Download Contemporary Approach to Strategic Control - McGraw

9
Strategic Control and
Corporate Governance
McGraw-Hill/Irwin
Strategic Management: Text and Cases, 4e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
•
After reading this chapter, you should have a good
understanding of:
-
The value of effective strategic control systems in strategy
implementation.
The key difference between “traditional” and “contemporary” control
systems.
The imperative for “contemporary” control systems in today’s
complex and rapidly changing competitive and general environments.
The benefits of having the proper balance among the three levers of
behavioral control: culture, rewards and incentives, and boundaries.
The three key participants in corporate governance: shareholders,
management (led by the CEO), and the board of directors.
The role of corporate governance mechanisms in ensuring that the
interests of managers are aligned with those of shareholders from
both the United States and international perspectives.
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Ensuring Informational Control
• 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
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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 a predetermined goal
• Most appropriate when
- Environment is stable and relatively simple
- Goals and objectives can be measured with certainty
- Little need for complex measures of performance
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Contemporary Approach
to Strategic Control
• Relationships between strategy formulation,
implementation and control are highly interactive
• Two different types of control
- Informational control
- Behavioral control
Adapted from Exhibit 9.2 Contemporary Approach to Strategic Control
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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 firm’s strategy
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Informational Control
The Firm’s
Update and Challenge
the assumptions
Assumptions
Premises
Contemporary
Control System
Continuously
• Monitor
• Test
• Review
Goals
Strategies
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Behavioral Control
• Behavioral control is focused on implementation—
doing things right
• Three key control “levers”
- Culture
- Rewards
- Boundaries
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Behavioral Control: Balancing Culture,
Rewards, and Boundaries
•Traditional approach
-Emphasizes comparing
outcomes to
predetermined
strategies and fixed
rules
Adapted from Exhibit 9.3 Essential Elements of Strategic Control
•Contemporary approach
- A balance between
•Culture
•Rewards
•Boundaries
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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
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Motivating with Rewards and Incentives
• Rewards and incentive systems
-
Powerful means of influencing an organization’s 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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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
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Role of Corporate Governance
• Corporate governance
- Relationship among
• The shareholders
• The management (led by the Chief Executive Officer)
• The board of directors
• Issue is
- How corporations can succeed (or fail) in aligning
managerial motives with
• The interests of the shareholders
• The interests of the board of directors
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Agency Theory
• Deals with the relationship between
- Principals – who are owners of the firm (stockholders), and
the
- Agents – who are the people paid by principals to perform a
job on their behalf (management)
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External Governance
Control Mechanisms
• Market for corporate control
• Auditors
• Banks and analysts
• Regulatory bodies (Sarbanes-Oxley Act in 2002)
• Media and public activists