Strategic Control Corp Governance

7/29/2019 Strategic Control Corp Governance

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Canadian

Edition

Copyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.STRATEGIC MANAGEMENTMcGraw-Hill Ryerson

Part 3:StrategicImplementation

Strategic Management:Creating Competitive Advantages

Gregory G. DessG. T. Lumpkin

Theodore Peridis

Chapter 9

Strategic Control andCorporate Governance


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9-2Copyright 2006 by McGraw-Hill Ryerson, Inc. All rights reserved.

Learning Objectives

After reading this chapter, you should

have a good understanding of:

1. The value of effective strategic control

systems in strategy implementation.

2. The differences between financial and

strategic controls and the role they play in

the success of organizations.


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Learning Objectives



3. The benefits of having a proper balanceamong the three levers of behaviouralcontrol: culture, rewards and incentives,and boundaries.

4. Why there is no one best way to designstrategic control systems and how the mosteffective systems are contingent onsituational factors and the organizationsspecific strategic choices.


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Learning Objectives



5. The role of corporate governancemechanisms in ensuring that the interestsof managers are aligned with those ofshareholders.


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Control Systems

Traditional control system

Based largely on the feedback approach

Little or no action taken to revise strategies, goals

and objectives until the end of the time period

Contemporary control system

Continually monitoring the environments (internal

and external) Identifying trends and events that signal the need to

revise strategies, goals and objectives


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Traditional Approach to Strategic Control

Traditional approach is sequential

Strategies are formulated and top management sets goals

Strategies are implemented

Performance is measured against the predetermined goal set

Control is based on a feedback loop from performance

measurement to strategy formulation

Adapted from Exhibit 9.1 Traditional Approach to Strategic Control


7/379-7Copyright 2006 by McGraw-Hill Ryerson, Inc. All rights reserved.

Traditional Approach to Strategic Control

Process typically involves lengthy time lags,often tied to the annual planning cycle

This single-loop learning control system

simply compares actual performance to apredetermined goal

Most appropriate when

Environment is stable and relatively simple

Goals and objectives can be measured withcertainty

Little need for complex measures of performance



Informational

control

Behavioural

control

Contemporary Approach to Strategic

Control

Relationships between strategy formulation,implementation and control are highlyinteractive

Two different types of control Informational control

Behavioural control

Adapted from Exhibit 9.2 Contemporary Approach to Strategic Control



Contemporary Approach to Strategic

Control

Informational control

Concerned with whether or not theorganization is doing the right things

Behavioural control

Concerned with whether or not theorganization is doing things right in the

implementation of its strategy Both types of control are necessary

conditions for success



Informational Control

Deals with internal environment andexternalstrategic context

Key question

Do the organizations goals and strategies still fitwithin the context of the current strategicenvironment?

Two key issues

Scan and monitor external environment (generaland industry)

Continuously monitor the internal environment




Traditional approach

Understanding of the

assumption base is an

initial step in the processof strategy formulation

Contemporary

approach

Information control is

part of an ongoingprocess of

organizational learning

that updates and

challenges the

assumptions underlying

the firms strategy




Strategies

Assumptions

Premises

Goals

The Firms

Continuously Monitor Test Review

Contemporary

Control System

Update and challenge the

assumptions



Behavioural Control

Behavioural control is focused on

implementationdoing things right

Three key control levers

Culture

Rewards

Boundaries



Behavioural 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



Characteristics of Effective Contemporary

Control Systems

Control system must focus on

Constantly changing information

Information identified by managers

as having potential strategicimportance

Changing

information




Control Systems

Information

Important enough to demand

frequent and regular attention from

operating managers at all levels of

the organization

Changing

information

Importantinformation


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Copyright 2006 by McGraw-Hill Ryerson, Inc. All rights reserved.


Control Systems

Data and information generated

by the control system

Interpreted and discussed in face-

to-face meetings Superiors

Subordinates

Peers

Changing

information


Interpretation

and discussion

of information


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Control Systems

Control system is a key catalyst

for ongoing debate

Underlying data

Assumptions

Action plans

Changing

information


Interpretation

and discussion

of information

Centrality of

control system


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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

Behavioural norms (the way we do things aroundhere)


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Culture sets implicit boundaries

(unwritten standards of acceptable

behaviour)

Dress Ethical matters

The way an organization conducts its

business

Culture acts as a means of

reducing monitoring costs

The role ofculture


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Effective culture must be

Cultivated

Encouraged

Fertilized

Maintaining an effective culture

Storytelling

Rallies or pep talks by top executives

The role ofculture

Sustaining an

effective

culture


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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


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Potential downside

Subcultures may arise in different businessunits with multiple reward systems

May reflect differences among functionalareas, products, services and divisions

Shared values may emerge in subculture inopposition to patterns of the dominant culture

Reward systems may lead to informationhoarding, working at cross purposes


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Creating effective reward and incentiveprograms

Objectives are clear, well understood and broadlyaccepted

Rewards are clearly linked to performance anddesired behaviours

Performance measures are clear and highly visible

Feedback is prompt, clear, and unambiguous

Compensation system is perceived as fair andequitable

Structure is flexible; it can adapt to changingcircumstances


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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 needto change

Short-term action plans

Specific Can be implemented

Individual managers held accountable for implementation ofaction plans


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Setting Boundaries and Constraints

Rule-based controls most appropriate in firms with thefollowing 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

O i ti l C t l Alt ti


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Organizational Control: Alternative

Approaches

Culture: a system ofunwritten rules that formsan internalized influence

over behaviour.

Approach Some Situational Factors

Adapted from Exhibit 9.5 Organizational Control: Alternative Approaches

Often found in professionalorganizations

Associated with high autonomy

Norms are the basis for behaviour

Rules: Written andexplicit guidelines thatprovide externalconstraints on behaviour.

Associated with standardizedoutput

Tasks are generally repetitive androutine

Little need for innovation orcreative activity

O i ti l C t l Alt ti


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Organizational Control: Alternative

Approaches

Rewards: The use ofperformance-basedincentive systems to

motivate.

Approach Some Situational Factors

Measurement of output andperformance is ratherstraightforward

Most appropriate in organizationspursuing unrelated diversificationstrategies

Rewards may be used to reinforceother means of control

Adapted from Exhibit 9.5 Organizational Control: Alternative Approaches

E l i f B d i t R d d


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Evolving from Boundaries to Rewards and

Culture

Organizations should strive to haveboundaries 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

B i L l St t d St t i


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Business-Level Strategy and Strategic

Control:

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

Overall Cost Leadership

B i L l St t d St t i


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Business-Level Strategy and Strategic

Control:

Firms competing on the basis ofdifferentiation must implement

Employ experts who can identify crucial

elements of intricate, creative designs andmarketing decisions

Support for collaboration and cooperationamong specialists and functional managers

Behavioural performance measures andintangible incentives and rewards

Differentiation

C t L l St t d St t i


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Corporate-Level Strategy and Strategic

Control

Key issue is the need for independence versusinterdependence

Cost strategies and unrelated diversification Less need for interdependence

Reward and control systems focus more on financialindicators

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 behavioural performance indicators

R l ti hi B t C t l d B i


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Relationships Between Control and Business-

Level and Corporate-Level Strategies

Business-level Overall cost leadership Low Financial

Business-level Differentiation High Behavioural

Corporate-level Related diversification High Behavioural

Corporate-level Unrelated diversification Low Financial

Primary TypeLevel of Types of Need for of RewardsStrategy Strategy Interdependence and Controls

Adapted from Exhibit 9.6 Summary of Relationships between Control and Business-Level and Corporate-Level Strategies


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Role of Corporate Governance

Corporate governance Relationship among

The shareholders

The management (led by the ChiefExecutive Officer)

The board of directorsManagement(led by CEO)

Issue is

How corporation s can succeed

(or fail) in aligning managerialmotives with the interests of the shareholders

The interests of the board ofdirectors

Shareholders

Board ofDirectors

Separation of Owners (Shareholders) and


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Management

Shareholders (investors)

Limited liability

Participate in the profits of theenterprise

Limited involvement in thecompanys affairs

Management(led by CEO)

Shareholders

Management

Run the company

Does not personally have toprovide the funds



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Management

Board of directors

Elected by shareholders

Fiduciary obligation to protectshareholder interests

Management(led by CEO)

Shareholders

Board ofDirectors


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Agency Theory: Two Problems

Goals of principals and agents may conflict

Difficulty or expensive for the principal to verify what

the agent is actually doing

Hard for board of directors to confirm that managers are

actually acting in shareholders interests

Managers may opportunistically pursue their own interests

Principal and agent may have different attitudes

and preferences toward risk

Strategic Control Corp Governance

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