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Complete Guide To Control Mechanisms In Business

The four functions of management are planning, leading, organizing and controlling. Companies use various control mechanisms — business plan, needs assessment, budgets, audits, pricing, communications, training, performance reviews, and employee incentives — to optimize performance in each of these areas.

What are Control Mechanisms in Business?

Control can be defined by its function: it promotes business continuity. A company may continue to exist, but if the business is not profitable, it does not have a clear mission. In order to maintain a business, managers may need to alter monetary, employee, or operational aspects of it. Managers tend to use control mechanisms to monitor performance in the four areas of management to ensure that the company can perform successfully.

Types of Control Mechanisms in Business

Control mechanisms are necessarily subjective. They are the mechanisms and procedures used to provide pertinent information about each aspect of business, as well as instructions and rewards for reaching a particular standard or goal. The selection of these control mechanisms depends largely on the industry of the business and the kind of product or service it provides.

The best control mechanisms provide feedback to managers, so they can continually maximize efficiency, productivity, and profits. A control system must be based on effective measurement, which is used for decisions and judgments based on fact. This may involve the use of both formal and informal controls.

Control Mechanisms in Business

Since business is conducted by individuals and groups, managers must exercise certain kinds of control that ensure the activities and goals of the company are met.

Control Mechanisms in Business Planning

Planning is the most important control for businesses. This is subjective and depends upon the conditions of the industry, the business’s history and the amount of risk facing the company.

A business plan describes the conditions for success of a business with the help of a SWOT analysis — which stands for strengths, weaknesses, opportunities, and threats — and a financial statement. The business plan gives direction to the company by providing a road map to management and serves as a communication mechanism.

Control Mechanisms in Business Leadering

Management is also necessary for the efficient use of available resources, which is frequently determined by the roles of leadership in business.

Leadership in business is subjective and depends on the size of a business, the complexity of its operations, the infrastructure of the company, and the financial and human resources of the business.

Leading involves motivating and leading employees and the members of a business to work toward common goals.

A few good managers have the ability to inspire their employees to reach their goals and are the heart and soul of any successful company.

The most common ways of developing such leaders are by using formal training programs and setting up mentoring relationships.

Control Mechanisms in Business Control

Control mechanisms are necessary to keep employees and the members of a business on the right path.

These control mechanisms help managers correct mistakes and avoid problems before they happen.

Many aspects of a business that may need controls are not measurable and are not formalized – such as market conditions. Because they are subjective, these controls vary from business to business; however, they all work toward the improvement and success of a company.

The most frequently used control mechanisms are:

• Organizational structure
• Human resources
• Economic resources
• Operational procedures
• Setting goals
• Publicity and promotions
• Monetary incentives
• Performance appraisals

Control Mechanisms in Business Performance Reviews

The two main reasons for conducting performance reviews are to recognize productive employees and to identify performance that is not up to par with requirements. Performance appraisals may be formal or informal and may include structured interviews as well as standard operating procedures. The objective of a performance review is to develop such plans for increased productivity as are appropriate.

Performance reviews must be conducted objectively and with specific guidelines to address the needs of all employees. The responsibility for conducting such reviews should be given to employees who are experienced and objective.

Performance appraisals are subjective in nature.

Organizational efficiency depends on high performance and motivation of employees. The use of performance appraisal tools helps measure employees’ job performance and assess their future.

Performance appraisal is a process of systematically gathering information about employee performance and forecasting future behavior and can be an effective mechanism to motivate employees.

Objective measures such as production records, productivity indices, and customer surveys may be used as one source of data for performance appraisal.

These measures can provide some feedback on work performance, but they do not take into account all the factors that contribute to the quality of work.

In addition to performance appraisal review by supervisors, employees should be given an opportunity to evaluate their own performance.

Control Mechanisms in Business Setting Goals

Many managers say that the most important step in the control of a business is to set goals and to measure the achievement of these goals. Managers must also have a plan of action in view of the goals that are not met.

As long as there is a discrepancy between goals and actual performance, there is no need for concern. The real test of good management is when there is agreement that goals are being achieved and financial results are strong.

The use of goal setting promotes efficiency and productivity, which are essential for the effective operation of any organization. Goals are the cornerstone of any operation.

Goals are used as an effective control mechanism because they give direction to an organization.

Performance goals should result in specific objectives and criteria. Objectives are measurable standards that must be met to achieve good results. Criteria are used to establish how objectives will be used and whether they are being used effectively. Criteria are under-developed measures used to assess a situation.

Control Mechanisms in Business Training

A comprehensive training program for the members of an organization is essential for the growth and stability of any business.

Control mechanisms in training are used to prepare employees, develop their skills and make them aware of their job responsibilities and the benefits they can derive from their jobs.

Training programs help to create a positive work environment that boosts efficiency and productivity.

Training programs for all employees can not exceed what is required for the managers to carry out their duties.

Manager’s Training

Training is an integral part of the company’s efforts to be an acknowledged leader in its industry. This is accomplished by understanding the company’s management responsibility.

While management practices come from the top, it is up to middle managers to put these practices into action. This is achieved through quality training programs for all members of an organization.

Control Mechanisms in Business Research and Development

Research and development (R&D) is a major task for all organizations.

This strategy allows the organization to be ahead of the competition by providing adequate strategies to meet customer needs. The strategy also provides cost savings by improving production methods and cutting costs.

The control mechanism for R&D should be used to measure actual performance against the forecast. Because R&D is innovative and subject to uncertainty, the allocation of resources is not always certain. This makes it difficult to develop a control mechanism for this area.

A relaxed, not too strict, control mechanism is advantageous for R&D to circulate freely. However, in order to achieve business objectives and to measure performance there is a need for a more precise, formalized control mechanism for R&D.

Control Mechanisms in Business Administration

Systems management is a useful control mechanism for the administration of a business. Many reports and forms can be generated to monitor and measure how well a business performs in general, as well as in specific areas of operation.

Control mechanisms in administration are also necessary to control the various types of transactions of a business, such as the preparation of budgets, audits, payroll, billing, receivables, etc.

The use of a control mechanism in administration allows a business to act and react to its environment in an orderly, predictable manner.

Control Mechanisms in Business Accounting

The use of a control mechanism in accounting allows an organization to determine the financial status of the business. Through careful and systematic monitoring, an organization can gain better control over its finances for proper budgeting, projections, and forecasts.

Control mechanisms in accounting help in the implementation of accounting policies and practices as well as financial transactions, ensuring that all accounting records are accurate and current. Accurate records also allow the business to make informed decisions about the future of the organization.

Control mechanisms in accounting help to assess the credibility of the company. These mechanisms also ensure that the internal and external levels of the company are in agreement with each other.

Control Mechanisms in Business External and Internal Controls

Control mechanisms in business serve to mitigate the risks and uncertainties that result from operating in a complex and dynamic environment.

External controls are used to mitigate undesirable and uncontrolled activity at the external boundary of a system, which may provide threat to a system.

or products are infected with defects.

Internal controls are used to mitigate undesirable and uncontrolled activity at the internal boundary of a system, which may reduce the efficiency and effectiveness of a system.

External and internal controls are complementary, each serving a distinctly different role.

External controls serve to protect an organization from harm. Internal controls serve to protect and manage an organization’s resources.

Control mechanisms in business can be classified into three basic categories:

• Regulation and control
• Accounting and control;
• Operational control.

Hassan Ahmed

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Levers of Control: What They Are & How They Can Impact Your Strategy

• 09 Jan 2024

Control is pivotal to ensuring alignment between business objectives and outcomes and fostering a culture of strategy execution .

Because of this, many companies implement rigorous oversight measures, such as performance metrics and regular progress reviews. They also have robust systems of checks and balances, known as levers of control.

If you struggle to implement strategic initiatives, you’re not alone. Here’s a breakdown of levers of control and how they can impact strategy execution.

Access your free e-book today.

What Are Levers of Control?

Levers of control enable you to manage tension, guide strategy execution, and achieve business goals and objectives . The four levers are:

• Belief systems
• Boundary systems
• Diagnostic systems
• Interactive control systems

According to Harvard Business School Professor Robert Simons, who teaches the online course Strategy Execution , the four Ps of strategy drive the levers:

• Strategy as perspective: Provides overarching direction that helps guide and inspire pride in employees
• Strategy as position: Creates a value proposition that attracts customers and differentiates products and services from competitors’
• Strategy as plans: Focuses on key initiatives through formal systems that set strategic goals, determine action plans, and measure progress
• Strategy as patterns of action: Detects changes in the competitive environment and adapts quickly through continuous learning

Here’s an overview of each lever so you can consider all four during strategy implementation.

Belief Systems

Belief systems are sets of organizational definitions you communicate and reinforce to provide direction to employees. They commonly take the form of credos, mission statements, and core values that define your organization’s purpose and impart what employees should do and how to act.

Belief systems are central to strategy as perspective , which considers your organization’s larger mission and purpose to inspire employee pride.

“It's a lens by which everyone in the business looks for new opportunities and understands how to conduct themselves,” Simons says in Strategy Execution .

Employees who support your strategic initiatives will likely search for ways to support your strategy’s execution. Belief systems provide clarity for them and help unleash their desire to contribute.

Boundary Systems

While belief systems often produce positive results, employees can behave badly—for example, by manipulating financial records or cutting corners in quality assurance—to achieve company goals.

Highly standardized processes can help safeguard from unethical behavior. Simons encourages taking a different approach, though, if your organization is in a constant state of change.

That approach involves using boundary systems —negatively phrased statements that tell employees what behaviors are forbidden. Rather than relying on positive messaging, like belief systems, this lever of control describes what not to do.

According to Strategy Execution , boundary systems can comprise:

• Business conduct boundaries: Documents like codes of conduct that outline unethical behaviors.
• Strategic boundaries: Opportunities you shouldn’t pursue because they don’t align with your strategy.

Strategic boundaries, in particular, control strategy as position . By identifying risks you should avoid, your employees can better understand how to create customer value.

Whereas belief systems focus on overarching principles that guide employee behavior, boundaries refine what to prioritize—giving your business a clear strategic direction.

“Businesses without a clear strategic position may lapse into trying to please everyone, and thus, please no one,” Simons says in Strategy Execution .

Related: A Beginner’s Guide to Value-Based Strategy

Diagnostic Control Systems

Even when employees understand your organization’s mission and the limits of their support in strategic initiatives, you still need to monitor their efforts to ensure your strategy execution runs smoothly.

You can accomplish that using the third level of control: diagnostic control systems —formal information systems that help monitor organizational outcomes.

Examples of diagnostic control systems include:

• Performance scorecards
• Project monitoring systems
• Human resources systems

“It allows managers to put key activities on autopilot,” Simons says in Strategy Execution .

For example, consider a call center’s monitoring efforts. Instead of combing through data, it could use automation to track metrics like the number of calls and customer satisfaction scores to identify areas for improvement, provide targeted training, and allocate resources more effectively.

It's crucial to strike a balance between monitoring and suppressing when designing such systems because they control strategy as plans —meaning they directly influence what action plan best supports your strategic initiatives.

“You must not only spend time negotiating and setting goals,” Simons says in Strategy Execution , “you must also design measures for these goals and then align performance incentives.”

Interactive Control Systems

Strategy execution often requires going on the defensive to avoid risk. However, the fourth lever of control allows you to do the opposite and mitigate risk through interactive control systems .

“Interactive control systems are the formal systems managers use to personally involve themselves in the decision activities of subordinates,” Simons says in Strategy Execution . “Decision activities that relate to and impact strategic uncertainties.”

For example, financial services firm JP Morgan implements interactive control systems that leverage AI for fraud detection and risk mitigation . Through real-time monitoring tools, its employees can detect and investigate suspicious patterns or anomalies in transactions. Those employees can then use their expertise to better inform automated technologies of how to enhance risk detection—making their company more effective at safeguarding against potential threats.

Employees shouldn’t be involved in all decision-making activities. To pinpoint which control systems would benefit from your team’s involvement, you must identify strategic uncertainties.

“Strategic uncertainties dictate which control systems you and your organization focus attention on, the types of information from those systems that will prove most relevant, and the nature of the debate and dialogue in which you want your entire organization to engage,” Simons says in Strategy Execution .

With a refined list of uncertainties requiring internal support, you can shape strategy as patterns of action and empower employees to assist in monitoring industry changes.

How Levers of Control Impact Strategy Execution

All four levers of control are vital to strategy execution.

Successful businesses search for ways to strike a balance between innovation and control. Consider Apple and Netflix. While both are highly profitable because of their innovative products and services, they suffer from constant pressure to do the next big thing .

When companies feel that pressure, so do their employees, which can lead to poor decision-making, unethical behavior, and illegal practices.

Implementing too many internal controls isn’t the answer. While many companies fear bad behavior’s legal ramifications, they still want to remain competitive in their industries.

“I think a lot of firms are trying to achieve this balance,” HBS Professor Eugene Soltes says in Strategy Execution . “Young, nimble startup firms tend to maybe not have enough controls. And some very large organizations potentially have too many.”

Employees are foundational to that balance, which is why using control systems interactively is essential in strategy implementation.

“If you devote your time and attention to asking questions about certain projects or systems, about specific customer data and initiatives, and if you pull your employees into frequent conversations about them, you can bet your company’s strategic uncertainties will be keeping them awake at night, too,” Simons says in Strategy Execution .

In doing so, you can create a top-down culture of strategy execution wherein employees monitor changes in the competitive environment and focus on mitigating ways your strategy can fail .

“You need to push people out of their comfort zone,” Simons says, “forcing them to take risks and move the needle for the business. To make that happen, you must drive the top-down questioning.”

Take Control of Your Strategy Execution

Controlling your strategy doesn’t have to require external help. With the right frameworks, tools, and employee support, you can successfully guide its execution.

“I want to emphasize that you don't need to hire a fancy consulting firm to implement your ideas,” Simons says in Strategy Execution . “All you need is the knowledge and discipline to apply these common-sense ideas to your own organization.”

By enrolling in an online course, like Strategy Execution , you can help ensure your organization strikes a balance between innovation and control.

Want to learn more about levers of control? Explore Strategy Execution —one of our online strategy courses —and download our free strategy e-book to take the first step toward successfully executing your business strategy.

About the Author

How Do Control Mechanisms Affect the Four Functions of Management?

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How to Turn a WPS File Into a PDF

What are the three basic functions of business communication, role of communication in employee motivation.

• How to Boot a MacBook Air From a USB External Drive
• Importance of Following a Business Plan

The four functions of management are planning, leading, organizing and controlling. Companies use various control mechanisms -- business plan, needs assessment, budgets, audits, pricing, communications, training, performance reviews, and employee incentives -- to optimize performance in each of these areas.

The creation and maintenance of a business plan forces senior management to think about the major issues that affect a company's ability to succeed. These factors include a market analysis, organization matrix, establishment of a marketing and sales strategy, and a description of the products or services offered. Management periodically reviews and updates the plan as conditions change. A needs assessment report is an additional tool to help management define goals and requirements prior to the initiation of major projects.

A good leader communicates with his staff and encourages the staff members to maximize their productivity. Regular staff meetings are a useful means of communication; even a complaint box works in certain circumstances. Granting employee incentives -- bonuses, pay raises, comp time -- are effective ways to improve morale and company loyalty. Providing employees with additional training classes and the chance for advancement is a critical factor in the establishment of a stable work force.

Maximizing the profitability of a company is the key to an optimal organizational structure. The business plan describes the initial organization of a company, but this will likely change as the company changes and profits from the knowledge gained by failures and successes. The distribution of financial reports to senior management keeps the staff informed and encourages discussions on ways to increase the profitability of the company and individual departments.

Controlling

There are many control mechanisms in a company. A strong human resources department controls managers and prevents employee abuse. Employee performance reviews and incentives assist in the control of employees. Compliance departments control legal risk and monitor operations to ensure the company follows state and federal rules. Financial budgets and accounting audits control financial risk. Product pricing controls marketing efforts. All the different departments must work together to create a strong and profitable company.

• FAO.org: Chapter 13 -- Improving the Organization and Management of Extension

Pat O'Connor is the broker/owner of The Veritas Real Estate Group in Coral Springs, Fla. She holds a M.A. in psychology from the University of South Carolina. O'Connor has been writing real estate and loan origination textbooks, as well as developing online courses, since 2005. Her latest publication is the kindle ebook, "The SAFE Mortgage Loan Originator National Exam Study Guide."

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Control plan (Six Sigma) — definition and example

Project managers and business executives are always looking to optimize organizational processes. If you’re in a leadership role, you probably already know about Six Sigma, a continuous improvement framework that’s part of the Lean methodology. You may even be familiar with the five stages of Six Sigma — Define, Measure, Analyze, Improve, and Control (DMAIC).

A control plan is a crucial element of that last stage and is designed to standardize processes established in the four previous stages. Understanding control plans can help you make lasting process changes that improve your organization.

In this article, you’ll learn what a control plan is, including an example, so you can continue your educational journey into Six Sigma. This post will cover:

• What a control plan is

Control plan example

• How to get started with Six Sigma

What is a control plan?

A control plan is a document that provides guidance on how to monitor a process. Control plans are part of the fifth and final phase of the Six Sigma process improvement framework. They help businesses standardize newly adopted processes to increase their uptake and longevity.

Control plans should contain:

• An outline of what the process should look like
• Key variables or metrics to measure the process
• Information on how frequently to measure these variables
• What to do if the results stray from the desired outcomes

The goal of the control plan is to provide guidance so that a process can be successfully replicated over time by different individuals. Originally created for manufacturing, Six Sigma and the Lean methodology are now used in a range of industries including healthcare, education, and the service sector.

There are a variety of control plan formats, but some of the basic information would typically include the industry that the plan is for, the company’s goal, and how the sections of the plan help the company track its progress.

For example, a control plan for a manufacturing product might contain:

• The name of the product
• Its key characteristics, such as size, color, and material
• How to measure those characteristics, including the tool needed
• The acceptable range — also called the tolerance range — for each characteristic
• The testing frequency, possibly as a time period or amount
• How to visualize and evaluate the measurements, perhaps in a chart
• A specific person who will oversee quality control
• Contingencies for particular or unexpected situations

While this example is for a manufacturing product, the same structure and approach could be applied to any business process. Remember, maintaining hard-won gains is as important as making them in the first place. Project teams need to put guidelines in place to ensure processes stay efficient, for instance by creating monitoring and response plans. Process owners should then make sure process changes are maintained and kept current with best practices.

Get started with Six Sigma

Control is one of the critical steps in the Six Sigma framework because it ensures that the processes you’ve refined will be maintained into the future. Without a control plan, processes could revert back to the way they were before, resulting in a loss of essential progress.

If Six Sigma and Lean management sound like they might be right for your business, and you’re interested in learning more, check out one of the additional resources below:

• Learn about Six Sigma to Improve Workplace Processes
• Lean Project Management
• A Guide to Lean Management

Adobe can help

Adobe Workfront is enterprise work management software that can help you adopt or expand Lean Six Sigma, optimizing your workflow and bringing organization to your teams.

Take a product tour or watch the overview video to learn more about Workfront.

https://business.adobe.com/blog/basics/what-is-six-sigma

https://business.adobe.com/blog/basics/lean

https://business.adobe.com/blog/basics/lean-management

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The Control Function of Management

After strategies are set and plans are made, management’s primary task is to ensure that these plans are carried out.

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After strategies are set and plans are made, management’s primary task is to take steps to ensure that these plans are carried out, or, if conditions warrant, that the plans are modified. This is the critical control function of management. And since management involves directing the activities of others, a major part of the control function is making sure other people do what should be done.

The management literature is filled with advice on how to achieve better control. This advice usually includes a description of some type of measurement and feedback process:

• The basic control process, wherever it is found and whatever it is found and whatever it controls, involves three steps: (1) establishing standards. (2) measuring performance against these standards. and (3) correcting deviations from standards and plans. 1
• A good management control system stimulates action by spotting the significant variations from the original plan and highlighting them for the people who can set things right . 2
• Controls need to focus on results. 3

This focus on measurement and feedback, however, can be seriously misleading. In many circumstances, a control system built around measurement and feedback is not feasible. And even when feasibility is not a limitation, use of a feedback-oriented control system is often an inferior solution. Yet, good controls can be established and maintained using other techniques.

What is needed is a broader perspective on control as a management function: this article addresses such a perspective. The first part summarizes the general control problem by discussing the underlying reasons for implementing controls and by describing what can realistically be achieved. In the second part, the various types of controls available are identified. The last part discusses why the appropriate choice of controls is and should be different in different settings.

Why Are Controls Needed?

If all personnel always did what was best for the organization, control — and even management — would not be needed. But, obviously individuals are sometimes unable or unwilling to act in the organization’s best interest, and a set of controls must be implemented to guard against undesirable behavior and to encourage desirable actions.

One important class of problems against which control systems guard may be called personal limitations. People do not always understand what is expected of them nor how they can best perform their jobs, as they may lack some requisite ability, training, or information. In addition, human beings have a number of innate perceptual and cognitive biases, such as an inability to process new information optimally or to make consistent decisions, and these biases can reduce organizational effectiveness. 4 Some of these personal limitations are correctable or avoidable, but for others, controls are required to guard against their deleterious effects.

Even if employees are properly equipped to perform a job well, some choose not to do so, because individual goals and organizational goals may not coincide perfectly. In other words, there is a lack of goal congruence. Steps must often be taken either to increase goal congruence or to prevent employees from acting in their own interest where goal incongruence exists.

If nothing is done to protect the organization against the possible occurrence of undesirable behavior or the omission of desirable behavior caused by these personal limitations and motivational problems, severe repercussions may result. At a minimum, inadequate control can result in lower performance or higher risk of poor performance. At the extreme, if performance is not controlled on one or more critical performance dimensions, the outcome could be organizational failure.

What Is Good Control?

Perfect control, meaning complete assurance that actual accomplishment will proceed according to plan, is never possible because of the likely occurrence of unforeseen events. However, good control should mean that an informed person could be reasonably confident that no major unpleasant surprises will occur. A high probability of forthcoming poor performance, despite a reasonable operating plan, sometimes is given the label “out of control.”

Some important characteristics of this desirable state of good control should be highlighted. First, control is future-oriented: the goal is to have no unpleasant surprises in the future. The past is not relevant except as a guide to the future, Second, control is multidimensional, and good control cannot be established over an activity with multiple objectives unless performance on all significant dimensions has been considered. Thus, for example, control of a production department cannot be considered good unless all the major performance dimensions, including quality, efficiency, and asset management, are well controlled. Third, the assessment of whether good performance assurance has been achieved is difficult and subjective. An informed expert might judge that the control system in place is adequate because no major bad surprises are likely, but this judgment is subject to error because adequacy must be measured against a future that can be very difficult to assess. Fourth, better control is not always economically desirable. Like any other economic good, the control tools are costly and should be implemented only if the expected benefits exceed the costs.

How Can Good Control Be Achieved?

Good control can be achieved by avoiding some behavioral problems and/or by implementing one or more types of control to protect against the remaining problems. The following sections discuss the major control options.

Control-Problem Avoidance

In most situations, managers can avoid some control problems by allowing no opportunities for improper behavior. One possibility is automation . Computers and other means of automation reduce the organization’s exposure to control problems because they can be set to perform appropriately (that is, as the organization desires), and they will perform more consistently than do human beings. Consequently, control is improved.

Another avoidance possibility is centralization, such as that which takes place with very critical decisions at most organization levels. If a manager makes all the decisions in certain areas, those areas cease to be control problems in a managerial sense because no other persons are involved.

A third avoidance possibility is risk-sharing with an outside body, such as an insurance company. Many companies bond employees in sensitive positions, and in so doing, they reduce the probability that the employees’ behavior will cause significant harm to the firm.

Finally, some control problems can and should be avoided by elimination of a business or an operation entirely. Managers without the means to control certain activities, perhaps because they do not understand the processes well, can eliminate the associated control problems by turning over their potential profits and the associated risk to a third party, for example, by subcontracting or divesting.

If management cannot, or chooses not to avoid the control problems caused by relying on other individuals, they must address the problems by implementing one or more control tactics. The large number of tactics that are available to help achieve good control can be classified usefully into three main categories, according to the object of control; that is, whether control is exercised over specific actions, results , or personnel . Table 1 shows many common controls classified according to their control object; these controls are described in the following sections.

Control of Specific Actions

One type of control, specific-action control, attempts to ensure that individuals perform (or do not perform) certain actions that are known to be desirable (or undesirable). Management can limit the incidence of some types of obviously undesirable activity by using behavioral constraints that render the occurrence impossible, or at least unlikely. These constraints include physical devices, such as locks and key-personnel identification systems, and administrative constraints, such as segregation of duties, which make it very difficult for one person to carry out an improper act.

A second type of specific action control is action accountability — a type of feedback control system by which employees are held accountable for their actions. The implementation of action-accountability control systems requires: (1) defining the limits of acceptable behavior, as is done in procedures manuals; (2) tracking the behaviors that employees are actually engaged in; and (3) rewarding or punishing deviations from the defined limits. Although action-accountability systems involve the tracking and reporting of actual behaviors, their objective is to motivate employees to behave appropriately in the future. These systems are effective only if employees understand what is required of them, and they feel that their individual actions will be noticed and rewarded or punished in some significant way.

A third type of specific-action control is preaction review . This involves observing the work of others before the activity is complete, for example, through direct supervision, formal planning reviews, and approvals on proposals for expenditures. Reviews can provide effective control in several ways by: correcting potentially harmful behavior before the full damaging effects are felt; or influencing behavior just by the threat of an impending review, such as causing extra care in the preparation of an expenditure proposal. One advantage of reviews is that they can be used even when it is not possible to define exactly what is expected prior to the review.

Control of Results

Control can also be accomplished by focusing on results: this type of control comes in only one basic form, results accountability, which involves holding employees responsible for certain results. Use of results-accountability control systems requires: (1) defining the dimensions along which results are desired, such as efficiency, quality, and service; (2) measuring performance on these dimensions; and (3) providing rewards (punishments) to encourage (discourage) behavior that will lead (not lead) to those results. As with action-accountability systems, results-accountability systems are future-oriented; they attempt to motivate people to behave appropriately. But they are effective only if employees feel that their individual efforts will be noticed and rewarded in some significant way.

Control of Personnel

A third type of control can be called personnel control because it emphasizes a reliance on the personnel involved to do what is best for the organization, and it provides assistance for them as necessary. Personnel controls can be very effective by themselves in some situations, such as in a small family business or in a professional partnership, because the underlying causes of the needs for controls (personal limitations and lack of goal congruence) are minimal. However, even when control problems are present, they can be reduced to some extent by: (1) upgrading the capabilities of personnel in key positions, such as tightening hiring policies, implementing training programs, or improving job assignments; (2) improving communications to help individuals know and understand their roles better and how they can best coordinate their efforts with those of other groups in the organization; and (3) encouraging peer (or subordinate) control by establishing cohesive work groups with shared goals.

Feasibility Constraints on the Choice of Controls

The design of a control system often depends partly on the feasibility of the various types of controls: not all of these tools can be used in every situation. Personnel controls are the most adaptable to a broad range of situations. To some extent, all organizations rely on their employees to guide and motivate themselves, and this self-control can be increased with some care in hiring, screening, and training. Even in a prison, where administrators are faced with a sharp lack of goal congruence and where few control options are available other than physical constraints, inmates are screened so that dangerous ones are not assigned to high-risk positions, such as in a machine shop.

Most situations, however, require reinforcing personnel controls by placing controls over specific actions, results, or a combination of the two. This is where feasibility becomes a limiting factor.

For control over specific actions, management must have some knowledge of which actions are desirable. While it may be easy to define precisely the required behavior on a production line, the definition of preferred behavior for a research engineer cannot be as precise. Being able to keep track of specific actions is also necessary to enforce actions accountability; however, this is usually not a limiting factor, except in rare situations such as a remote outpost, because actions can be observed directly or assessed indirectly through action reports, such as hours worked, sales calls made, or procedural violations.

For control over results, the most serious constraint is the ability to measure the desired results effectively. (Management usually knows what results are desirable.) Ideally, measurements should: (1) assess the correct performance areas — the ones for which results are truly desired; (2) be precise — not determined by only crude estimations; (3) be timely and (4) be objective — not subject to manipulation. While perfect measures are rarely available, reasonable surrogates can often be found or developed. For example, “complaints received” might be a good (negative) indicator of the performance of hotel staff personnel along the customer-service dimension. Significant difficulty in achieving any of these four measurement qualities, however, can lead to failure of a results-oriented control system.

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Figure 1 shows how the two factors most limiting control feasibility — knowledge of desirable actions and the ability to measure results on the important performance dimensions — can influence the choice of controls used. 5 The most difficult control situation, shown in box 4 of Figure 1, is one in which the desirable actions are not known and the important result areas cannot be measured well. Only personnel controls (or problem avoidance) are available options. In a research laboratory, for example, success might be difficult to assess for years, yet prescription of specific actions could be counterproductive. Fortunately, in this specific setting, control is not a serious problem because research scientists tend to be professional — well trained and responsible to the standards of their profession. They tend to control themselves, and consequently, control of research laboratories tend to be dominated by controls over personnel.

In box 3 of Figure 1, where knowledge of desirable specific actions is poor but good results measurements are available, control is best accomplished by controlling results. Movie production is a good example. It is probably impossible to dictate what a movie director should do or even to observe his or her behavior and predict whether the finished product will be good. It is, however, a relatively easy task to measure the economic performance of the movie and the artistic merit, if that is a concern. In this situation, the best control system would seem to be a results-accountability system that defines to the director the results expected, holds him or her responsible for achieving them, and provides some reinforcement in the form of compensation and/or recognition.

For similar reasons, results controls tend to be dominant at most upper-management levels. It is usually not possible to prescribe and keep track of the specific actions each manager should be performing, but it is relatively easy to define the results desired, in terms similar to those desired by shareholders.

Specific-action controls should dominate where there is knowledge about which actions are desirable but where results measurement is impossible or difficult, as indicated in box 2 of Figure 1. Consider, for example, control over a real-estate development business where large capital investment decisions are made frequently. Results of these decisions are difficult to measure in a timely, accurate fashion because of their long-term nature; they tend to be inseparable from the results of other actions and are confounded by changes in the environment. However, the techniques of investment analysis are well developed (e.g., net present value analysis with tests of the sensitivity of assumptions), and control may be accomplished by formally reviewing the techniques used and the assumptions made.

How to Choose among the Feasible Options

Often managers cannot rely completely on the people involved in a given area and cannot employ one or more of the avoidance strategies mentioned earlier. When this is the case, the best situation is one in which either specific-action or results controls, or both, can be chosen, as is shown in box 1 of Figure 1. In general, the choice of one or more tools should involve consideration of: (1) the total need for control; (2) the amount of control that can be designed into each of the control devices; and (3) the costs of each, both in terms of money spent and unintended behavioral effects, if any. These decision parameters will be described more fully.

Need for Controls

The need for controls over any particular behavior or operation within an organization depends very simply on the impact of that area on overall organizational performance. Thus, more control should be exercised over a strategically important behavior rather than over a minor one, regardless of how easy it is to control each. For example, controlling the new-product-development activity is far more important in many companies than making sure that the production of existing products is accomplished as efficiently as possible. Consequently, more resources should be devoted to controlling the new-product activity, even though it is a far more difficult area to control.

Amount of Control Provided by Feasible Options

The amount of control provided by each of the control tools depends both on their design and on how well they fit the situation in which they are used. Personnel controls should usually provide some degree of control. But although they may be totally effective in some situations, such as in a small business, they provide little or no warning of failure. They can break down very quickly if demands, opportunities, or needs change.

Specific-action and results controls can provide widely varying amounts of control. In general, reasonably certain (or tight) control requires: (1) detailed specific-action of what is expected of each individual ; (2) prevention of undesired actions, or effective and frequent monitoring of actions or results; and (3) administration of penalties or rewards that are significant to the individuals involved.

For example, with specific-action-accountability systems, the amount of control can be affected by changing one or more of the elements of the system. First, tighter control can be effected by making the definitions of acceptability more specific. This might take the form of work rules (e.g., no smoking) or specific policies (e.g., a purchasing policy to secure three competing bids before releasing the purchase order), as opposed to general guidelines or vague codes of conduct (e.g., act professionally). Second, control can be made tighter by improving the effectiveness of the action-tracking system. Personnel who are certain that their actions will be noticed relatively quickly will be affected more strongly by an action-accountability system than will those who feel that the chance of their being observed is small. Thus, constant direct supervision should provide tighter control than would an audit sampling of a small number of action reports some time later. Third, control can be made tighter by making the rewards or punishments more significant to the individuals involved. In general, this impact should vary directly with the size of the reward (or the severity of the punishment), although different individuals may react differently to identical rewards or punishments.

Results-accountability systems can be varied along similar lines. Expected performance can be defined broadly, for instance, with a goal for annual net income. Alternatively, expected performance can be defined in more detailed form by prescribing goals for specific result areas (for example, sales growth, efficiency, quality) and by using line items with short time horizons (e.g., month or quarter). Control is tighter when the performance dimensions for which results are desired are defined explicitly and, of course, correctly: this type of control is particularly effective if well-established results standards are available, perhaps in the form of output from an engineering study, industry survey, or historical analysis. Results-accountability control can also be tightened by improving the measurement of results. This can be accomplished by making the measures more precise. more timely, and/or less subject to manipulation.

In addition, reviews can be used to provide either tight or loose assurance. Tight assurance is more likely if the reviews are detailed, comprehensive, and frequent.

Of course, managers do not have to rely exclusively on a single type of control in a control system. Use of more than one type of control — in effect. overlapping controls — will often provide reinforcement. For example, most organizations rely on selecting good people. establishing some set procedures. implementing some accountability for results, and reviewing some key decisions before they are made.

Costs: Outlay and Behavioral

The cost of a control depends on two factors: the incremental dollar cost of the tool and the cost of any unintended behavioral effects. The actual dollar cost of a control might be considerably less than it first appears because some devices that provide control may already be in place for other reasons. For example. a budgeting process for a small firm does not have to justify its’ cost on the basis of control reasons alone. Creditors probably already require pro forma financial statements. so the incremental cost might involve only additional detail (e.g.. down to the operations level) and involvement of a greater number of participants.

The costs of any unintended negative effects must also be considered. and these can be very significant. It is beyond the scope of this article to provide an exhaustive enumeration of the many negative side effects possible. Indeed, they come in many different forms, but it is nevertheless useful to mention a few examples.

A common problem with specific-action controls is that they cause operating delays. These can be relatively minor. such as delays caused by limiting access to a stockroom. but they can also be major. For example, after the executives of Harley-Davidson Motor Company bought the firm from AMF, Inc., they found that they were able to implement a rebate program in ten days. rather than the six to eight weeks it would have taken with all the reviews required in the multilayered AMF organization. 6 Obviously, where timely action is important, delays caused by control processes can be very harmful.

Another problem with specific-action controls is that they can cause rigid. bureaucratic behavior. Individuals who become accustomed to following a set routine are not as apt to sense a changing environment, nor are they likely to search for better ways of doing the tasks at hand in a stable environment.

Results controls can create severe, unintended negative effects when all the measurement criteria are not met satisfactorily. Perhaps the most serious common problem is a failure to define the results areas correctly. This causes “goal displacement,” a situation where individuals are encouraged to generate the wrong results — in response to the goals defined in the control system — rather than those results truly needed by the organization. For example, a department store introduced an incentive compensation plan to pay employees on the basis of sales volume. The immediate impact was indeed an increase in sales volume, but the increase was accomplished in ways that were inconsistent with long-term organizational goals. The employees competed among themselves for customers and neglected important but unmeasured and unrewarded activities such as stocking and merchandising. 7 Another common example of goal displacement is caused by the practice of rewarding managers on the oft criticized return-on-investment criterion. 8

Data distortion is another dangerous potential side effect of results controls. If the measurement methods are not objective, then the employees whose performances are being measured might falsify the data or change the measurement methods, and, in so doing, undermine the whole organization’s information system.

Many of the ramifications of these unintended effects of control systems are not well understood, and their costs are very difficult to quantify. However, consideration of these effects is an important control-system design factor: they cannot be ignored.

Where Does Feedback Fit In?

Because feedback does not appear prominently in the preceding discussion, it is useful for clarification purposes to consider where feedback fits in, Control is necessarily future-oriented, as past performance cannot be changed, but analysis of results and feedback of variances can often provide a particularly strong addition to a control system. A prerequisite, of course, is the ability to measure results, so feedback can only be useful in the situations presented in boxes 1 and 3 of Figure 1.

There are three reasons why feedback of past results is an important part of many control systems. First, feedback is necessary as reinforcement for a results-accountability system. Even if the feedback is not used to make input adjustments, it signals that results are being monitored. This can heighten employee awareness of what is expected of them and should help stimulate better performance.

Second, in repetitive situations, measurement of results can provide indications of failure in time to make useful interventions. This is shown in the simple feedback control model presented in Figure 2. When the results achieved are not satisfactory, the inputs, which include the specific actions and types of persons involved, can be changed to provide different results. Obviously, these input adjustments are more likely to improve results when there is a good understanding of how inputs relate to results; otherwise, the interventions are essentially experiments.

Third, analysis of how the results vary with different combinations of inputs might improve understanding of how the inputs relate to results. This process is depicted in loop A of Figure 3, a slightly more complicated feedback control model. As this input/results understanding improves, it provides the opportunity to shift the control system from a results-oriented to a specific-action-oriented focus. If managers discover that certain specific actions produce consistently superior results, then it might be beneficial to inform employees of the specific actions that are expected of them, for example, by publishing these desired actions in a procedures manual. The greater the knowledge about how actions bring about results, the greater the possibilities of using a tight, specific-action-oriented control system.

Note that these latter two reasons for analyzing feedback — for making interventions and for learning — are only useful in situations that at least partially repeat themselves. If a situation is truly a one-time occurrence, such as a major divestiture or a unique capital investment, management has little use for feedback information. In these cases, by the time the results are available, it is too late to intervene, and a greater understanding of how results are related to inputs is not immediately useful.

There are other circumstances where feedback need not, and perhaps should not, be a part of a good control system. In many cases, although feedback control systems are not really feasible, they are used anyway. This occurs because of the consistent tendency “to concentrate on matters that are concrete and quantifiable, rather than intangible concepts,” which may be equally or more important. 9 Invariably, this will lead to dysfunctional effects, as will all other failures to satisfy the measurement criteria or to define results appropriately.

Cost considerations also commonly lead to decisions not to include feedback in a control system. The design, implementation, and maintenance of results-tracking information systems can often be very expensive. Thus, it is not feasible to have feedback as part of every control system, nor is it necessarily desirable even when feasibility constraints are not present.

The Design Process

As discussed at the beginning of this article, management control is a problem of human behavior. The challenge is to have each individual acting properly as often as possible. Thus, it seems logical to start the control-system design process by considering the personnel component of the organization by itself. In some situations, well-trained, highly motivated personnel can be expected, with a high degree of certainty, to perform their jobs satisfactorily without any additional control steps being taken. A confident reliance on personnel controls is a very desirable situation because additional controls cost money and may have undesirable side effects.

If, however, management determines that personnel controls should be supplemented, the first step should be to examine the feasibility of the various control options. To do this, management must assess two factors: how much is known about which specific actions are desirable, and how well measurement can be accomplished in the important performance areas. This feasibility test might immediately determine whether the controls that can be added should be oriented toward specific actions or results. Control can be made tighter by strengthening the controls in place, along the lines discussed earlier, or by implementing overlapping controls, such as controls over results and specific actions.

In most cases, management has some, but less than complete, knowledge of which specific actions are desirable and some, but not perfect, ability to measure the important result areas. This situation usually calls for implementation of both specific-action and results controls, with feedback loops to improve understanding of the relevant processes.

An Example: Control of a Sales Force

The above observations about control can be illustrated by describing how control of a sales force might work. Generally, personnel controls are some part of every sales force control system. Consider, for example, this statement by a sales and marketing consultant:

I think I can tell a good salesman just by being around him. If the guy is experienced, confident, well-prepared, speaks well, maintains control of situations, and seems to have his time planned. I assume I have a good salesman.

If a sales manager feels confident about all of the salespeople employed, he or she might wish to allow personnel controls to dominate the control system. This is likely, for example, in a small business with a sales force comprised solely of relatives and close friends. But most sales managers are not willing to rely exclusively on hiring and training good people.

What controls should be added? The answer, of course, depends on the type of sales involved. In a single-product, high-volume operation, the volume of sales generated is probably a good simple factor on which to base a results-oriented control system. It provides a reasonable, although not perfect, surrogate for long-range profitability, and the measurements are very inexpensive because the data are already gathered as a necessary input to the financial reporting system. The results-accountability system can then be completed by providing reinforcement in the form of sales commissions. This simple solution will also work where multiple products with varying profitabilities are involved, if the commission schedules are varied so that rewards are assigned in proportion to the profitability of the sales generated.

Consider, however, a situation where salespeople sell large-scale construction equipment and where sales come in very large but infrequent chunks. A commission-type, results-accountability system is still feasible. Measurement of results is not difficult and can be accurate to the penny. The amount of control provided, however, is not high because the measurements fail on the timeliness dimension. Because sales are infrequent, zero sales is not an unusual situation in any given month. Therefore, a salesperson could be drawing advances on hypothetical future commissions for many months without performing any of the desired promotional activities.

Two solutions are possible. One is to augment the commission system with some specific-action controls, such as activity reports. Some activities are probably known to be desirable, such as the number of hours worked and the quantity of calls made. If the product mix and market environment are fairly stable, then requiring and monitoring activity reports is not as costly as it might seem, because it could provide an important side benefit — an activity-oriented data base. The patterns in this data base can be analyzed and compared with results over time to add to knowledge about which activities yield the best results.

An alternate solution is to improve the results-accountability system. It might be possible to define some factors that are strong predictors of sales success, such as customer satisfaction with the salesperson or customer familiarity with the company’s products. Measurement of these intangibles, of course, would have to be done by surveying customers. Even though these measures do not directly assess the desired result area (long-range profitability), and measurement is imprecise, they could provide a better focus for a results-oriented control system than a sales-generated measure because of the improvement in timeliness. Over time, it is likely that the choice of measures and measurement methodologies could be improved. The advantage of this results-oriented solution over an action-oriented system is that it is more flexible and less constraining to the salespeople; they can continue to use styles best suited to their personalities.

Conclusions

This article has taken a new look at the most basic organizational control problem — how to get employees to live up to the plans that have been established. In the course of discussion, the following major points were made:

1. Management control is a behavioral problem. The various control tools are only effective to the extent that they influence behavior in desirable directions.

2. Good control can often be achieved in several different ways. In some circumstances, the control problems can be avoided, for example, by centralizing or automating certain decisions. If problems cannot be avoided, one or more types of controls are usually desirable or necessary. The options can be classified according to the object of control, labeled in this article as specific actions, results, and personnel.

3. Not all types of controls are feasible in all situations. Figure 4 presents the questions to ask when assessing the feasibility of control types. If none of the controls is feasible, the probability of undesirable results occurring is high.

4. Control can be strengthened either by employing a tighter version of a single type of control or by implementing more than one type of control. However, tighter control is not always desirable because of additional system costs and the potential of undesirable side effects, such as destruction of morale, reduction of initiative, or displacement of employee focus toward measurable result areas only. Some of the qualities, benefits, and costs of each of the major control types are listed in Table 2.

5. The basic management control problems and alternatives are the same in all functional areas and at all levels in the organization, from the lowest supervisory levels to the very top levels of management. The best solutions, however, vary between situations.

An understanding of control can be an important input into many management decisions. For example, control problems should be considered in making some types of investments. An investment in an operation in which control is very difficult — such as a highly specialized and technical area where control must depend heavily on personnel controls — is, by definition, risky. Thus, investments in such areas should promise high returns to compensate for this risk.

Similarly, control considerations should affect the design of the other parts of the management system. Consider, for example, the organizational structure. If independent areas of responsibility cannot be carved out as part of the organizational structure, results-accountability control systems will not work well because employees will not feel that their individual actions have a notice able effect on results. (It should be noted that many of the prescriptions calling for “responsibility accounting” only provide the illusion of results independence because of the many allocations of the costs and/or benefits of shared resources.) If independent areas of authority are not established, specific-action-accountability control systems cannot work. This principle underlies the internal control principle of “separation of duties.” In addition, if tighter reviews of specific actions are necessary for adequate performance assurance, it is likely that the supervisory spans of control will have to be reduced, Similar observations can be made about other management functions, but they are beyond the scope of this article.

This article has attempted to provide a new look at this basic, but often overlooked, management problem. The control area is decidedly complex, and there is much that is not known about how controls work and how employees respond to different types of controls. For example, it would be worthwhile to know more about how controls can be designed to maximize the amount of control provided while minimizing the cost in the form of employee feelings of lost autonomy. However, an increased awareness of the control problem, of what can be accomplished, and of the options available should provide a new perspective that will suggest ways to improve control systems and overall organizational performance.

About the Author

Kenneth A. Merchant is Assistant Professor of Business Administration at Harvard University. Dr. Merchant holds the B.A. degree from Union College, the M.B.A. degree from Columbia University, and the Ph.D. degree from the University of California, Berkeley. His main interests lie in the areas of accounting, information systems, and planning and control. Dr. Merchant has published articles for such journals as The Accounting Review and Accounting, Organizations, and Society.

1. See H. Koontz, C. O'Donnell, and H. Weihrich. Management, 7th ed. (New York: McGraw-Hill, 1980). p. 722.

2. See W. D. Brinckloe and M. T. Coughlin, Managing Organizations (Encino, CA: Glencoe Press. 1977). p. 298.

3. See P. F. Drucker. Management: Tasks, Responsibilities, Practices (New York: Harper & Row. 1974). p. 497.

4. A recent summary of many of the findings in this area (illustrating such cognitive limitations as conservative revision of prior subjective probabilities when new information is provided. and the use of simplifying decision-making heuristics when faced with complex problems) is provided by W. F. Wright, “Cognitive Information Processing Biases: Implications for Producers and Users of Financial Information,” Decision Sciences (April 1980): 284–298.

5. A similar scheme is presented in W. G. Ouchi, “A Conceptual Framework for the Design of Organizational Control Mechanisms,” Management Science (September 1979): 833–848.

6. See H. Klein, “At Harley-Davidson, Life without AMF Is Upbeat but Full of Financial Problems,” Wall Street Journal . 13 April 1982, p. 37.

7. See N. Babchukand W. J. Goode. “Work Incentives in a Self-Determined Group,” American Sociological Review (1951): 679–687.

8. For a summary of criticisms of return-an-investment (ROI) measures of performance, see J. Dearden, “The Case against ROI Control,” Harvard Business Review , May–June 1969, pp. 124–135.

9. See D. Mitchell. Control without Bureaucracy (London: McGraw-Hill Book Company Limited, 1979), p. 6.

Acknowledgments

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15.4: Types and Levels of Control

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Learning Objectives

• Know the difference between strategic and operational controls.
• Understand the different types of controls.
• Be able to differentiate between financial and nonfinancial controls.

Figure \(\PageIndex{1}\): Controls allow you to align the pieces with the big picture. Jason7825 – A 3D Jigsaw Puzzle – public domain.

Recognizing that organizational controls can be categorized in many ways, it is helpful at this point to distinguish between two sets of controls: (1) strategic controls and (2) management controls, sometimes called operating controls (Harrison & St. John, 2002).

Two Levels of Control: Strategic and Operational

Imagine that you are the captain of a ship. The strategic controls make sure that your ship is going in the right direction; management and operating controls make sure that the ship is in good condition before, during, and after the voyage. With that analogy in mind, strategic control is concerned with tracking the strategy as it is being implemented, detecting any problem areas or potential problem areas suggesting that the strategy is incorrect, and making any necessary adjustments (Venkataraman & Saravathy, 2001). Strategic controls allow you to step back and look at the big picture and make sure all the pieces of the picture are correctly aligned.

Ordinarily, a significant time span occurs between initial implementation of a strategy and achievement of its intended results. For instance, if you wanted to captain your ship from San Diego to Seattle you might need a crew, supplies, fuel, and so on. You might also need to wait until the weather lets you make the trip safely! Similarly, in larger organizations, during the time you are putting the strategy into place, numerous projects are undertaken, investments are made, and actions are undertaken to implement the new strategy. Meanwhile, the environmental situation and the firm’s internal situation are developing and evolving. The economy could be booming or perhaps falling into recession. Strategic controls are necessary to steer the firm through these events. They must provide some means of correcting direction on the basis of intermediate performance and new information.

Operational control , in contrast to strategic control, is concerned with executing the strategy. Where operational controls are imposed, they function within the framework established by the strategy. Normally these goals, objectives, and standards are established for major subsystems within the organization, such as business units, projects, products, functions, and responsibility centers (Mattews, 1999). Typical operational control measures include return on investment, net profit, cost, and product quality. These control measures are essentially summations of finer-grained control measures. Corrective action based on operating controls may have implications for strategic controls when they involve changes in the strategy.

Types of Control

It is also valuable to understand that, within the strategic and operational levels of control, there are several types of control. The first two types can be mapped across two dimensions: level of proactivity and outcome versus behavioral. The following table summarizes these along with examples of what such controls might look like.

Proactivity

Proactivity can be defined as the monitoring of problems in a way that provides their timely prevention, rather than after the fact reaction. In management, this is known as feedforward control ; it addresses what can we do ahead of time to help our plan succeed. The essence of feedforward control is to see the problems coming in time to do something about them. For instance, feedforward controls include preventive maintenance on machinery and equipment and due diligence on investments.

Table \(\PageIndex{1}\): Types and Examples of Control

Concurrent Controls

The process of monitoring and adjusting ongoing activities and processes is known as concurrent control . Such controls are not necessarily proactive, but they can prevent problems from becoming worse. For this reason, we often describe concurrent control as real-time control because it deals with the present. An example of concurrent control might be adjusting the water temperature of the water while taking a shower.

Feedback Controls

Finally, feedback controls involve gathering information about a completed activity, evaluating that information, and taking steps to improve the similar activities in the future. This is the least proactive of controls and is generally a basis for reactions. Feedback controls permit managers to use information on past performance to bring future performance in line with planned objectives.

Control as a Feedback Loop

In this latter sense, all these types of control function as a feedback mechanism to help leaders and managers make adjustments in the strategy, as perhaps is reflected by changes in the planning, organizing, and leading components. This feedback loop is characterized in the following figure.

Why might it be helpful for you to think of controls as part of a feedback loop in the P-O-L-C process? Well, if you are the entrepreneur who is writing the business plan for a completely new business, then you would likely start with the planning component and work your way to controlling—that is, spell out how you are going to tell whether the new venture is on track. However, more often, you will be stepping into an organization that is already operating, and this means that a plan is already in place. With the plan in place, it may be then up to you to figure out the organizing, leading, or control challenges facing the organization.

Outcome and Behavioral Controls

Controls also differ depending on what is monitored, outcomes or behaviors. Outcome controls are generally preferable when just one or two performance measures (say, return on investment or return on assets) are good gauges of a business’s health. Outcome controls are effective when there’s little external interference between managerial decision making on the one hand and business performance on the other. It also helps if little or no coordination with other business units exists.

Behavioral controls involve the direct evaluation of managerial and employee decision making, not of the results of managerial decisions. Behavioral controls tie rewards to a broader range of criteria, such as those identified in the Balanced Scorecard. Behavioral controls and commensurate rewards are typically more appropriate when there are many external and internal factors that can affect the relationship between a manager’s decisions and organizational performance. They’re also appropriate when managers must coordinate resources and capabilities across different business units.

Financial and Nonfinancial Controls

Finally, across the different types of controls in terms of level of proactivity and outcome versus behavioral, it is important to recognize that controls can take on one of two predominant forms: financial and nonfinancial controls. Financial control involves the management of a firm’s costs and expenses to control them in relation to budgeted amounts. Thus, management determines which aspects of its financial condition, such as assets, sales, or profitability, are most important, tries to forecast them through budgets, and then compares actual performance to budgeted performance. At a strategic level, total sales and indicators of profitability would be relevant strategic controls.

Without effective financial controls, the firm’s performance can deteriorate. PSINet, for example, grew rapidly into a global network providing Internet services to 100,000 business accounts in 27 countries. However, expensive debt instruments such as junk bonds were used to fuel the firm’s rapid expansion. According to a member of the firm’s board of directors, PSINet spent most of its borrowed money “without the financial controls that should have been in place (Woolley, 2001).” With a capital structure unable to support its rapidly growing and financially uncontrolled operations, PSINet and 24 of its U.S. subsidiaries eventually filed for bankruptcy (PSINet, 2001). While we often think of financial controls as a form of outcome control, they can also be used as a behavioral control. For instance, if managers must request approval for expenditures over a budgeted amount, then the financial control also provides a behavioral control mechanism as well.

Increasing numbers of organizations have been measuring customer loyalty, referrals, employee satisfaction, and other such performance areas that are not financial. In contrast to financial controls, nonfinancial controls track aspects of the organization that aren’t immediately financial in nature but are expected to lead to positive performance outcomes. The theory behind such nonfinancial controls is that they should provide managers with a glimpse of the organization’s progress well before financial outcomes can be measured (Ittner & Larcker, 2003). And this theory does have some practical support. For instance, GE has found that highly satisfied customers are the best predictor of future sales in many of its businesses, so it regularly tracks customer satisfaction.

Key Takeaway

Organizational controls can take many forms. Strategic controls help managers know whether a chosen strategy is working, while operating controls contribute to successful execution of the current strategy. Within these types of strategy, controls can vary in terms of proactivity, where feedback controls were the least proactive. Outcome controls are judged by the result of the organization’s activities, while behavioral controls involve monitoring how the organization’s members behave on a daily basis. Financial controls are executed by monitoring costs and expenditure in relation to the organization’s budget, and nonfinancial controls complement financial controls by monitoring intangibles like customer satisfaction and employee morale.

• What is the difference between strategic and operating controls? What level of management would be most concerned with operating controls?
• If feedforward controls are the most proactive, then why do organizations need or use feedback controls?
• What is the difference between behavioral and outcome controls?
• What is the difference between nonfinancial and financial controls? Is a financial control a behavioral or an outcome control?

Harrison, J. S., & St. John, C. H. (2002). Foundations in Strategic Management (2nd ed., 118–129). Cincinnati, OH: South-Western College.

Ittner, C., & Larcker, D. F. (2003, November). Coming up short on nonfinancial performance measurement. Harvard Business Review , 2–8.

Matthews, J. (1999). Strategic moves. Supply Management, 4 (4), 36–37.

PSINet, retrieved January 30, 2009, from PSINet announces NASDAQ delisting. (2001, June 1). www.psinet.com.

Venkataraman, S., & Sarasvathy, S. D. (2001). Strategy and entrepreneurship: Outlines of an untold story. In M. A. Hitt, R. E. Freeman, & J. S. Harrison (Eds.), Handbook of strategic management (650–668). Oxford: Blackwell.

Woolley, S. (2001, May). Digital hubris. Forbes , 66–70.

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What Are Internal Controls?

Understanding internal controls, importance of internal controls.

• Preventative vs. Detective
• Limitations
• Internal Control FAQs

The Bottom Line

• Business Essentials

Internal Controls: Definition, Types, and Importance

Internal controls are accounting and auditing processes used in a company's finance department that ensure the integrity of financial reporting and regulatory compliance.

Internal controls help companies to comply with laws and regulations, and prevent fraud. They also can help improve operational efficiency by ensuring that budgets are adhered to, policies are followed, capital shortages are identified, and accurate reports are generated for leadership.

Key Takeaways

• Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud.
• Internal controls aid companies in complying with laws and regulations, and preventing employees from stealing assets or committing fraud.
• They also can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.
• Internal audits play a critical role in a company’s internal controls and corporate governance.
• The Sarbanes-Oxley Act of 2002 made managers legally responsible for the accuracy of their companies' financial statements.

http://www.investopedia.com/terms/i/internalcontrols.asp

Internal controls have become a key business function for every U.S. company since the accounting scandals of the early 2000s. In the wake of such corporate misconduct, the Sarbanes-Oxley Act of 2002 was enacted to protect investors from fraudulent accounting activities and to improve the accuracy and reliability of corporate disclosures.

This had a profound effect on corporate governance. The legislation made managers responsible for financial reporting and creating an audit trail. Managers found guilty of not properly establishing and managing internal controls face serious criminal penalties.

The auditor’s opinion that accompanies financial statements is based on an audit of the procedures and records used to produce them. As part of an audit, external auditors will test a company’s accounting processes and internal controls and provide an opinion as to their effectiveness.

Internal audits evaluate a company’s internal controls, including its corporate governance and accounting processes. These internal controls can ensure compliance with laws and regulations as well as accurate and timely financial reporting and data collection. They help to maintain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit.

Internal audits play a critical role in a company’s operations and corporate governance, now that the Sarbanes-Oxley Act of 2002 has made managers legally responsible for the accuracy of its financial statements.

No two systems of internal controls are identical, but many core philosophies regarding financial integrity and accounting practices have become standard management practices. While they can be expensive, properly implemented internal controls can help streamline operations and increase operational efficiency, in addition to preventing fraud.

The U.S. Congress passed the Sarbanes-Oxley Act of 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.

Components of Internal Controls

A company's internal controls system should include the following components:

• Control environment : A control environment establishes for all employees the importance of integrity and a commitment to revealing and rooting out improprieties, including fraud. A board of directors and management create this environment and lead by example. Management must put into place the internal systems and personnel to facilitate the goals of internal controls.
• Risk Assessment:  A company must regularly assess and identify the potential for, or existence of, risk or loss. Based on the findings of such assessments, added focus and levels of control might be implemented to ensure the containment of risk or to watch for risk in related areas.
• Monitor:  A company must monitor its system of internal controls for ongoing viability. By doing so, it can ensure, whether through system updates, adding employees, or necessary employee training, the continued ability of internal controls to function as needed.
• Information/Communication:  Solid information and consistent communication are important on two fronts. First, clarity of purpose and roles can set the stage for successful internal controls. Second, facilitating the understanding of and commitment to steps to take can help employees do their job most effectively.
• Control Activities:  These pertain to the processes, policies, and other courses of action that maintain the integrity of internal controls and regulatory compliance. They involve preventative and detective activities.
• Compliance with Laws and Regulations : An organization's financial activities must adhere to all relevant laws, regulations, and standards. This involves keeping up-to-date with changes in financial regulations and implementing measures to ensure compliance.
• Separation of Duties : Distributing responsibilities among different people reduces the risk of error or inappropriate actions. This includes separating authorization, custody, and record-keeping roles to prevent fraud and errors.
• Physical Controls : A business must implement security measures to protect its assets, including cash, inventory, and equipment. This could involve secure storage facilities, access controls, and surveillance systems.

Preventative vs. Detective Controls

Internal controls are typically comprised of control activities such as authorization, documentation, reconciliation, security, and the separation of duties. They are broadly divided into preventative and detective activities.

Preventative control activities aim to deter errors or fraud from happening in the first place and include thorough documentation and authorization practices. Separation of duties, a key part of this process, ensures that no single individual is in a position to authorize, record, and be in the custody of a financial transaction and the resulting asset. Authorization of invoices and verification of expenses are internal controls.

In addition, preventative internal controls include limiting physical access to equipment, inventory, cash, and other assets.

Detective controls are backup procedures that are designed to catch items or events that have been missed by the first line of defense. Here, the most important activity is reconciliation, which is used to compare data sets. Corrective action is taken upon finding material differences. Other detective controls include external audits from accounting firms and internal audits of assets such as inventory.

Limitations of Internal Controls

Regardless of the policies and procedures established by an organization, internal controls can only provide reasonable assurance that a company's financial information is correct.

The effectiveness of internal controls can be limited by human judgment. For example, a business may give high-level personnel the ability to override internal controls for operational efficiency reasons.

What's more, internal controls can be circumvented through collusion, where employees whose work activities are normally separated by internal controls, work together in secret to conceal fraud or other misconduct.

Auditing techniques and control methods from England migrated to the United States during the Industrial Revolution. In the 20th century, auditors' reporting practices and testing methods were standardized.

Why Are Internal Controls Important?

Internal controls are the mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud. Besides complying with laws and regulations and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial reporting.

The Sarbanes-Oxley Act of 2002, enacted in the wake of the accounting scandals in the early 2000s, seeks to protect investors from fraudulent accounting activities and improve the accuracy and reliability of corporate disclosures.

What Are the 2 Types of Internal Controls?

Internal controls are broadly divided into preventative and detective activities. Preventative control activities aim to deter errors or fraud from happening in the first place and include thorough documentation and authorization practices. Detective controls are backup procedures that are designed to catch items or events that have been missed by the first line of defense. 

What Are Some Preventative Internal Controls?

Separation of duties, a key part of the preventative internal control process, ensures that no single individual is in a position to authorize, record, and be in the custody of a financial transaction and the resulting asset. Authorization of invoices, verification of expenses, limiting physical access to equipment, inventory, cash, and other assets are examples of preventative internal controls.

What Are Detective Internal Controls?

Detective internal controls attempt to find problems within a company's processes once they have occurred. They may be employed in accordance with many different goals, such as quality control, fraud prevention, and legal compliance. Here, the most important activity is reconciliation, which compares data sets. Other detective controls include internal and external audits.

Internal controls are vital to ensuring the integrity of companies' operations and the trustworthiness of the financial information they report. The Sarbanes-Oxley Act of 2002 spurred internal controls in the aftermath of such scandals as those involving Enron and WorldCom to protect investors from corporate accounting fraud.

The success of internal controls can be limited by personnel who cut control activity corners for the sake of operational efficiency and by those employees who work together to conceal fraud.

Congress.gov. " H.R.3763 - Sarbanes-Oxley Act of 2002 ," Sec. 906.

Govinfo. " Sarbanes-Oxley Act of 2002 ," Page 1.

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• Guide: Control Plan

Daniel Croft

Daniel Croft is an experienced continuous improvement manager with a Lean Six Sigma Black Belt and a Bachelor's degree in Business Management. With more than ten years of experience applying his skills across various industries, Daniel specializes in optimizing processes and improving efficiency. His approach combines practical experience with a deep understanding of business fundamentals to drive meaningful change.

• Last Updated: June 11, 2023
• Learn Lean Sigma

In business it is not uncommon for processes and outputs from processes to be out of control and need action to be taken to address them. This is where Control Plans become extremely useful. Control plans have been developed to support lean Six Sigma process and quality management systems in measuring critical-to-quality (CTQ) measures of processes and their outputs to ensure they remain in control with regular data collection and clear actions to be taken to address issues if they arise. 

Control plans are mostly popularized and used within the manufacturing sector. However, they can be useful for a range of processes that output variables that can be measured and controlled.

Table of Contents

What is a control plan.

A Control Plan in its basic form is a document that outlines the process, steps and actions needed to manage, control, and ensure the quality of a process or product. Developed from the principles of Lean Six Sigma, the tool is used to many industries, such as manufacturing, logistics, automotive, and aerospace.

Control plans may vary slightly from business to business as teams and management tweak them to suit local business needs. However, the Control Plan typically consists of elements such as process input variables, output variables, control points (limits), what measurements are to be taken, and actions to be taken if a deviation occurs. 

Below you can see a good example of how a control plan may look. You can also download this control plan from our template section.

A control plan is usually a tool you will use towards the end of an improvement project, such as in the Control phase of the DMAIC methodology, and continues to serve as a “living document,” which means it is continually reviewed and updated as the process evolves or new data becomes available.

How to Create a Control Plan

Creating a Control Plan is an important process that involves several steps. The guide below will clearly explain each step to guide you through creating a robust and effective Control Plan.

Step 1: Identify the Process

The first step in creating a control plan is to identify a process that you are looking to control. This should be a process that is critical to the quality of your product or service and would have a significant impact on customer satisfaction or operational efficiency if it were to go wrong. Therefore, lend them to a key candidate of a process to control 

It is important to have a clear understanding of the flow of the process, including the inputs and outputs and all the steps involved. It can be useful to use a tool such as a flowchart to map out the process to ensure you fully understand all the elements and variables of the process. 

Step 2: List CTQs (Critical to Quality Characteristics)

Once the process has been identified, the next step in the process is to identify the CTQ characteristics. These are the key attributes or features of the product or service that need to be controlled to ensure quality. The best way to identify what the CTQs are is to understand the customer requirements, such as product specifications.

For example, let’s say a business manufactures brake pads, and the CTQ is the thickness tolerance of the brake pads; this might be ±0.5mm.

Step 3: Select Measurement Methods

Once you have listed all the CTQs that you want to control, decide how you will measure these characteristics. The method that you decide on should be accurate, reliable, and repeatable and follow the principles of Attribute Agreement Analysis (AAA). The measurement method should consider what tools, instruments, or techniques will be used. Additionally, it is important to define the frequency with which the measurement is taken and what the acceptable limits or tolerances are for each CTQ.

Step 4: Determine Control Methods

Now that you know what CTQs you want to control and the methods used to measure them you need to determine the methods of control. Control methods are the strategies, tools or techniques used to ensure that the process stays within the defined limits or customer spec limits.  Popular tools and techniques used to control processes and variables include Statistical Process Control (SPC) charts, Mistake Proofing (Poka Yoke) or Standard Operating Procedures (SOP) / Standard Work Instructions (SWI), which control method you use will depend on the type of process and CTQ identified.

Step 5: Develop Action Plans

If in the event a process or variable goes out of control it is important to take action to address and correct the process and bring it back under control. To do this action plans should be developed as part of the control plan. These action plans define what steps need to be taken to bring the process back within its acceptable limits. 

Like any good action plan it needs make it clear what action needs to be taken and who is responsible for taking that action. 

Step 6: Train the Team

Now that you have developed a control plan its important to ensure that in the event it is needed, it is used. Therefore, you should clearly communicate what the CTQs are, what the operators need to do to measure the process and clarify what actions need to be taken by whom if a process goes out of control. 

Training is key to the success of the control plan being followed.

Step 7: Implement and Monitor

Now that you have developed and trained out the plan, the next step is to officially implement it. This involves putting all the required measures and controls into place. If special tools like calipers or software’s are needed to take measurements, ensure they have what they need. The process then needs to be continuously monitored to ensure the process remains within the stated control limits. Data should then be analyzed at regular intervals to detect and trends or deviations in the process outputs.

Step 8: Review and Update

Finally Step 8, it is important to remember that the control plan is a living document that should be reviewed and updated regularly as the process or CTQs change. Regular reviews will ensure the Control Plan remains effective and relevant. 

By following this process you should be able to develop a robust Control Plan that will help you control your process and ensure quality and drive continuous improvement of the process.

Implementing a Control Plan is beneficial for controlling the quality and performance of processes and preventing defects or quality issues. From identifying the process to training your team, each step is geared towards ensuring that your business operations are as seamless as possible. The goal is not just to maintain current performance levels but to set the stage for continuous improvement.

As we’ve outlined in this guide, creating and implementing a Control Plan is a detailed process involving multiple steps, each is important and builds on the previous step. You should also remember, a Control Plan is a living document must be regularly monitored and updated to its sustain success.

• Westgard, J.O., 2003. Internal quality control: planning and implementation strategies.   Annals of clinical biochemistry ,  40 (6), pp.593-611.
• Mehrasa, M., Pouresmaeil, E., Jørgensen, B.N. and Catalão, J.P., 2015. A control plan for the stable operation of microgrids during grid-connected and islanded modes.   Electric Power Systems Research ,  129 , pp.10-22.

Q: What is a control plan?

A: A control plan is a documented framework that outlines the methods, procedures, and actions necessary to maintain process control and ensure consistent and acceptable outcomes. It helps identify critical control points, measurement methods, control limits, and corrective actions to monitor and manage process performance effectively.

Q: Why is a control plan important?

A: A control plan is important because it helps organizations maintain process stability, minimize process variations, and ensure consistent product or service quality. It provides a systematic approach to monitor, control, and improve processes, leading to reduced defects, improved customer satisfaction, and increased operational efficiency.

Q: How does a control plan fit into the DMAIC methodology?

A: A control plan is a key component of the Control phase in the DMAIC (Define, Measure, Analyze, Improve, Control) methodology. In this phase, the control plan is developed to sustain the improvements made during the earlier phases. It helps ensure that the process remains in control, deviations are promptly addressed, and continuous improvement efforts are sustained.

Q: What are critical control points?

A: Critical control points are specific stages or activities within a process where variations can significantly impact the quality or outcome. These points need to be closely monitored and controlled to prevent defects or deviations from the desired target. Examples include temperature control, pressure control, or specific steps in a manufacturing process.

Q: How are control limits determined?

A: Control limits are determined based on historical data, customer specifications, or statistical analysis. Historical data provides insights into the process performance, while customer specifications define the acceptable range for product quality. Statistical techniques, such as process capability analysis, can help determine control limits based on the process’s inherent variation and the desired level of performance.

Q: What is the role of corrective actions in a control plan?

A: Corrective actions are specified in a control plan to address deviations from control limits or target values. These actions provide a systematic approach to identify and resolve the root causes of variations, ensuring that the process is brought back into control. Corrective actions may involve adjusting process parameters, modifying procedures, retraining employees, or conducting equipment maintenance, among other steps.

Q: Who is responsible for implementing a control plan?

A: Responsibility for implementing a control plan typically falls on the process owner or a designated team responsible for process management and improvement. These individuals or teams are accountable for monitoring the process, collecting data, analyzing it for deviations, and implementing corrective actions when necessary.

Q: How often should a control plan be reviewed and updated?

A: A control plan should be reviewed and updated regularly to ensure its effectiveness and alignment with changing process requirements. It is recommended to review the control plan during regular process performance reviews or when significant changes occur in the process or customer requirements. This helps to adapt the control plan to evolving conditions and continuously improve its efficacy.

Daniel Croft is a seasoned continuous improvement manager with a Black Belt in Lean Six Sigma. With over 10 years of real-world application experience across diverse sectors, Daniel has a passion for optimizing processes and fostering a culture of efficiency. He's not just a practitioner but also an avid learner, constantly seeking to expand his knowledge. Outside of his professional life, Daniel has a keen Investing, statistics and knowledge-sharing, which led him to create the website learnleansigma.com, a platform dedicated to Lean Six Sigma and process improvement insights.

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15.3 Organizational Control

Learning objectives.

• Know what is meant by organizational control.
• Recognize that controls have costs.
• Understand the benefits of controls.

Up to this point you have probably become familiar with the planning, organizing, and leading components of the P-O-L-C framework. This section addresses the controlling component, often taking the form of internal systems and process, to complete your understanding of P-O-L-C. As you know, planning comprises all the activities associated with the formulation of your strategy, including the establishment of near- and long-term goals and objectives. Organizing and leading are the choices made about the way people work together and are motivated to achieve individual and group goals and objectives.

What Is Organizational Control?

The fourth facet of P-O-L-C, organizational control , refers to the process by which an organization influences its subunits and members to behave in ways that lead to the attainment of organizational goals and objectives. When properly designed, such controls should lead to better performance because an organization is able to execute its strategy better (Kuratko, et. al., 2001). As shown in the the P-O-L-C framework figure, we typically think of or talk about control in a sequential sense, where controls (systems and processes) are put in place to make sure everything is on track and stays on track. Controls can be as simple as a checklist, such as that used by pilots, flight crews, and some doctors (The Health Care Blog, 2008). Increasingly, however, organizations manage the various levels, types, and forms of control through systems called Balanced Scorecards . We will discuss these in detail later in the chapter.

Organizational control typically involves four steps: (1) establish standards, (2) measure performance, (3) compare performance to standards, and then (4) take corrective action as needed. Corrective action can include changes made to the performance standards—setting them higher or lower or identifying new or additional standards. Sometimes we think of organizational controls only when they seem to be absent, as in the 2008 meltdown of U.S. financial markets, the crisis in the U.S. auto industry, or the much earlier demise of Enron and MCI/Worldcom due to fraud and inadequate controls. However, as shown in the figure, good controls are relevant to a large spectrum of firms beyond Wall Street and big industry.

The Need for Control in Not-for-Profit Organizations

We tend to think about controls only in the for-profit organization context. However, controls are relevant to a broad spectrum of organizations, including governments, schools, and charities. Jack Siegel, author of A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good , outlines this top 10 list of financial controls that every charity should put in place:

Control 1—Require two signatures for checks written on bank and investment accounts. This prevents unapproved withdrawals and payments.

Control 2—The organization’s bank statements should be reconciled on a monthly basis by someone who does not have signature authority over the accounts. This is a further check against unapproved withdrawals and payments.

Control 3—Since cash is particularly susceptible to theft, organizations should eliminate the use of cash to the extent possible.

Control 4—Organizations should only purchase goods from an approved list of vendors. This provides protection from phony invoices submitted by insiders.

Control 5—Many charities have discovered “ghost employees” on their payrolls. To minimize this risk, organizations should tightly control the payroll list by developing a system of reports between payroll/accounting and the human resources department.

Control 6—Organizations should require all otherwise reimbursable expenses to be preauthorized. Travel and entertainment expenses should be governed by a clearly articulated written policy that is provided to all employees.

Control 7—Physical inventories should be taken on a regular and periodic basis and then be reconciled against the inventories carried on the books. Besides the possible detection of theft, this control also provides a basis for an insurance claim in the case of a fire, flood, or other disaster.

Control 8—Every organization should develop an annual budgeting process. The nonprofit’s employees should prepare the budget, but the board should review and approve it.

Control 9—Organizations should use a competitive bidding process for purchases above a certain threshold. In reviewing bids, organizations should look for evidence of collusion.

Control 10—Organizations that regularly received grants with specific requirements should have someone who is thoroughly versed in grant administration.

Retrieved January 30, 2009, from http://www.charitygovernance.com/charity_governance/2007/10/ten-financial-c.html#more .

The Costs and Benefits of Organizational Controls

Organizational controls provide significant benefits, particularly when they help the firm stay on track with respect to its strategy. External stakeholders, too, such as government, investors, and public interest groups have an interest in seeing certain types or levels of control are in place. However, controls also come at a cost. It is useful to know that there are trade-offs between having and not having organizational controls, and even among the different forms of control. Let’s look at some of the predominant costs and benefits of organizational controls, which are summarized in the following figure.

Controls can cost the organization in several areas, including (1) financial, (2) damage to culture and reputation, (3) decreased responsiveness, and (4) botched implementation. An example of financial cost is the fact that organizations are often required to perform and report the results of a financial audit. These audits are typically undertaken by external accounting firms, which charge a substantial fee for their services; the auditor may be a large firm like Accenture or KPMG, or a smaller local accounting office. Such audits are a way for banks, investors, and other key stakeholders to understand how financially fit the organization is. Thus, if an organization needs to borrow money from banks or has investors, it can only obtain these benefits if it incurs the monetary and staffing costs of the financial audit.

Controls also can have costs in terms of organization culture and reputation. While you can imagine that organizations might want to keep track of employee behavior, or otherwise put forms of strict monitoring in place, these efforts can have undesirable cultural consequences in the form of reduced employee loyalty, greater turnover, or damage to the organization’s external reputation. Management researchers such as the late London Business School professor Sumantra Ghoshal have criticized theory that focuses on the economic aspects of man (i.e., assumes that individuals are always opportunistic). According to Ghoshal, “A theory that assumes that managers cannot be relied upon by shareholders can make managers less reliable (Ghoshal & Moral, 1996).” Such theory, he warned, would become a self-fulfilling prophecy.

Less theoretical are practical examples such as Hewlett-Packard’s (HP) indictment on charges of spying on its own board of directors. In a letter to HP’s board, director Tom Perkins said his accounts were “hacked” and attached a letter from AT&T explaining how the breach occurred. Records of calls made from Perkins’s home phone were obtained simply with his home phone number and the last four digits of his Social Security number. His long-distance account records were obtained when someone called AT&T and pretended to be Perkins, according to the letter from AT&T (IN, 2009).

The third potential cost of having controls is that they can afford less organizational flexibility and responsiveness. Typically, controls are put in place to prevent problems, but controls can also create problems. For instance, the Federal Emergency Management Agency (FEMA) is responsible for helping people and business cope with the consequences of natural disasters, such as hurricanes. After Hurricane Katrina devastated communities along the U.S. Gulf Coast in 2005, FEMA found that it could not provide prompt relief to the hurricane victims because of the many levels of financial controls that it had in place (US Government Printing Office, 2006).

The fourth area of cost, botched implementation, may seem obvious, but it is more common than you might think (or than managers might hope). Sometimes the controls are just poorly understood, so that their launch creates significant unintended, negative consequences. For example, when Hershey Foods put a new computer-based control system in place in 1999, there were so many problems with its installation that it was not able to fulfill a large percentage of its Halloween season chocolate sales that year. It did finally get the controls in working order, but the downtime created huge costs for the company in terms of inefficiencies and lost sales (Greenspun, 2009). Some added controls may also interfere with others. For instance, a new quality control system may improve product performance but also delay product deliveries to customers.

Although organizational controls come at some cost, most controls are valid and valuable management tools. When they are well designed and implemented, they provide at least five possible areas of benefits, including (1) improved cost and productivity control, (2) improved quality control, (3) opportunity recognition, (4) better ability to manage uncertainty and complexity, and (5) better ability to decentralize decision making. Let’s look at each one of these benefits in turn.

Summary of Control Costs and Benefits

• Financial costs—direct (i.e., paying for an accountant for an audit) and indirect (i.e., people such as internal quality control the organization employs whose primary function is related to control).
• Culture and reputation costs—the intangible costs associated with any form of control. Examples include damaged relationships with employees, or tarnished reputation with investors or government.
• Responsiveness costs—downtime between a decision and the actions required to implement it due to compliance with controls.
• Poorly implemented controls—implementation is botched or the implementation of a new control conflicts with other controls.

Key Benefits

• Cost and productivity control—ensures that the firm functions effectively and efficiently.
• Quality control—contributes to cost control (i.e., fewer defects, less waste), customer satisfaction (i.e., fewer returns), and greater sales (i.e., repeat customers and new customers).
• Opportunity recognition—helps managers identify and isolate the source of positive surprises, such as a new growth market. Though opportunities can also be found in internal comparisons of cost control and productivity across units.
• Manage uncertainty and complexity—keeps the organization focused on its strategy, and helps managers anticipate and detect negative surprises and respond opportunistically to positive surprises.
• Decentralized decision making—allows the organization to be more responsive by moving decision making to those closest to customers and areas of uncertainty.

First, good controls help the organization to be efficient and effective by helping managers to control costs and productivity levels. Cost can be controlled using budgets, where managers compare actual expenses to forecasted ones. Similarly, productivity can be controlled by comparing how much each person can produce, in terms of service or products. For instance, you can imagine that the productivity of a fast-food restaurant like McDonald’s depends on the speed of its order takers and meal preparers. McDonald’s can look across all its restaurants to identify the target speed for taking an order or wrapping a burger, then measure each store’s performance on these dimensions.

Quality control is a second benefit of controls. Increasingly, quality can be quantified in terms of response time (i.e., How long did it take you to get that burger?) or accuracy (Did the burger weigh one-quarter pound?). Similarly, Toyota tracks the quality of its cars according to hundreds of quantified dimensions, including the number of defects per car. Some measures of quality are qualitative, however. For instance, Toyota also tries to gauge how “delighted” each customer is with its vehicles and dealer service. You also may be familiar with quality control through the Malcolm Baldrige National Quality Program Award. The Baldrige award is given by the president of the United States to businesses—manufacturing and service, small and large—and to education, health care, and nonprofit organizations that apply and are judged to be outstanding in seven areas: leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource focus; process management; and results (National Institute of Standards and Technology, 2009). Controlling—how well the organization measures and analyzes its processes—is a key criterion for winning the award. The Baldrige award is given to organizations in a wide range of categories and industries, from education to ethics to manufacturing.

The third area by which organizations can benefit from controls is opportunity recognition. Opportunities can come from outside of the organization and typically are the result of a surprise. For instance, when Nestlé purchased the Carnation Company for its ice cream business, it had also planned to sell off Carnation’s pet food line of products. However, through its financial controls, Nestlé found that the pet food business was even more profitable than the ice cream, and kept both. Opportunities can come from inside the organization too, as would be the case if McDonald’s finds that one of its restaurants is exceptionally good at managing costs or productivity. It can then take this learned ability and transfer it to other restaurants through training and other means.

Controls also help organizations manage uncertainty and complexity. This is a fourth area of benefit from well-designed and implemented controls. Perhaps the most easily understood example of this type of benefit is how financial controls help an organization navigate economic downturns. Without budgets and productivity controls in place, the organization might not know it has lost sales or expenses are out of control until it is too late.

Control Criteria for the Baldrige National Quality Award

Measurement, Analysis, and Improvement of Organizational Performance: How Do You Measure, Analyze, and then Improve Organizational Performance? (45 points)

Describe how your organization measures, analyzes, aligns, reviews, and improves its performance using data and information at all levels and in all parts of your organization. Describe how you systematically use the results of reviews to evaluate and improve processes.

Within your response, include answers to the following questions:

Performance Measurement

• How do you select, collect, align, and integrate data and information for tracking daily operations and for tracking overall organizational performance, including progress relative to strategic objectives and action plans? What are your key organizational performance measures, including key short-term and longer-term financial measures? How do you use these data and information to support organizational decision making and innovation?
• How do you select and ensure the effective use of key comparative data and information to support operational and strategic decision making and innovation?
• How do you keep your performance measurement system current with business needs and directions? How do you ensure that your performance measurement system is sensitive to rapid or unexpected organizational or external changes?

Performance Analysis, Review, and Improvement

• How do you review organizational performance and capabilities? What analyses do you perform to support these reviews and to ensure that the conclusions are valid? How do you use these reviews to assess organizational success, competitive performance, and progress relative to strategic objectives and action plans? How do you use these reviews to assess your organization’s ability to respond rapidly to changing organizational needs and challenges in your operating environment?
• How do you translate organizational performance review findings into priorities for continuous and breakthrough improvement and into opportunities for innovation? How are these priorities and opportunities deployed to work group and functional-level operations throughout your organization to enable effective support for their decision making? When appropriate, how are the priorities and opportunities deployed to your suppliers, partners, and collaborators to ensure organizational alignment?
• How do you incorporate the results of organizational performance reviews into the systematic evaluation and improvement of key processes?

Retrieved January 30, 2009, from http://www.quality.nist.gov .

The fifth area of benefit in organizational control is related to decentralized decision making. Organization researchers have long argued that performance is best when those people and areas of the organization that are closest to customers and pockets of uncertainty also have the ability (i.e., the information and authority) to respond to them (Galbraith, 1974). Going back to our McDonald’s example, you can imagine that it would be hard to give a store manager information about her store’s performance and possible choices if information about performance were only compiled at the city, region, or corporate level. With store-level performance tracking (or, even better, tracking of performance by the hour within a store), McDonald’s gives store managers the information they need to respond to changes in local demand. Similarly, it equips McDonald’s to give those managers the authority to make local decisions, track that decision-making performance, and feed it back into the control and reward systems.

Key Takeaway

This chapter introduced the basics of controls, the process by which an organization influences its subunits and members to behave in ways that lead to attaining organizational goals and objectives. When properly designed, controls lead to better performance by enabling the organization to execute its strategy better. Managers must weigh the costs and benefits of control, but some minimum level of control is essential for organizational survival and success.

• What do properly conceived and implemented controls allow an organization to do?
• What are three common steps in organizational control?
• What are some of the costs of organizational controls?
• What are some of the benefits of organizational controls?
• How do managers determine when benefits outweigh costs?

Galbraith, J. R. (1974). Organization design: An information processing view. Interfaces, 4 , 28–36. Galbraith believes that “the greater the uncertainty of the task, the greater the amount of information that must be processed between decision makers during the execution of the task to get a given level of performance.” Firms can reduce uncertainty through better planning and coordination, often by rules, hierarchy, or goals. Galbraith states that “the critical limiting factor of an organizational form is the ability to handle the non-routine events that cannot be anticipated or planned for.”

Ghoshal S., & Moran, P. (1996). Bad for practice: A critique of the transaction cost theory. Academy of Management Review. 21 (1), 13–47.

Greenspun, retrieved January 30, 2009, from Hershey profits for 4Q 1999 down 11% due to SAP implementation problem. http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=002SUM .

IN, retrieved January 30, 2009, from http://i.n.com.com/pdf/ne/2006/perkins_letter.pdf HP Chairman Patricia Dunn defended this rather extreme form of control as legal, but the amount of damage to the firm’s reputation from these charges led the firm to discontinue the practice. It also prompted the resignation of several directors and corporate officers. Retrieved January 30, 2009, from http://news.zdnet.com/2100-9595_22-149452.html .

Kuratko, D. F., Ireland, R. D., & Hornsby. J. S. (2001). Improving firm performance through entrepreneurial actions: Acordia’s corporate entrepreneurship strategy. Academy of Management Executive, 15 (4), 60–71.

National Institute of Standards and Technology, retrieved January 30, 2009, from http://www.nist.gov/public_affairs/factsheet/baldfaqs.htm .

The Health Care Blog, Retrieved December 9, 2008, from http://www.thehealthcareblog.com/the_health_care_blog/2007/12/pilots-use-chec.html .

U.S. Government Printing Office. (2006, February 15). Executive summary. Select Bipartisan Committee to Investigate the Preparation for and Response to Hurricane Katrina.

Principles of Management Copyright © 2015 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

Module 15: Control

The control process, learning outcomes.

• Explain the basic control process.
• Differentiate between feedback, proactive, and concurrent controls.

The proper performance of the management control function is critical to the success of an organization. After plans are set in place, management must execute a series of steps to ensure that the plans are carried out. The steps in the basic control process can be followed for almost any application, such as improving product quality, reducing waste, and increasing sales. The basic control process includes the following steps:

• Setting performance standards: Managers must translate plans into performance standards. These performance standards can be in the form of goals, such as revenue from sales over a period of time. The standards should be attainable, measurable, and clear.
• Measuring actual performance: If performance is not measured, it cannot be ascertained whether standards have been met.
• Comparing actual performance with standards or goals: Accept or reject the product or outcome.
• Analyzing deviations: Managers must determine why standards were not met. This step also involves determining whether more control is necessary or if the standard should be changed.
• Taking corrective action: After the reasons for deviations have been determined, managers can then develop solutions for issues with meeting the standards and make changes to processes or behaviors.

Consider a situation in which a fictional company, The XYZ Group, has suffered a decrease in the profits from its high-end sunglasses due to employee theft. Senior executives establish a plan to eliminate the occurrence of employee theft. It has been determined that the items are being stolen from the company warehouse. The executives establish a goal of zero thefts ($0) within a three-month period (Step 1). The company currently loses an average of $1,000 per month due to employee theft.

To discourage the undesired behavior, XYZ installed cameras in the warehouse and placed locks on the cabinets where the most expensive sunglasses are stored. Only the warehouse managers have keys to these cabinets.

After three months, XYZ managers contact the bookkeeper to get the sales and inventory figures for the past three-month period (Step 2). The managers then compare the figures with the previous period, taking into account orders for deliveries, returns, and defective merchandise (Step 3). It has been determined that the company lost $200 the first month, $300 the second month, and $200 the third month due to theft, which is an improvement but short of the goal. Managers then come up with suggestions for making adjustments to the control system (Step 4).

XYZ senior executives approve of the suggestion to institute a zero-tolerance policy for employee theft. Now, if there is evidence that an employee has stolen a pair of sunglasses, that employee’s job will be terminated. The employee handbook is updated to include the change, and XYZ executives hold a meeting with all warehouse employees to communicate the policy change (Step 5).

Practice Question

Timing of controls.

Controls can be categorized according to the time in which a process or activity occurs. The controls related to time include feedback, proactive, and concurrent controls. Feedback control concerns the past. Proactive control anticipates future implications. Concurrent control concerns the present.

Feedback occurs after an activity or process is completed. It is reactive. For example, feedback control would involve evaluating a team’s progress by comparing the production standard to the actual production output. If the standard or goal is met, production continues. If not, adjustments can be made to the process or to the standard.

An example of feedback control is when a sales goal is set, the sales team works to reach that goal for three months, and at the end of the three-month period, managers review the results and determine whether the sales goal was achieved. As part of the process, managers may also implement changes if the goal is not achieved. Three months after the changes are implemented, managers will review the new results to see whether the goal was achieved.

The disadvantage of feedback control is that modifications can be made only after a process has already been completed or an action has taken place. A situation may have ended before managers are aware of any issues. Therefore, feedback control is more suited for processes, behaviors, or events that are repeated over time, rather than those that are not repeated.

Proactive control

Proactive control, also known as preliminary, preventive, or feed-forward control, involves anticipating trouble, rather than waiting for a poor outcome and reacting afterward. It is about prevention or intervention. An example of proactive control is when an engineer performs tests on the braking system of a prototype vehicle before the vehicle design is moved on to be mass produced.

Proactive control looks forward to problems that could reasonably occur and devises methods to prevent the problems. It cannot control unforeseen and unlikely incidents, such as “acts of God.”

Concurrent control

With concurrent control, monitoring takes place during the process or activity. Concurrent control may be based on standards, rules, codes, and policies.

One example of concurrent control is fleet tracking. Fleet tracking by GPS allows managers to monitor company vehicles. Managers can determine when vehicles reach their destinations and the speed in which they move between destinations. Managers are able to plan more efficient routes and alert drivers to change routes to avoid heavy traffic. It also discourages employees from running personal errands during work hours.

In another example, Keen Media tries to reduce employee inefficiency by monitoring Internet activity. In accordance with company policy, employees keep a digital record of their activities during the workday. IT staff can also access employee computers to determine how much time is being spent on the Internet to conduct personal business and “surf the Web.”

The following diagram shows the control process. Note that the production process is central, and the control process surrounds it.

The control process

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Strategic Control: Meaning, Process, Importance And Examples

Even well-thought-out strategies can go askew as they evolve and change during their implementation period. Therefore, it’s important that businesses…

Even well-thought-out strategies can go askew as they evolve and change during their implementation period. Therefore, it’s important that businesses have systems of evaluation and control in place to help monitor their performances. By establishing a strategic control process as a part of management, organizations can rethink strategies and take immediate actions in case of undesired or unintended outcomes.

The purpose of strategic control is to steer a business toward its long-term goal by controlling its strategic direction. Strategic control definition states that the process tracks a strategy during its implementation period and detects changes or problems that may affect the outcome. It then makes adjustments to avoid such problems. Let’s discuss the meaning of strategic control, the processes involved, its importance and strategic control examples.

Strategic Control Meaning

The strategic control process, importance of strategic control, strategic control example.

Strategic control is a method of managing the execution of a strategic plan. It’s considered unique in the management process, as it can handle the unknown and ambiguous while tracking a strategy’s implementation and the subsequent results. In other words, strategic control is a way to find different methods of strategy implementation by adapting to changing external and internal factors to achieve strategic goals.

A strategy is usually implemented over a significant period of time during which two major questions are answered:

a.  Is strategy implementation taking place as planned? 

b.  Taking the observed results into consideration, does the strategy require changes or adjustments? 

The strategic control definition shows us that it’s an evaluation exercise focused on achieving the strategic goals set by an organization. The process is crucial in bridging gaps and adapting to changes during the implementation period.

Every technique of strategic evaluation follows the same method. Here are the six steps involved in the strategic control process:

1. Determining What To Control

Prioritize evaluation of elements that relate directly with the mission and vision of the organization and which can affect the organization’s goals.

2. Setting Standards

Past, present and future actions must be evaluated. Setting qualitative or quantitative control standards help in determining how managers can evaluate progress and measure goals.

3. Measuring Performance

Measuring, addressing and reviewing performance on a monthly or quarterly basis can help determine a strategy’s progress and ensure that standards are being met.

4. Comparing Performance

Performance comparison is done to determine if an organization is falling short of the set benchmark and if these gaps between target and actuals are normal for that industry. 

 5. Analyzing Deviations

If there are deviations, managers have to analyze performance standards and determine why performance was below par.

6. Corrective Action

If a deviation is due to internal factors such as resource shortage, then managers can act to sort them out. But if it’s caused by external factors that are beyond one’s control, then incorrect actions can worsen the outcome.

Traditional control concepts have to be replaced by the strategic control process, as it recognizes the unique needs of long-term strategies.

Let’s look at the importance of strategic control:

Measuring Progress

Strategic control can help measure organizational progress. As a strategy is chosen or implemented, an outcome is determined based on the likeliness. In strategic management, it’s important to measure results during and after implementation. This allows timely corrective actions as well.

  Feedback For Future Actions

Since strategic management is continuous, it helps in recycling actions that are essential for achieving the objectives of an organization. This acts as inputs for making adjustments and implementing them in other future processes.

Rewards And Recognition Based On Performance

A reward system based on performance that recognizes employees throughout the implementation period is crucial for performance, desired outcome and talent retention.

The purpose of strategic control is to let managers identify changes in circumstances and allow them to modify strategies.

Here are some examples of strategic control:

1. A courier business decides to boost performance by setting an on-time delivery goal of 100%. Managers are alerted by the control system as it automatically reports problems even if delivery rate falls by 1%. By using such a control strategy, the organization allows its managers to undertake immediate corrective measures for every delivery-performance issue that’s raised.    

2. Consider a unit that produces widgets. If the error rate goes above the desired limit or the number of widgets is lower than expected, strategic control helps an organization evaluate the hiring criteria and employee onboarding to make necessary adjustments for achieving strategic goals of the business.

Managers must be fully aware of strategic control meaning to realize that it’s a steering wheel that they can use to navigate their organization toward its mission, vision and long-term goals.

Control techniques are crucial for solving problems associated with strategic management. Sign up for Harappa’s See The Big Picture pathway to develop a holistic approach to finding solutions. Build a bi-focal approach that’ll help you look at every situation from all angles. Reflect and act at the same time with the help of the Balcony and Dance Floor framework. Use Hypothesis Trees to analyze problems in depth. We will prepare you for an industry that requires you to rapidly move between ideas while identifying patterns, connections and trends.

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Control mechanisms play an important role in any business organization, without which the roles of managers get constrained. Control is required for achieving the goals in a predefined manner because it provides the instruments which influence the performance and decision-making process of an organization. Control is in fact concerned with the regulations applied to the activities within an organization to attain expected results in establishing policies, plans, and practices.

Control mechanisms can be set according to functions, product attributes, geographical attributes, and the overall strategic and financial objectives.

Objectives of Control

There are three major objectives for having a control mechanism in an international firm. They are −

To get data and clues for the top management for monitoring, evaluating, and adjusting their decisions and operational objectives.

To get clues based on which common objectives can be set to get optimum coordination among units.

To evaluate the performance metrics of managers at each level.

In 1916, Henri Fayol defined management control as follows −

“Control of an undertaking consists of seeing that everything is being carried out in accordance with the plan which has been adopted, the orders which have been given, and the principles which have been laid down. Its object is to point out mistakes in order that they may be rectified and prevented from recurring”

Types of Control Mechanisms

There are various modes of control. The most influential ones are the following −

Personal Controls

Personal controls are achieved via personal contact with the subordinates. It is the most widely used type of control mechanism in small firms for providing direct supervision of operational and employee management. Personal control is used to construct relationship processes between managers at different levels of employees in multinational companies. CEOs of international firms may use a set of personal control policies to influence the behavior of the subordinates.

Bureaucratic Controls

These are associated with the inherent bureaucracy in an international firm. This control mechanism is composed of some system of rules and procedure to direct and influence the actions of sub-units.

The most common example of bureaucratic control is found in case of capital spending rules that require top management’s approval when it exceeds a certain limit.

Output Controls

Output Controls are used to set goals for the subsidiaries to achieve the targeted outputs in various departments. Output control is an important part of international business management because a company’s efficiency is relative to bureaucratic control.

The major criteria for judging output controls include productivity, profitability, growth, market share, and quality of products.

Cultural Controls

Corporate culture is a key for deriving maximum output and profitability and hence cultural control is a very important attribute to measure the overall efficiency of a firm. It takes form when employees of the firm try to adopt the norms and values preached by the firm.

Employees usually tend to control their own behavior following the cultural control norms of the firm. Hence, it reduces the dependence on direct supervision when applied well. In a firm with a strong culture, self-control flourishes automatically, which in turn reduces the need for other types of control mechanisms.

Approaches to Control Mechanisms

There are seven major approaches for controlling a business organization. These are discussed below −

Market Approach

The market approach says that the external market forces shape the control mechanism and the behavior of the management within the organizational units of an MNC. Market approach is applied in any organization having a decentralized culture. In such organizations, transfer prices are negotiated openly and freely. The decision-making process in this approach is largely directed and governed by the market forces.

Rules Approach

The rules approach applies to a rules-oriented organization where a greater part of decision-making is applied to strongly impose the organizational rules and procedures. It requires highly developed plan and budget systems with extensive formal reporting. Rules approach of control utilizes both the input and output controls in an organized and exclusively formalized manner.

Corporate Culture Approach

In organizations that follow the corporate culture approach, the employees internalize the goals by building a strong set of values. This value-syndication influences the operational mechanism of the organization. It has been observed that even when some organizations have strong norms of behavioural controls, they are informal and less explicit. Corporate culture approach requires more time to bring the aimed changes or adjustments in an organization.

Reporting Culture

Reporting culture is a powerful control mechanism. It is used while allocating resources or while the top management wants to monitor the performance of the firm and the employees. Rewarding the personnel is a common practice in such approaches of control. However, to get the maximum out of reporting approach, the reports must be frequent, correct, and useful.

Visits to Subsidiaries

Visiting the subsidiaries is a common control approach. The disadvantage is that all the information cannot be exchanged via visits. Corporate staff usually and frequently visit subsidiaries to confer and socialize with the local management. Visits can enable the visitors to collect information about the firm which allows them to offer advice and directives.

Management Performance Evaluation

Management performance Evaluation is used to evaluate the subsidiary managers for the subsidiary’s performance. However, as decision-making authority is different from the operational managers, some aspects of control cannot be managed via this approach. Slow growth rates of firms and risky economical and political environment requires this kind of approach.

Cost and Accounting Comparisons

Cost and Accounting Comparisons is a financial approach. It arises due to the difference in expenditure among various units of the subsidiaries. A meaningful comparison of the operating performances of the units is necessary to get the full output from this approach. Cost accounting comparisons use a set of rules that are applicable to the home country principles to meet local reporting requirements.

Constraints of Control Approaches

Control mechanisms can never be uniform in every country. International firms have to face severe constraints based on which they modify their control mechanisms in every country. Here is a list of major constraints that affect an organization in setting its managerial control mechanism −

Distance − Geographical distances and various forms of cultural disparities is a big constraint of control systems. Nowadays, email and fax transmissions have replaced the human communication, changing the meaning of distance among units and employees of an organization.

Diversity − It is hard to apply a common control system to everyone due to diversity. It requires the managers to be locally responsive to address the needs of the country in which the firm operates. Diverse attributes may exist in the form of labor, cost, currency, economic factors, business standards, etc.

Degree of Uncertainty − Data relating to the reporting mechanism may be inaccurate and incomplete, raising serious challenges to control mechanisms. Due to uncertainities, control mechanisms must focus on setting goals and developing plans to meet the goals.

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• Project management |
• 5 project controls and where to impleme ...

5 project controls and where to implement them

Project controls are the processes used to understand the time and costs spent on a project. In this piece, we’ll explain what project controls are and how you can use these processes to help you stay within project scope, minimize your project budget, and keep to your project schedule.

In this piece, we’ll explain what project controls are and how you can use them to help you predict and understand the time and money spent on your projects.

What are project controls in project management?

Project controls are a set of processes used to understand and influence the amount of time or money spent on a project. Each project control focuses on a distinct part of the project plan , like the schedule, resources, or potential risks.

The goal of using project controls is to stay within project scope , minimize the project budget when possible, and stick to the project schedule.

Project controls vs. project management

Project controls and project management have overlapping functions. Both processes help you keep a project on track and within scope. However, project controls aren’t as broad in their purpose as project management. 

While project management focuses on keeping the entire project on track, including people, processes, and deliverables, project controls focus specifically on quality control in order to save time and money. 

Why project controls are important

Project controls provide information that allow project managers to make informed and timely decisions that prevent project risks. From project initiation to completion, your job as project manager is to keep things on track and within scope. 

Without a project control process, it’s difficult to answer important questions about the project, which may impact or complicate project success. Some reasons why projects might go off track without project controls include:

People: Without project controls, questions may arise about who’s available to work on a project, who’s in charge of which roles and responsibilities , and who should take ownership of specific tasks during project development.

Quality: The project control process ensures that expectations are met, items in every project phase are complete, and everything works along the way.

Cost: When the project cost isn’t controlled, unforeseen fees may occur because of changes from stakeholders or miscalculations during project planning. 

Time: Monitoring project time prevents issues like schedule delays, shifting priorities, and clashes in resources, which can lead to unsatisfactory project results.

Through the control process, you can catch when things don’t go as planned and quickly course correct to keep your project on track. 

The 5 project management controls

These are the five project controls you can implement to get better intel into your project plan.

1. Schedule

Increasing visibility into your project schedule helps you know you’re proceeding along your project timeline. To do this, make sure you’re tracking all of your project work in one place, like a project management tool . That way, you can get at-a-glance insight into your tasks, deadlines, and dependencies. Plus, you can put project milestones in place as checkpoints to gauge your progress.

To keep your stakeholders looped in on the project’s progress, use project status reporting . These biweekly or monthly reports are a great way to evaluate whether your project is on track or not. If the project is not going as planned, you can quickly pinpoint the reason and troubleshoot accordingly. Then, share this information with stakeholders so everyone is on the same page.

Quick tip: Use a Gantt chart to see your project schedule broken down by tasks and milestones. A Gantt chart is a horizontal bar chart that illustrates the timeline of a project, program, or work. This type of chart can help you assess how long a project will take and show you dependencies between tasks .

2. Resource

Every project depends on resources—things like time, money, or project team member availability. Resource management is a critical part of the project control process because it is your team’s chance to effectively control costs and monitor your available time and materials. Cost estimating and resource planning during project initiation can also help you stay within budget. 

Not only do you need a clear sense of what resources are available when the project begins, you also need a way to keep track of costs and resources as the project goes on. If a part of the project goes over budget, or a team member is no longer available when you thought they would be, proactive project controls can help you quickly identify an alternative. 

Quick tip: Try calculating cost variance to analyze whether you’re performing at the right rate to stay within your means. To determine your cost variance, subtract actual cost from earned value. Earned value is the amount of a task actually completed. Actual cost is the amount of money that has been spent for the work already done.  The formula to calculate cost variance is CV = EV – AC.

Project risk management is a crucial project control to proactively identify and prevent risks from derailing your project. The best way to do this is with a risk register , where you rank potential risks by priority and assess how to manage them accordingly. 

Quick tip: Common risk scenarios you may encounter in your project include data security, communication issues, scheduling delays, unplanned work, and material theft. You can use these categories to begin brainstorming your risk register.

Change control is one of the best ways to prevent project scope creep , which can lead to timeline delays, increased budget, and project defects. When you implement a change control process , you’ll feel prepared for any project changes that come your way. 

That’s because a change control process can help you evaluate whether proposed changes are important and, if so, which changes to implement without increasing your project timeline or impacting your project scope. Using this process can ensure your team handles the change effectively because they feel informed, involved, and validated.

Quick tip: Typically, the change control process is project-specific. For larger, organizational change, consider implementing a change management process. Change management is the process of preparing for and managing organizational change.

5. Performance

Performance management is the broad process of monitoring your project’s success. The simplest way to do this is to set key performance indicators (KPIs) to assess project performance. These may include tracking costs against baselines, on-time completion, billed hours, and return on investment.

No matter what goals you set, make sure they’re quantifiable, specific, and measurable. When in doubt, use the SMART goal method . SMART is an acronym that stands for specific, measurable, achievable, realistic, and time-bound. 

Quick tip: A good KPI should track one measurable value that you or your team can influence in a timely manner. It should also help you achieve your strategic objectives and give team members a clear sense of how their projects contribute to company goals. 

When you use these project controls, you can feel confident that you’re monitoring your project from all angles. This will ultimately save you time and money and help you create successful project deliverables . 

Where to use project controls

Controlling your project is just as important as creating your project deliverables. Implement project controls at every stage of the project life cycle if you want to avoid unexpected surprises.

Project planning (initiation)

The project planning phase is your chance to build project controls into the bedrock of your project. The more detailed your plan is, the less control management you’ll need to do later on. 

Project planning includes:

Outlining your project timeline

Assigning roles and responsibilities

Creating a work breakdown structure (WBS)

Identifying stakeholders

Creating project objectives

You should also plan your budget during the project planning phase and try to estimate future costs. Preparing for what’s coming is part of the control process because it keeps your project on track before it begins.

Project execution

Once your project is in development, it’s go-time for your control processes. As your team members design, code, and create your product, your project controls will help you monitor the project and its progress.

Consider the five project controls listed above and ensure you’ve covered all your bases as you move through the project life cycle. Using these controls during project execution can give you a big picture view of your project status in real time.

Project closure

After submitting your completed deliverables to all project stakeholders, use the information you’ve gathered from your project control processes to lead a post mortem meeting. 

The post mortem meeting is a chance to assess what you’ve learned and get guidance for future projects. Whether you lost money and time because of mistakes or handled things exceptionally well, this step allows you to take any learnings from this experience into future projects.

Control your project with project management software

Controlling various parts of your project at one time can get chaotic. Because the control process happens while the project is in motion, you have to keep track of project controls while also ensuring your project team stays engaged and focused on high-impact work. 

With project management software , you can track and monitor project progress, stay on top of important metrics and status changes, and get the bird’s eye view you need to keep your project on schedule and within budget.

Related resources

How Asana uses work management to optimize resource planning

Understanding dependencies in project management

Program manager vs. project manager: Key differences to know

Critical path method: How to use CPM for project management

Planning access control? Here’s are some examples

Establishing an access control plan means finding ways to identify, authenticate and authorize users considering physical restrictions and threats.

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Access control is a security measure which is put in place to regulate the individuals that can view, use, or have access to a restricted environment. Various access control examples can be found in the security systems in our doors, key locks, fences, biometric systems, motion detectors, badge system, and so forth.

Furthermore, creating or planning effective security measures using these access control systems start with understanding the principles involved. To better understand access control security, we need to break it down into its core elements, which include:

Identification : The primary aim of an access control system is protecting your building or a restricted area from unauthorized access. The access control system also controls the movement of individuals using the building. Hence, the access control system makes it possible for you to determine the identity of any person that enters the building, or accesses any of the secure or restricted areas within the building.

Authentication : Once the access control system identifies an individual, it is important that the person’s identity is authenticated. This will help ensure that only the right individuals are granted access into the building or area.

Authorization : After the system authenticates the individual’s identity successfully, building access control systems will be able to grant the person, access to the building or other secure or restricted areas, depending on the specified criteria.

What are the main aspects of access control?

Every control plan example needs to integrate three aspects of business security: the technological, the administrative and the physical access control. Although each aspect has implications, functional physical access controls examples start from the ground, weaving the plan around the layout of the physical location.

When you are creating an access control plan, start by considering all aspects , and develop the actual document in sections. Certain businesses carry greater risk for internal threats, such as staff strikes or sabotage. Others are in disaster-prone areas, and require physical planning against natural and man-made disasters. A smaller company may rely on a single power source.The same option included in an access control plan for a corporation can create unforseen costs. That would have been easily avoided by following the lessons from other physical access controls examples created by large businesses.

Planning your physical security is all about who, when and how you’ll let into your premises. Thinking about the vulnerabilities of the access points will affect the type of doors, key locks, fences, camera systems, security guards, card or fob readers, biometric access, interdepartmental access and overall role distribution on horizontal and vertical level.

In a nutshell, the merit of an effective control plan example is in setting the right physical obstacles at critical points; to enable unrestricted work flow for authorized users and prevent unauthorized users from finding a way through.

What are the considerations for each abovementioned aspect of access control?

Work on physical access control plans is concentrated on the physical protection of information, facilities, staff, visitors and contractors, technical installations, raw materials, products and other business resources. Physical access controls examples include prevention, deterrence and recovery. To enable sturdy and reliable physical security, consider including the following components as clear sections in the access control plan:

Physical Security

Network identification and control . Doors, fences and locks need to be somehow controlled. What type of cabling is workable within your access control plan? Relate the relevant network with the authorized users, explain the clear distinctions in several control plan examples and ask your access control provider to help you choose the best.

Perimeter security and interdepartmental requirements . Will you use single authentication with card readers, or add security guards and on a CCTV system at the entry gate? Will your use motion sensors? How will you handle “out-of-the-blue” access? Is issuing cards or fobs always better than providing one-off mobile access codes? Define work areas with restricted access and identify the users with special authorizations for distinct departments.

Physical computer control. Define a central control, monitoring and reporting zone. Assign access to computer units on the ground and set access control tools. Is there a need fo a separate server room? (In most cases, the answer is yes.)

Technical Security

User access. Define data sensitivity levels and assign appropriate user clearance levels. Use the space in your access control plan to define rules for setting passwords and specify technical aspects of wiring, routers, permissions and user access control.

Network encryptions and IT security protocols . Despite its user-friendliness, your plan needs to include methods for Certain access control plan examples tackle this in a comprehensive document; others restructure the information in appendices for trained IT staff.

Architecture. How will the logical and the physical layout of the IT network look like? How will you separate the access control between levels and areas?

Administrative Security

Design a functional access control plan . The plan is an integral part of your business security. Make sure it includes guidelines for staff under various risk levels, incident response and recovery steps, procedures for maintenance, updates and audits of the access control system set in place.

Role-based security and supervision . This aspect need to reflect the distribution of authority within your company, state roles and link associated duties and responsibilities. Identify staff responsible for overseeing the plan, supervising the set controls and enabling training for staff and testing of the equipment.

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How will an access control plan look like?

No access control plan is alike. Each business facility must look at its particular circumstances.

Essential factors for each plan include steps for choosing the right technology, reviewing the building architecture and the spatial infrastructure around the facility, as well as considering other buildings’ proximity and the access control mechanisms already in place. The similarities between the majority of control plan examples are about describing the particular business requirements, assigning user responsibilities, defining access control software application, and setting rules for user management and monitoring.

If you need to adopt one from several proposed physical access controls examples, consider the business needs and the security aspects as described above. That’s one way to design the structure. If you want to dig into a more detailed version, examine this sample plan, and see what needs to go and what needs to stay in your example:

Introduction

• Security aspects
• Policies, guidelines and resources
• Access control model in use
• Security Staff
• Lighting, sensors and alarms
• Fences, door and locks
• CCTV and IP Cameras
• Access for law enforcement

Maintenance and Power Supply

• Energy sources
• Access control alternatives
• Spare parts and software updates
• System support and servicing
• Monitoring and reporting

Infrastructure

• Unit passwords
• Perimeter and internal access control
• Specialized equipment control
• Computer network control
• Role-based access control

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