible enough to change when conditions change. Because managers cannot watch everything, standards are set at selected strategic or critical points.
2. Measure actual performance. Measure objectively and reliably, by personal observation, sample checking, performance reports, ratios or live data. Measure in the same units as the standard, so that the two can be compared. Where possible, measure during the work, not only after it: weigh each batch of dough before it goes into the oven, track a delivery van's progress while it is on the road.
3. Compare performance with the standard. The comparison shows the deviation: the gap between what was planned and what happened. Quantitative standards make the comparison easy.
4. Analyse the deviations. First fix an acceptable range: small deviations within it are ignored. Then apply critical point control and management by exception (sub-topic 3): only significant deviations, and any deviation in a key area, go to management. Then find the cause. Causes include unrealistic standards, a faulty process, too few resources, a weak structure, constraints within the organisation, and outside factors beyond its control. Trace each deviation to the person or unit responsible.
5. Take corrective action. No action is needed inside the acceptable range. Beyond it, especially in key areas, act at once so that the deviation does not recur. The remedy matches the cause: train workers, repair or replace equipment, change methods, add people or machines or allow overtime, reassign duties, give clearer instructions or better leadership. If the deviation cannot be corrected by managerial action, revise the standard or the plan. Lessons also go into the next plan.

A control system works only if it is built on sound principles. The requirements below are the ones answers are marked on.

Control by exception and critical point control

Critical point control: it is neither cheap nor easy to check every activity, so control concentrates on the key result areas, the points where a failure hurts the whole organisation. A small rise in a large, vital cost can matter more than a large rise in a trivial one.

Management by exception (or control by exception): trying to control everything ends in controlling nothing. So an acceptable range of deviation is fixed in advance. Deviations inside it are left to subordinates; only those that cross the limit go to management, and a major deviation gets immediate attention.

Advantages of the two together:

• Managers' time and effort are saved, because they deal only with significant deviations.
• Attention goes to the important areas, so managerial talent is better used.
• Routine problems stay with subordinates, which supports delegation and raises their morale.
• Critical problems are spotted in time.

(B.Com Prog line; MP13, sub-topic 5, in U2 treats the same relationship.) Planning and controlling are inseparable twins. Planning sets the standards; controlling checks that events conform to them.

• Planning without controlling is pointless: plans drift and stay intentions.
• Controlling without planning is blind: with no standard set in advance, there is nothing to measure against.
• Planning is prescriptive, an intellectual process of thinking out what should be done. Controlling is evaluative: it checks whether decisions became the desired action.
• They reinforce each other: planning built on facts makes control easier and sharper, and control improves future planning with information from experience.
• They share tools: budgets, schedules, MBO targets and standards serve both. Both are continuous and pervasive: every manager plans and controls, in one cycle of plan, act, control and plan again.

"Planning is looking ahead, controlling is looking back"

Only partly true. Planning looks ahead, since plans are made for the future on forecasts; controlling looks back, like a post-mortem that finds past deviations. But planning is guided by past experience, and corrective action aims to improve future performance. Feedforward and concurrent controls act before and during the work. So both look back and forward.

The B.Com Hons guidelines sort the measures of control into two groups, and the notes follow that sorting:

Other techniques found in the study texts:

A budget is a plan for a future period expressed in numbers, usually money: how resources will be got and used, and what results are expected. Budgeting is preparing budgets; budgetary control is using them to control: each manager receives a budget for their area, actual results are compared with it as the period goes on, the causes of significant gaps (variances) are found, and action is taken. The budget is the plan; the comparison is the control.

Kinds of budget

Steps in budgetary control

1. Organise for budgeting: a budget committee and officer, and a budget manual setting out procedures and responsibilities.
2. Fix the budget period and the key factor: the period (often a year, split into months) and the factor that limits everything else, such as sales demand or plant capacity.
3. Prepare the functional budgets and combine them into the master budget.
4. Record actual performance for each budget centre.
5. Compare and analyse variances by cause and by the person responsible.
6. Correct and revise: act on adverse variances, and revise the budget if conditions have changed.

Benefits

• Every activity is directed towards the goals, and departments are coordinated, since their budgets are linked (sales decides production, production decides purchases and labour).
• Variances are found and responsibility is fixed on the right manager.
• People become cost-conscious, so labour, machines and materials are used better.
• It is participative: managers help prepare their own budgets, authority is delegated within approved limits, and commitment rises.

How budgets give control in a large enterprise

Limitations

Budgets are only as good as the estimates behind them; a fixed budget becomes meaningless when activity differs widely from the forecast; budgets can become rigid; managers may pad them to make targets easy; and the system costs time and paperwork. Top-management support and genuine participation reduce these problems.

A financial ratio relates two connected figures from the financial statements, expressed as a proportion, a percentage or a number of times (net profit as a percentage of sales). In control, ratios are used as standards and measures: managers set target ratios, work out actual ratios each period, compare them with targets, past periods, other divisions and competitors, and act on unfavourable gaps. Because a ratio relates figures, it removes the effect of size, so units of different sizes can be compared.

The main ratios

This split shows whether a fall in return comes from thinner margins or from assets being under-used.

How ratios help evaluate performance

• Efficiency: turnover ratios show whether stock, debtors and assets are used well.
• Profitability: margins and return on investment show how well sales and capital become profit.
• Liquidity and solvency: early warning of cash shortage or over-borrowing.
• Trends: a ratio watched over several periods signals a problem before it grows.
• Comparison: across divisions and with competitors or industry averages, which also helps set targets.
• Responsibility: ratios tied to a department (collection period to the credit department) make its manager answerable.
• Decisions: on pricing, credit terms, borrowing and investment.

Limitations: ratios rest on past accounting figures; they are affected by accounting policies and inflation; a ratio means little without a standard to compare it with; and they show symptoms, not causes. Use several together and with judgement.

Accounting profit and earnings per share ignore the cost of the owners' capital. A firm can report a profit and still earn less than its investors could have earned elsewhere at the same risk. Value-based measures charge for all the capital used, borrowed and owned, and ask whether value was created.

Economic value added (EVA)

EVA is what is left of operating profit after tax once a charge for all the capital employed has been taken off.

• NOPAT: operating profit after tax, before interest.
• Capital employed: all the funds, equity and debt, invested in the business or division.
• Weighted average cost of capital (WACC): the average return lenders and shareholders require, each weighted by its share of the capital.

A positive EVA means the unit earned more than its capital costs: value was created. A negative EVA means value was destroyed, even if a profit was reported.

Market value added (MVA)

MVA is how much more (or less) the market values the firm than the capital invested in it.

For a listed company, the market value of equity = number of shares × market price. A positive MVA means management has created wealth for investors; a negative one means it has destroyed wealth. MVA reflects the market's view of the present value of all the firm's future EVAs.

EVA and MVA compared

In control: EVA can be set as each division's target and tied to managers' bonuses, which pushes them to use capital efficiently, avoid low-return projects and release idle assets. MVA is used by top management and investors to judge whether the company as a whole creates wealth.

Financial measures are lagging indicators: they report the results of past decisions, they encourage short-term thinking, and they say little about what creates future value (loyal customers, efficient processes, skilled people). The balanced scorecard, developed by Robert Kaplan and David Norton, turns a firm's vision and strategy into objectives and measures from four perspectives. It balances financial with non-financial measures, short-term with long-term goals, lagging with leading indicators, and the outside view with the inside one.

The perspectives are linked by cause and effect: skilled, motivated staff improve processes; better processes raise customer satisfaction; satisfied customers lead to better financial results. A strategy map draws these links.

Using the scorecard for control

1. Clarify the vision and strategy, and turn them into objectives under each perspective.
2. Choose measures, set targets and plan initiatives for each objective.
3. Cascade the scorecard to divisions, departments and individuals, so that everyone's goals support the strategy.
4. Measure performance regularly and review it against targets in all four perspectives.
5. Correct, and use the feedback to test and revise the strategy itself.
6. Link rewards to scorecard results.

Merits: links control to strategy; balances short and long term; leading indicators give early warning; aligns everyone with the strategy; aids communication. Limitations: the right measures are hard to choose; too many measures confuse; cause-and-effect links are assumed, not proved; it needs time, data systems and top-management commitment.

Network analysis plans and controls a project: a one-time job made of many activities that depend on one another (building a plant, launching a product, installing a computer system). The project is broken into small activities, arranged in logical order, and drawn as a network diagram that shows which activities must finish before others can start. The diagram also shows gaps in the plan. The two most popular network techniques are PERT and CPM.

The basic terms

• Activity: a task that takes time and resources (lay the foundation).
• Event: the start or finish of an activity, a point in time.
• Path: a chain of activities from the project's start to its end.
• Critical path: the longest path through the network. Its length is the shortest time in which the whole project can be finished.
• Critical activities: those on the critical path. They have no spare time: if one slips, the whole project slips.
• Slack (float): the spare time of a non-critical activity, which can be delayed by that much without delaying the project.

Steps

1. List all activities.
2. Fix their order and which depends on which.
3. Draw the network.
4. Estimate the time of each activity.
5. Find the critical path and the slack of the other activities.
6. Monitor progress, watching critical activities most closely and moving resources from activities with slack.

PERT (Programme Evaluation and Review Technique)

Used where activity times are uncertain, as in research and development or a first-of-its-kind project. Each activity gets three time estimates: optimistic (o), most likely (m) and pessimistic (p).

It uses probability to estimate activity times, and the chance of finishing by a given date can be estimated. It helps plan schedules and costs, forecast manpower needs, foresee slippages and allocate resources. It is used in building ships, buildings and highways, launching projects, publishing books and installing computer systems.

CPM (Critical Path Method)

Used where activity times are fairly well known (one time estimate), as in construction or maintenance. It is the most widely used planning and control technique in business. It marks the critical activities and concentrates on them, taking the expected time as the time the work will take. It also weighs time against cost: activities can be crashed (speeded up) at extra cost to shorten the project. It needs more planning, which costs more, but the cost is justified because supervision is focused on the critical path instead of on everything. It also gives a standard way to communicate project plans, schedules and costs.

Use in control: managers know which activities cannot be delayed, where resources can be moved from activities with slack, and how far the project is behind. Limitations: time estimates may be unreliable, large networks are complex, and the techniques focus on time more than on quality.

(B.Com Hons only; no past questions yet.) Control is only as strong as the link between results and the people who produce them. Accountability for performance is the obligation of a person, team or unit to answer for results judged against standards agreed in advance, with consequences that follow: reward when the results are met, explanation and correction when they are not. It is where control (MP20) meets delegation (U3, MP14): authority and responsibility are passed down, and accountability for the results flows back up.

Importance

Prerequisites

1. Clear objectives and standards, set in advance and understood and accepted by the person to be judged (as in MBO, U2, MP10).
2. Clearly assigned responsibility with matching authority: nobody can be held to account for a result they had no power to influence (parity of authority and responsibility).
3. Controllability: people are judged only on what they control; responsibility centres (cost, revenue, profit, investment) are drawn so that each manager answers for figures within their reach.
4. Reliable, timely measurement and reporting of actual results.
5. Regular review and feedback, so that problems surface while they can still be fixed.
6. Fair consequences linked to results: recognition and reward, or coaching and correction.
7. An open culture in which honest mistakes are reported and learned from instead of hidden.
8. Commitment from the top: senior managers hold themselves to account too.