Feedback Control – Definition, Example, and How does it work?

Definition:

Feedback control is a process used by managers to assess the performance of the team. It helps to determine the performance of an individual member of the team. The implementation of the feedback control puts the manager in a position to lead the team effectively.

In other words, feedback control is a system of control that helps managers to control and monitor the performance of a team by providing feedback.

How does it work?

The feedback control compares the performance/output of the team with a set goal or expected performance. This gives a clear expectation from the team.

Once the process is completed the actual performance of the team can be compared with the pre-set goal to assess if the team has been successful in the achievement of the desired goal.

How to design a feedback control?

The feedback control can be designed with four elements. These elements include pre-set point, actual performance, variance, and feedback.

First of all, the goal or certain level of the performance is set by the manager that includes identification of certain points to direct the complete mechanism of control ahead. This is the target approach of the manager or a desired result from the process.

The second element is getting actual performance from the process which is obtained once the process is completed to a certain extent or a complete process has been performed. That’s the point from where actual performance is collected to be used in the further process.

The third element of the feedback control system is variance analysis. The variance is calculated by comparing pre-set performance or goal with the actual performance of the business.

That’s the main point where analysis needs to be done and reasons need to be identified for the variances and matrices of the controls. If managers perform effectively in this area of performance, feedback control is more than effective to enhance the performance of the business.

The fourth element of feedback control is the provision of feedback. That’s the main area where the professional judgment of the manager is required to formulate effective feedback. If feedback is constructive it motives the employee to performance of their duties.

All the four elements of the feedback system are linked and flow in a sequence. If all the steps of the feedback control are effective, it results in better management of the feedback control system.

Advantages of feedback control

There are multiple advantages of a feedback control system in the organization. These advantages include effective planning of the project, variance analysis, positive influence on the business, and alignment of the business strategy.

1) Effectiveness of planning

The use of a feedback control system requires pre-set of the performance or goal for the organization. It increases the culture of planning and performance measurement within the business.

The culture of the planning and performance measurement helps to enhance the effectiveness of the planning process.

2) Variance analysis

The variance analysis helps to identify key areas of the processes that affect the efficiency of a business. This is the main point of improvement where critical processes can be identified that create problems in the achievement of organizational goals.

3) Positive influence/motivation

The feedback control helps to communicate the expectation of the business to employees of the company. It gives a certain direction to the employees and keeps them motivated to work.

They also have in their mind that their performance is to be evaluated in the future which helps them to achieve their career goal.

4) Alignment in business strategy

The feedback control helps to direct the direction of the environment, business strategy, and value. It helps to set the direction of the business. The main point of the feedback control is that planning that can be aligned with the overall direction of the business.

Limitation of feedback control

The performance with the feedback control can only be measured once a certain part of the process has been completed. If there is a deviation in the performance in comparison with the pre-set pro forma, the manager cannot do much to reverse the process and get the performance of his desire.

In other words, feedback control is not a preventative control that helps in avoidance of the error. On the contrary, it’s a detective control that measures the deviation once the process has been completed. So, the feedback control system cannot be of much importance in the case of unique projects However, if the project is of repetitive nature it can be used effectively.

Example of feedback control

The sales manager of the company sets the target of the tram to sell 10,000 units of product in one month. There are 10 salesmen and each salesman is assigned the responsibility to sell 1,000 units in a month and the target market were divided among them. The first step of the process is completed for setting the goal.

The second step starts when after the month-end, the results are collected from team members and discovered that the total sale of the units was 8,000. There was a shortage of 2,000 units in the number of products sold.  The third stage starts where the manager calculates the variance of each salesman and comes to know that four salesmen could not achieve the desired target and the sale of each salesman was short by 500 units.

In the fourth stage, the manager interviews the sales manager and inquires the reasons for not being able to achieve the target. The manager discovers that the time of visit for these managers was at the peak hours of the market and the owners of the shops did not entertain them as they were already busy with their customers.

So, the manager provided his feedback to align their time of visit with other salesmen that were successful. Hence, the manager provided feedback to enhance the performance of the sales team. If these underperforming salesmen follow the feedback from the manager, they seem to achieve the desired targets as other salesmen in the team.

Decision Tree: What Is It and How Does It Work?

Decision tree

The decision tree is a diagrammatic approach to make a decision on the basis of the statistical concept of probability. The diagram is called a decision tree as the branches of the diagram are spread in the form of a tree. Different branches of the tree present different outcomes or decisions on account of different probabilities and expectations of the outcomes.

It’s a sound tool for decision making used around the globe for making a decision about not only complex investing and financing issues but issues related to the personal lives of the people.

The concept of the decision tree is more useful in a situation that involves series of decisions with a number of outcomes at each step of the decision making.

For instance, the project to expand in a new country can contain a number of variables that need to be considered before making any final decision.

The strength of the decision tree is the division of the decision-making process into chunks that provide a base for analytical thinking and assertive exercise to come up with the most suitable decision easily. Sometimes, variables of the decision are dependent on each other.

For instance, with an increase in sales up to a certain threshold there may be a decrease in the cost of sales, the company may have the policy to allocate 20% of the revenue for sales and marketing. Hence, the situation becomes complex and a human memory may not be able to process the information easily.

Hence, diagrammatic presentation of the variables helps in understanding flow for the process of decision making. Let’s understand that how a decision tree works.

Steps of decision tree

There are two steps of using tree decision that include construction of decision tree and making evaluation and recommendation based on the constructed decision tree.

1)  Construction of decision tree

The process of construction starts with a rectangle on the left-hand side of the paper. A rectangle is a place where the main idea/criteria are written that leads to a final decision at the end. The circles are assigned for the outcomes, there can be two outcomes for certain situations either good or bad.

These outcomes may depend on other outcomes and further leaves need to be drawn. Systematic construction of tree based on outcomes provide an excellent approach to reach a rational decision.

An important point to note is that the outcomes are not under the control of managers and external information needs to be taken to close the circles in the rectangle.

It’s like taking information in the form of circles and reaching the rectangles in the form of a decision. This provides a logical flow and visual approach for a decision to be reached.

Consider a decision tree with two branches. The two branches mean two outcomes are possible for the decision under consideration. The upper branch does not have a point of the outcome, it means there is certainty regarding the decision on the upper side of the branch.

However, the lower branch has an outcome point that divides into further outcome points. This indicates that there are different variables of the outcomes that need to be considered in reaching the point of a rectangle or the decision.

2)  Evaluation of the decision

The evaluation of the decision tree starts from the right side. It moves from right to left by considering expected values and all the calculations for the probabilities. If there are different branches in the tree, all of them are solved from right to left and the decision is reached in the final.

The first step of evaluation is the labeling of the leaves and all other parts of the tree. Expected values and probability are written on the tree.

Once the decision tree is labeled, start with the extreme right and keep on multiplying expected values with probability. It will provide a decision when all of the branches are closed.

However, the prediction of expected values and probability is judgmental and the real figures may not even be close to the expected values. Further, the use of a decision tree does not consider risk appetite, and all the decision making is based on probability and expected values.

It’s important to note that a comprehensive understanding of the factors affecting decision and a strong understanding of the factors is required to reach an optimum decision using a decision tree, otherwise, it may not be of much use.

Example of decision tree

The given example illustrates that how a decision tree helps in deciding on a situation about expected values and probabilities.

The square at the left shows that we need to decide on the development of the software. We have two branches/options. The first option is to not go for the development and no revenue and no cost. The second option is to incur the cost of USD 2,000 and earn revenue.

However, success and failure are probable with 0.3 and 0.7. If the business gets the success it will be able to USD 7,000 as calculation show {(5000*0.7) + (10,000*0.2) + (15000*0.1)}. On the other side, the expected cash flows are USD 1,500 {(1500*0.5) + (1500*0.5)}.

The probability of success and failure is 0.3 and 0.7 respectively. If we allocate the expected amount in case of success, we get USD 2,100 (7,000*0.3) and in case of failure, we get USD 1,050 as (1500*0.7).

Hence, to reach the triangle we get USD 3,150 as (2,100+1050) which is more than the cost of development amounting to USD 2,000, and business is expected to generate a return.

Hence, based on given cost, expected revenue, and probabilities, the decision can be made to opt for software development.

However, the use of a decision tree requires a comprehensive understanding of the market, external factors, internal capabilities, management competence, and a sound sense of judgment to allocate the probabilities to certain outcomes.

The changes in the variables may lead to a change in the decision. Hence, due care needs to be exercised in estimating input variables for a decision tree.

What is a Public Limited Liabilities Company?

Public Limited Liabilities Company:

Public Limited company is also known as PLC and the acronym PLC is used at the end of the name of the company. The PLC signifies that business can sales the share to the public.  The acronym PLC is used in the UK and some commonwealth countries for public listed entities but in the USA INC is used for public limited companies.

Key takeaways:

  • PLC is used in British companies which are equaling to the USA “INC”.
  • Companies listed in the London stock exchange are known as “PLC”.

The abbreviation PLC is used after the name of the company which is registered on the stock exchange and it is mandatory. Because it communicates to the investors and other related parties that it is a public traded entity.

Examples of PLC:

  • All companies listed on the London Stock Exchange will be known as PLC, such as in Fashion Industry Burberry Group PLC, in automaker Rolls Royce PLC.
  • The Top 100 companies listed in the London Stock Exchange will be grouped together in a single index knowing as Financials Times Stock Exchange  100 (FSTE 100)
  • The companies included in FSTE 100 represent the whole economy of the United Kingdom.
  • The largest PLC Company by market capitalization is Royal Dutch Shell.

All PLC companies might not be listed on the stock exchange, a company might choose to not list on the stock exchange or may not meet the stock exchange requirements.

How a Public Limited Company Works?

PLC is a limited liability company that trades its shares in the stock exchange market and investors (general public) can purchase are its shares from the stock market. The share buyers of PLC have limited liability up to the level of their shares. Shareholders cannot be responsible for more than their worth of shares in the company and the maximum loss for the shareholders will be the number of shares.

In the United Kingdom (UK) PLC operates in similar lines for the public corporation in the United States of America (USA).  Their operation is strictly regulated by Limited liability companies (LLC) and published for shareholders and potential investors.

The potential investors and current shareholders of the PLC can evaluate the performance of the company through published information. The regulatory authorities strictly instruct the management of PLC companies to publish true and fair information for the public.

When a PLC publishes its financial statements to the public, it is regulatory requirements that those financial statements must be audited by Independent Auditors.  An Independent Auditor’s report is also published with the financial statements of the company.

Conclusion:

If we conclude our discussion then public limited companies are those companies that are listed on the stock exchange and have the ability to sell their share in the stock exchange market. The shares of Public Limited companies are available for the general public. These companies are often larger in size than public Limited Companies but it is not necessary.

The Companies listed in stock exchanges often represent the economy of the country to the expansion of their operations. These companies have very strict legislative requirements to registers themselves on the stock exchange, most companies often fail to fulfill the stock exchange requirements.

What is a Limited Liability Company?

Introduction:

In this article, we will discuss the Limited Liability Company and understand the limited liability company. We will also discuss the forming of limited, advantages, disadvantages of a limited liability company. Distinguish the partnership and Limited Liability Company.

What is a Limited Liability Company?

A Limited Liability Company is the type of business in which the owner is not individually liable for business liabilities and debts.  These companies are the combinations of characteristics of a corporation with those of sole proprietor and partnership. These companies’ features are similar to the corporation.

Understanding Limited Liability Companies (LLCs):

These companies’ business structure is allowed under state statutes. The owner of LLCs is known as members of the company.  Many states allow these companies anyone can be a member of the company such as individual, foreigners, corporation, and foreign entities but some states prohibit banks and insurance companies to be a member of the company.

An LLC is more formal than a sole proprietor and partnership, these companies follow the articles of the organization. LLC is easy to set up rather than a corporation with minimum requirements. In LLCs member’s wages are deemed to be part of operating expense and will be deducted from the profits of the company.

Forming the Limited Liability Company:

Requirements for forming the LLC might different in different countries, but there are many similarities in forming the LLC in many countries such as members must choose the name of the company before farming.

Once the name of the company is decided then members submit the request in legislative authority to know the availability of the name. If the name is available then those authorities allow using the name otherwise members have to select the name which is not registered.

After confirming the name of the company articles of the organization must be submitted to the state’s legislative authorities.  These articles demonstrate the power, liabilities, rights, and obligation of each member. Other information included the name and addresses of the members and the company’s agents.

Advantages and Disadvantages of LLCs:

Advantages:

  1. LLC restricts the liability of members
  2. LLC is well organized and formal of doing business rather than partnership or sole proprietor.
  3. Articles of the organization are submitted at the time of forming the company, which reduces the conflicts or disputes between members.
  4. In many countries tax rates of LLCs are lower than individuals.

Disadvantages:

  1. Adopting the formalities of the state for LLC will increase the cost of the business.
  2. The state imposes many restrictions on LLCs, which might divert management’s attention from operational activities.

Conclusion:

Forming the LLC is beneficial for a businessman because LLC will reduce the liability of the businessman. The Limited Liability Company has many attractive features for members. Because in LLC business is a separate legal entity and owner is the member of the company, which restricts the liability of the member.

In sole proprietor and partnership, the owner’s business liabilities will not be limited and is liable to settle the business liabilities from personal assets. 

We hope you will understand the importance of LLC, Please leave a comment for us if you have any query or question.

How Business Process Reengineering would influence operational performance?

Business Process Reengineering is the process of rethinking and resigning about the fundamental’s business process in the organizations. Management of the entity consider Business Process Reengineering only for significant process in the entity and to make sure its business could meeting the following factors.

  • Simplification
  • Cost reduction
  • Improved quality
  • Enhance customer satisfaction

My personal word for Business process reengineering is radically and fundamentally change the way how processes are usually running to meet the above objective.

Business process reeginering

Let me clarify about these four main objective of Business process reengineering before we move to the influence of operational performance.

  • First one is simplification. The objective of process reengineering is to make sure that process of doing an activity is as easy as possible. It is start by rethinking about the basis of each of activities and making sure people handing each process could easily understand the process. Process should not involve too many stage to get one activity done. The objective is the result of process complexity that happen in the day to day operation. Then, the reengineering will need to make sure the complexity are not happen again.
  • Cost reduction stand in the second in rank, but it is equally importance in term of the benefit to the entity. The cost reduction here does not mean the reduction in quality.It still focus on the quality that those processes are running and supporting. However, while performing redesign the process, we have to ensure that all of the waste of material or others kind of resource need to be minimizes.Long running process and complexity of the process also incur cost. Therefore, this one link directly with process simplification.
  • Improved quality of the products or services to make sure that the company could compete its business in the market. This is quite importance.  The quality here sometime not exactly the products or service that we sold to outside customers. But it is the quality of output that the process being consider to reengineer are offering.
  • The last objective of Business Process Eeengineering is to enhance customer satisfaction. Business Process Eeengineering need to make sure that all the Business Process Eeengineering provide the benefit to customers. The customers are relies because of quality of products and quality of services. For example, the process are design to make sure after sales services are fast and reliable.

Now let move to the way how Business Process Reengineering would influence operational performance of an entity.

Reengineering would influence into the operation of company by making two main out put. Negative and Positive.

Well, positive or negative will base mainly on how the environment, processes and leadership of project management are. It also affect by the gap of existing and new process is. In some organization, people are enjoy follow the old fashion, or old way of doing thing. People are not fully aware about the new technology and they willing not to adopt the new things. Especially, when we introduce new things.

With such situation, probably there is big resistance from those process holders. In this case, the the project manager who is responsible to make change is not strong enough, the change will not success. Then there will be negative impact. The better way to make sure that the Business Process Reengineering is require project manager to have proper planing.

For example, the project plan schedule need to be prepared. The budget for project need to be approve. The project manager also need to get strong support from key person and senior manager.

If the Business Process Reengineering is success, the company will get many positive affect and appear the better result in the performance. As mention in the objective above, the company’s cost will in decrease as the result of removing the process that is not necessary. Staff who hold the process also feel being motivate because of the process they are doing are importance for the company.

One of the best benefit is the company will receive the positive feedback from its customers because the change will make the process flexible with quality mine set.

Ultimate Guide of Transfer Pricing

The Concept of Transfer Pricing:

Transfer pricing (TP) is the price of goods or services being sold or buy between divisions in the same group or entity. For the divisions that operate in the same jurisdiction, transfer pricing is set for the purpose of performance management, and motivation of division from the group or entity level. Sometime it is setting up to solve the conflict between division. However, for the group that have many divisions operate in the multinational countries, TP is setting for the purpose of complying with law and tax purpose.

To summary, the purposes of transfer pricing are:

  • To keep goal congruence among divisions: Pricing police are normally set to ensure that the decision making at the divisional level are retaining the benefit for both divisions and group as a whole. It is the risky when the decision making are delegate all the power to the divisional level since some division made at the division are benefit at the division but impair group profit.
  • To allow managers to retain autonomy: In the modern performance management, the decision making are delegated to the local manager as they know the situation more that group level. Transfer Pricing is part of modern performance management so that divisions could survive for themselves. Yet, not all of the power and decision are delegates.
  • To permit performance evaluation of division: Divisional performance management is very importance as it is affected the performances, reward and motivation of starts and managements at divisional level. This is one of the most importance parts of TP.
  • Tax Management: For the group companies that have many divisions that operate in different countries and corporate tax rates are different, transfer pricing that manage by group are very importance to make sure that the group pay too much tax or in others words, how the group could save tax.
  • Managing profit for minor shareholders: Well, it might be a bit difficult in this point, but some of the major shareholders are managing profit of the companies and they have the chance to manage the benefit of minor shareholder as well. Mostly through the pricing of goods or services transfer among the group.

Types of Transfer Pricing:

The following are the five types of transfer pricing usually set by the group company and jointly set by the division.

  • Market Price Transfer Pricing: Marketing price is the type of transfer price policies that use available market price of the same or similar products or services in the market as the base price for charging. This type of pricing is fair for both transferring division and receiving division. Both division could compare the price that they are paid and receive to the market price; however, by using Transfer Price, the Transferring Division might not are not spend on transportation fee if they both are in the same country.
  • Adjusted Market Price Transfer Pricing: Adjusted Marketing Price is the type of TP policies that use the available price in the market and make adjustment for some type of expenses that not incurred as the outsider. For example, transport fee.
  • Marginal Costs Transfer Pricing: This kind of pricing is charge at the variable cost incurred at the transferring division. Such pricing might demotivate transfer division as some cost that incurred at their department is not considered. For example, fixed cost is not taking into account.
  • Full Cost Transfer Pricing: The price is charge based on the full cost that incurred at the transferring division. This type of TP have many disadvantages. First, it might be motivating the transferring division not to control the cost of products or services because all of the cost that incurred at the transferring division will be charged to the receiving division. Per group point of view, there is poor cost control and result wasted to the group. Another disadvantage is that the receiving division will be demotivate as they could control the cost that being charge to them.
  • Negotiate Transfer Pricing is the type of transfer price that Group Company delegates the power to its division to have the right to negotiate the prices. This type of TP strategy is almost of same to adjusting market as the prices are decided by both transferring and receiving division.

Issues Need to Consider for International Transfer Pricing

Many of the group of companies now has many international divisions for the purpose of market expansion and low cost strategy. In such situation, transfer pricing play the significant rule and normally there are many issue to consider.

The following are the five issues that need to consider when setting Transfer Pricing for International Division:

  • Exchange Rate Fluctuation: Some of the divisions are operating in the county that have low economic and highly fluctuate exchange rates. For example, the transferring division is operating in the high fluctuation exchange rate; the receiving division will incurred the loss of exchange rate. In such case, hedging currency might need to consider.
  • Taxation Rates: It is for obverse reasons operating in different countries, the group have to expose different tax rates, and the pricing have to set based on those tax rates to ensure that the group does not paid too much tax.
  • Import Duties: Some country try to control and manage the transfer price by setting the price for import or exports. It also the main factors that we need to consider when consider the transfer pricing strategy.
  • Fund Repatriation: The concept of fund repatriation is that the government wants to control the fund outflow from its country by investors through transfer pricing by charging the high prices products or services.
  • Anti-dumping legislation: Such concept that governments want to propose the local products by setting the market price for products export from the country. For example, some of the group companies open the production division in the low labor cost country and the product charge from those countries is at the low price.

Written by Sinra