Strategic Control and Corporate Governance

1
Chapter 9

• Strategic Control and Corporate Governance

2
Two Approaches to Control

• Traditional control system
• Contemporary control system

3
Traditional Approach to Strategic Control
4
Traditional Approach to Strategic Control

• Involves lengthy time lags, often tied to the
  annual planning cycle
• Single-loop learning control system compares
  actual performance to a predetermined goal
• Appropriate when
• Stable and simple environment
• Goals and objectives can be measured with
  certainty
• Little need for complex measures of performance

5
Contemporary Approach to Strategic Control
Informational control
Behavioral control

• Relationships between strategy formulation,
  implementation and control are highly interactive
• Two different types of control
• Informational control
• Behavioral control

6
Contemporary Approach to Strategic Control

• Informational control
• Concerned with whether or not the organization is
  doing the right things
• Behavioral control
• Concerned with whether or not the organization is
  doing things right in the implementation of its
  strategy

7
Informational Control

• Deals with internal environment and external
  strategic context
• Key question
• Do the organizations goals and strategies still
  fit within the context of the current strategic
  environment?
• Two key issues
• Scan and monitor external environment (general
  and industry)
• Continuously monitor the internal environment

8
Informational Control

• Traditional approach
• Understanding of the assumption base is an
  initial step in the process of strategy
  formulation

• Contemporary approach
• Information control is part of an ongoing process
  of organizational learning that updates and
  challenges the assumptions underlying the firms
  strategy

9
Informational Control
The Firms

• Continuously
• Monitor
• Test
• Review

10
Behavioral Control

• Behavioral control is focused on
  implementationdoing things right
• Three key control levers
• Culture
• Rewards
• Boundaries

11
Behavioral Control Balancing Culture, Rewards,
and Boundaries

• Traditional approach
• Emphasizes comparing outcomes to predetermined
  strategies and fixed rules

• Contemporary approach
• A balance between
• Culture
• Rewards
• Boundaries

Adapted from Exhibit 9.3 Essential Elements of
Strategic Control
12
Characteristics of Effective Contemporary Control
Systems

• Control system must focus on
• Constantly changing information
• Information identified by managers as having
  potential strategic importance

13
Characteristics of Effective Contemporary Control
Systems

• Information
• Important enough to demand frequent and regular
  attention from operating managers at all levels
  of the organization

14
Characteristics of Effective Contemporary Control
Systems

• Data and information generated by the control
  system
• Interpreted and discussed in face-to-face
  meetings
• Superiors
• Subordinates
• Peers

15
Characteristics of Effective Contemporary Control
Systems

• Control system is a key catalyst for ongoing
  debate
• Underlying data
• Assumptions
• Action plans

16
Building a Strong and Effective Culture

• Organizational culture is a system of
• Shared values (what is important)
• Beliefs (how things work)
• Organizational culture shapes a firms
• People
• Organizational structures
• Control systems
• Organizational culture produces
• Behavioral norms

17
Building a Strong and Effective Culture

• Culture sets implicit boundaries
• Dress
• Ethical matters
• The way an organization conducts its business
• Culture acts as a means of reducing monitoring
  costs

18
Building a Strong and Effective Culture

• Effective culture must be
• Cultivated
• Encouraged
• Fertilized
• Maintaining an effective culture
• Storytelling
• Rallies or pep talks by top executives

19
Motivating with Rewards and Incentives

• Rewards and incentive systems
• Powerful means of influencing an organizations
  culture
• Focuses efforts on high-priority tasks
• Motivates individual and collective task
  performance
• Can be an effective motivator and control
  mechanism

20
Motivating with Rewards and Incentives

• Potential downside
• Subcultures may arise in different business units
  with multiple reward systems
• May reflect differences among functional areas,
  products, services and divisions
• Shared values may emerge in subculture in
  opposition to patterns of the dominant culture
• Reward systems may lead to information hoarding,
  working at cross purposes

21
Motivating with Rewards and Incentives

• Creating effective reward and incentive programs
• Objectives are clear, well understood and broadly
  accepted
• Rewards are clearly linked to performance and
  desired behaviors
• Performance measures are clear and highly visible
• Feedback is prompt, clear, and unambiguous
• Compensation system is perceived as fair and
  equitable
• Structure is flexible it can adapt to changing
  circumstances

22
Setting Boundaries and Constraints

• Focus efforts on strategic priorities
• Short-term objectives
• Specific and measurable
• Specific time horizon for attainment
• Achievable, but challenging
• Provide proper direction, but be flexible when
  faced with need to change
• Short-term action plans
• Specific
• Can be implemented
• Individual managers held accountable for
  implementation of action plans

23
Setting Boundaries and Constraints

• Rule-based controls most appropriate in firms
  with the following characteristics
• Stable and predictable environments
• Largely unskilled and interchangeable employees
• Consistency in product and service is critical
• Risk of malfeasance is extremely high
• Guidelines
• Can set spending limits and range of discretion
• Can specify proper relationships with customers
  and suppliers

24
Organizational Control Alternative Approaches
Approach Some Situational Factors
Culture a system of unwritten rules that forms
an internalized influence over behavior.

• Often found in professional organizations
• Associated with high autonomy
• Norms are the basis for behavior

Rules Written and explicit guidelines that
provide external constraints on behavior.

• Associated with standardized output
• Tasks are generally repetitive and routine
• Little need for innovation or creative activity

25
Organizational Control Alternative Approaches
Approach Some Situational Factors
Rewards The use of performance-based incentive
systems to motivate.

• Measurement of output and performance is rather
  straightforward
• Most appropriate in organizations pursuing
  unrelated diversification strategies
• Rewards may be used to reinforce other means of
  control

26
Evolving from Boundaries to Rewards and Culture

• Organizations should strive to have boundaries
  internalized
• System of rewards and incentives coupled with a
  strong culture
• Hire the right people (already identify with the
  firms dominant values)
• Train people in the dominant cultural values
• Have managerial role models
• Reward systems clearly aligned with
  organizational goals and objectives

27
Business-Level Strategy and Strategic Control
Overall Cost Leadership

• Firms competing on the basis of cost must
  implement
• Tight cost controls
• Frequent and comprehensive reports to monitor
  costs associated with outputs
• Highly structured tasks and responsibilities
• Incentives based on explicit financial targets,
  rather than innovation and creativity

28
Business-Level Strategy and Strategic Control
Differentiation

• Firms competing on the basis of differentiation
  must implement
• Employ experts who can identify crucial elements
  of intricate, creative designs and marketing
  decisions
• Support for collaboration and cooperation among
  specialists and functional managers
• Behavioral performance measures and intangible
  incentives and rewards

29
Corporate-Level Strategy and Strategic Control

• Key issue is the need for independence versus
  interdependence
• Cost strategies and unrelated diversification
• Less need for interdependence
• Reward and control systems focus more on
  financial indicators
• Differentiation or related diversification
• Intense need for tight interdependencies among
  functional areas and business units
• Sharing of resources is critical
• Synergies are more important than cost leadership
• Heavy use of behavioral performance indicators

30
Relationships Between Control and Business-Level
and Corporate-Level Strategies
Primary Type Level of Types of Need for of
Rewards Strategy Strategy Interdependence and
Controls
Business-level Overall cost leadership Low Financi
al Business-level Differentiation High Behavioral
Corporate-level Related diversification High Behav
ioral Corporate-level Unrelated
diversification Low Financial