CHAPTER 12

LESSON 37: STRATEGIC CONTROL

CONTROL PROCESS

STRATEGIC MANAGEMENT
Learning Objectives Resources refer to capital expenditure, human resources, etc.
On completion of this chapter you should be able to: after identifying these characteristics; the desired level of each
characteristic is determined. The desired level of performance
• You will understand the complete control process.
should be reasonable and feasible. The level should have some
• You will be able to understand the evaluation and control amount of flexibility also, and should be stated in terms of
criteria. range-maximum and minimum as shown in Figure
• You will understand the factors for strategic evaluation and
control.
Control Process
Control, particularly, a process consisting of four major steps as
shown in Figure exercises operational control

Figure: Control Process

In order to exercise control, managers have to take four steps as
indicated in Figure These steps are as follows:
Figure: Control range
1. Setting performance standards
Control standards are most effective when they are related to the
2. Measuring actual performance performance of a specific individual because a particular
3. Analyzing variance individual can be made responsible for specific results. How-
4. Taking corrective actions. ever, sometimes accountability for a desired result is not so
simply assigned; for example, the decision regarding investment
Setting Performance Standards in inventory- is affected by purchase, rate of production, and
Every function in the organizations begins with plans, which sales. In such a situation, where no one person is accountable
are goals, objectives, or targets to be achieved. In the light of for the levels of inventories, standards may be set for each step
these, standards are established which are criteria against which that is being performed by a person.
actual results are measured.
Measuring Actual Performance
For setting standards for control purposes, it is important to
The second major step in control process is the measurement
identify clearly and precisely the results which are desired.
of performance. The step involves measuring the performance
Precision in the statement of these standards is important. In
in respect of a work in terms of control standards. The presence
many areas, great precision is possible. However, in some areas,
of standard implies a corresponding ability to observe and
standards are less precise. Standards may be precise if they are
comprehend the nature of existing conditions and to ascertain
set in quantities-physical, such as volume of products, man-
the degree of control being achieved.
hour or monetary, such as costs, revenues, investment. They
may also be in qualitative terms, which measure performance. The measurement of performance against standards should be
on a future basis, so that deviations may be detected in advance
After setting the standards, it is also important to decide about
of their actual occurrence and avoided by appropriate actions.
the level of achievement or performance, which will be regarded
Appraisal of actual or expected performance becomes an easy
as good or satisfactory. There are several characteristics of a
task, if standards are properly determined and methods of
particular work that determine good performance. Important
measuring performance which can be expressed in physical and
characteristics, which should be considered while determining
monetary terms, such as production units, sales volume,
any level of performance as good for some operations are
profits, etc. can be easily and precisely measurable. The perfor-
i. Output mance, which is qualitative and intangible such as human
ii. Expense relations, employee morale, etc., cannot be measured precisely.
iii. Resources. Expense refers to services or functions, which For such purposes, techniques like psychological tests and
may be expressed in quantity, for achieving a particular level opinion surveys may be applied. Such techniques draw heavily
of output. from intuitive judgment and experience, and these tools are fat”
from exact. According to Peter Drucker, it is very much desirable

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 to have clear and common measurements in all key areas of summary of the control report should be given to the superior
STRATEGIC MANAGEMENT

business. It is not necessary that measurements are rigidly concerned because the person on the job may either need help
quantitative. In his opinion, for measuring tangible and of his superior in improving the performance or may need
intangible performance, measurement must be warning for his failure. In addition, other people who may be
i. Clear, simple, and rational, interested in control reports are (i) executives engaged in
formulating new plans: and (ii) staff personnel who are
ii. Relevant,
expected to be familiar with control information for giving any
iii. Direct attention and efforts, and advice about the activity under control when approached.
iv. Rreliable, self-announcing, and understandable without
Taking Corrective Actions
complicated interpretation or philosophical discussions.5
This is the last step in the control process, which requires that
Analyzing Variance actions should be taken to maintain the desired degree of
The third major step in control process is the comparison of control in the system or operation. An organisation is not a
actual and standard performance. It involves two steps self-regulating system such as thermostat, which operates in a
i Finding out the extent of deviations, and state of equilibrium put there by engineering design. In a
ii Identifying the causes of such deviations. When adequate business organisation, this type of automatic control cannot be
standards are developed and actual performance is measured established because the state of affairs that exists is the result of
accurately, any variation will be clearly revealed.. Management so many factors in the total environment. Thus some addi-
may have information relating to work performance, data, tional actions are required to maintain the control. Such actions
charts, graphs and written reports, besides personal observation may be on the following lines:
to keep itself informed about performance in different seg- 1. Improvement in the performance by taking suitable actions
ments of the organisation. Such performance is compared with if theperformance is not up to the mark: or
the standard to find out whether the various segments and
2. Resetting the performance standards if these are too high
individuals of the organisation are progressing in the right
and unrealistic; or
direction.
3. Change the objectives, strategies and plans if these are not
When the standards are achieved, no further managerial action is
workable.
necessary and control process is complete. However, standards
may not be achieved in all cases and the extent of variations may Evaluation and Control Criteria
differ from case to case. Naturally, management is required to In putting the control process in operation, two basic issues are
determine whether strict compliance with standards is required involved what to control and how to control. The first issue is
or there should be a permissible limit of variation (Figure) In related, to the identification of those factors on the basis of
fact, there cannot be any uniform practice for determining such which degree of business success is determined. The second
variations. Such variations depend upon the type of activity. For issue involves the use of various control techniques. The first
example, a very minute variation in engineering products may issue is taken here while the second issue will be taking in the
be significant than a wide variation in other activities. next chapter.
When the deviation between standard and actual performance is Criteria of Business Success
beyond the prescribed limit, an analysis is made of the causes The success of any organisation, whether business or non-
of such deviations. For controlling and planning purposes, business, measured in tem1s of its objective achievement. Since
ascertaining the causes of variations along with computation of an organisation May pursue a number of objectives simulta-
variations is important because such analysis helps management neously, and these may be expressed: in different forms there
in taking up proper control action. The analysis will pinpoint are a number of criteria, which are used for control.
the causes, which ate controllable by the person re-possible. In These criteria are grouped into two categories: intervening
such a case, person concerned will take necessary corrective criteria and end-result criteria as shown in Figure.
action.
However. if the variation is caused by uncontrollable
factors the person concerned cannot be held respon-
sible and he cannot take any action.
Measurement of performance.’ analysis of deviations
and their causes may be of no use unless these are
communicated to the person who can take corrective
action. Such communication is presented generally in
the form of a report showing performance standard actual Figure: Evaluation and Control criteria
performance deviations between those two, tolerance limits, and
Causal Factors
causes for deviations. As soon as possible reports containing
Causal factors are those that influence the course of develop-
control information should be sent to the person whose
ment in an organisation. These are independent variables and
performance is being measured and controlled. The underlying
affect intervening criteria and through these, end-result criteria.
philosophy is that the person who is responsible for a job can
For example, strategy formulation and its implementation
have a better influence on final results by his own action. A

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152 11.601
affects various product, customer, and personnel related criteria. After identifying the factors to be evaluated, another issue

STRATEGIC MANAGEMENT
These, in turn, affect different end-result criteria, which are used, comes in the form of fixing standard in respect of these factors.
generally, to measure business performance. Since many factors are in qualitative form and others are in
quantitative form, both qualitative and quantitative standards
Intervening Criteria
are set for evaluation and control.
Intervening criteria are those factors, which are reflected as the
internal state of the organisation. These are caused by causal At this stage, it will be worthwhile to understand the criteria
factors and, therefore, cannot be changed independently except that are used by companies for strategic evaluation and control.
by changing causal factors; in this case type of strategy and its Table presents the findings of a study of 72 companies on the
implementation. For example, personnel attitudes and morale, criteria used by these companies.
an intervening criterion, cannot be changed unless there is a TABLE: Factors for strategic evaluation and control
suitable change in organisational design, systems, and leader-
ship-all being elements of strategy implementation.
Intervening criteria are, generally grouped into three categories: Factor Average
product, customer, and personnel related. An illustrative list of 1. Value added 2.32
intervening criteria is given below:
2. Return on value added 1.56
Product Related Criteria
3. ROV A/ROI 2.21
1. Product quality and performance
4. Attracting and retaining talent 2.25
2. Product cost and price
5. Number of future managers developed 2.06
3. New products introduced
6. New product development 2.20
Customer Related Criteria
1. Customer service 7. Improved service to customers 2.65
2. Customer satisfaction 8. Competitive return to shareholders 2.25
3. Customer loyalty 9. Maximization of shareholders' value 2.14
Personnel Related Criteria
1. Attracting and retaining human talent
Measured at 4- Point Scale
2. Personnel ability and skills The above study shows the various factors for strategic
3. Personnel motivation and attitudes to work evaluation and control in general form. Let us take the case of
End-Result Criteria factors used for measuring a company’s performance. Financial
End-result criteria are those factors, which are caused by causal Express, a daily financial newspaper, uses the following criteria
and intervening factors and are often in terms of the criteria in for selecting the best company of the year as shown in Exhibit
which organisational success is measured. These factors are Exhibit: Criteria for performance measurement used by
highly dependent and, therefore, cannot be changed except by Financial Express
changing the factors responsible for these. End-result criteria are 1. Export revenue for competitiveness,
grouped in four categories: rate of growth, profitability, 2. Cash plough back/total debt for capability to reduce debt,
shareholder value, and social performance. Given below is the
illustrative list of these factors: 3. Profit after tax/net worth for profitability
4. Plough back to net worth for capability to use internal
Rate of Growth
accruals,
1. Sales growth
5. Interest cover for ability to serve lenders,
2. Market share
6. Gross profit/sales for profit margin,
3. Asset increase
7. Earnings before depreciation, interest and tax/total assets for
Profitability ability to use assets,
1. Profit-sales relationship 8. Profit after tax/assets for profitability in using assets,
2. Return on value added 9. Debt/equity for capital gearing,
3. Return on investment 10.Increase in assets for growth,
Shareholder Value 11.Increase in sales for growth.
1. Dividend payment At the second stage, the publication uses six different criteria for
2. Bonus shares judging the companies. These are: earning before depreciation,
interest and tax/net assets, profit after tax/net worth; growth in
3. Market price of shares
assets, growth in sales, gross profit/sales, cash plough back/net
Social Performance worth.
Satisfaction of various stakeholders.

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 Let us see what criteria (quantitative) companies use for places where their attention is required and should be give. This
STRATEGIC MANAGEMENT

measuring their performance. Exhibit presents criteria used by implies the use of management by exception particularly in
Hindustan Lever Limited. controlling aspect. Management by exception is a system of
Exhibit: Hindustan Lever: Use of quantitative criteria for identification a communication that signals to the manager
performance measurement when his attention is needed. From this point of view,
management by exception can be used in other management
In terms of ratios:
processes also though its primary focus revolves around
1. Profit after tax/sales controlling.
2. Earning per share (EPS) Management by exception has six basic ingredients: measure-
3. Dividend per share (DPS) ment, projection, selection, observation, comparison, and
4. Gross gearing-debt/equity decision-making.
5. Interest cover (times) 1. Measurement assigns values to past and present
performances: This is necessary because without
6. Return on capital employed (RGCE)
measurement of some kind, it would be impossible to
7. Return on net worth (RONW) identify an exception.
8. Fixed assets turnover.(times) 2. Projection analyses those measurements that are meaningful
9. Working capital turnover (times) to organisational objectives and extends them into future
In absolute terms: expectations.
1. Sales 3. Selection involves the criteria which management will use to
2. Exports follow progress towards organisational objectives.
4. Observation stage of management by exception involves
3. Contribution to exchequer
measurement of current performance so that managers are
4. Market price of share aware of the current state of affairs in the organisation.
5. Market capitalization 5. Comparison stage makes comparison of actual and planned
The company uses these criteria for ten years on comparative performance and identifies the exceptions that require
Besides, the company uses various qualitative criteria also. attention and reports thevariances to management.
Exhibit presents the criteria used by Reliance Industries to 6. Decision-making prescribes the action that must be taken in
measure its performance. order to bring performance back into control or to adjust
expectations to reflect changing conditions, or to exploit
Exhibit: Reliance Industries: Criteria used for performance
opportunity.
measurement
Thus, it can be observed that management by exception is
In terms of ratios: inseparable from other management essentials in many ways.
1. Sales per share However, the major difference lies in the fact that the superior’s
2. Net profit margin attention is drawn only in the case of exceptional differences
between planned performance and actual performance. In other
3. Earning per share
cases, subordinate manager takes decisions. However, what is
4. Cash earning per share exceptional requires the completion of whole process.
5. Book value per share
Benefits of Management by Exception
6. Debt: equity ratio There are various areas where precepts of management by
7. EBDIT/sales exception are used such as statistical control of product quality,
8. Return on net worth economic order quantities and order points for control of
inventories and supplies, break-even points for determining
9. Equity dividend
operating levels, trends in ratios of indirect to direct labour used
10.Payout ratio in apportioning overhead, attitude surveys for gauging
In absolute terms: employee morale, etc. The use of management by exception is
1. Total sales prevalent because of the following factors:
2. Export and deemed export 1. Management by exception saves executives’ time because they
3. Taxes paid to the Government apply themselves on fewer problems which are important.
Other details of the problems are left to subordinates.
4. Market capitalization
2. It concentrates executives’ efforts on major problems.
Management by Exception Instead of spreading managerial attention across all sorts of
One of the most important ways of tailoring controls for problems, it is placed selectively where and when it is needed.
efficiency effectiveness is to make sure that they are designed to Thus, it ensures better utilization of managerial talents.
point out exception In other words, by concentrating on 3. It facilitates better delegation of authority, increases. span of
exceptions from planned performance controls based on the management and consequently provides better opportunities
time-honoured exception principle allow managers detect those

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 for self-motivated personnel in the organisation. It lessens

STRATEGIC MANAGEMENT
the frequency of decisions at the higher levels of
management which can concentrate on.
Notes

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