Mc Graw-Hill Irwin Copyright 2009 by The Mc

Chapter 8 Strategic Control

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. 8 -3

Ensuring Informational Control § Traditional control system ØBased largely on the feedback approach ØLittle or no action taken to revise strategies, goals and objectives until the end of the time period 8 -4

Ensuring Informational Control § Contemporary control system ØContinually monitoring the environments (internal and external) ØIdentifying trends and events that signal the need to revise strategies, goals and objectives 8 -5

Traditional Approach to Strategic Control § Traditional approach is sequential ØStrategies are formulated and top management sets goals ØStrategies are implemented 8 -6

Traditional Approach to Strategic Control § Traditional approach is sequential ØPerformance is measured against the predetermined goal set ØControl is based on a feedback loop from performance measurement to strategy formulation § Process typically involves lengthy time lags, often tied to the annual planning cycle 8 -7

Traditional Approach to Strategic Control § This “single-loop” learning control system simply compares actual performance to a predetermined goal § Most appropriate when ØEnvironment is stable and relatively simple ØGoals and objectives can be measured with certainty ØLittle need for complex measures of performance 8 -8

Contemporary Approach to Strategic Control § Relationships between strategy formulation, implementation and control are highly interactive § Two different types of control ØInformational control ØBehavioral control 8 -9

Contemporary Approach to Strategic Control § Informational control ØConcerned with whether or not the organization is “doing the right things” § Behavioral control ØConcerned with whether or not the organization is “doing things right” in the implementation of its strategy § Both types of control are necessary conditions for success 8 -10

Informational Control § Deals with internal environment and external strategic context § Key question Ø“Do the organization’s goals and strategies still ‘fit’ within the context of the current strategic environment? ” § Two key issues ØScan and monitor external environment (general and industry) ØContinuously monitor the internal environment 8 -11

Informational Control § Traditional approach ØUnderstanding of the assumption base is an initial step in the process of strategy formulation § Contemporary approach ØInformation control is part of an ongoing process of organizational learning that updates and challenges the assumptions underlying the firm’s strategy 8 -12

Question What are two compelling reasons for an increased emphasis on culture and rewards in implementing a system of behavioral control? 8 -13

Behavioral Control: Balancing Culture, Rewards, and Boundaries § Behavioral control is focused on implementation —doing things right § Three key control “levers” ØCulture ØRewards ØBoundaries 8 -14

Behavioral Control: Balancing Culture, Rewards, and Boundaries 8 -15

Behavioral Control: Balancing Culture, Rewards, and Boundaries §Traditional approach ØEmphasizes comparing outcomes to predetermined strategies and fixed rules §Contemporary approach ØA balance between üCulture üRewards üBoundaries 8 -16

Question Organizational culture shapes a firm’s: a) b) c) d) People Organizational structures Control systems All of the above 8 -17

Building a Strong and Effective Culture § Organizational culture is a system of ØShared values (what is important) ØBeliefs (how things work) § Organizational culture shapes a firm’s ØPeople ØOrganizational structures ØControl systems § Organizational culture produces ØBehavioral norms (the way we do things around here) 8 -18

Building a Strong and Effective Culture § Culture sets implicit boundaries (unwritten standards of acceptable behavior) ØDress ØEthical matters ØThe way an organization conducts its business § Culture acts as a means of reducing monitoring costs 8 -19

Example: Researchers are Breaking the Rules § Numerous researchers are falsifying their research to compete with the intense competition within the field of science. § Organizational culture of a company, not an individual’s failing character, is the underlining cause for unethical behavior of researchers. Source: . “Many Researchers Break the Rules: Study, , ” Forbes. April 13, 2006. 8 -20

Building a Strong and Effective Culture § Effective culture must be ØCultivated ØEncouraged ØFertilized § Maintaining an effective culture ØStorytelling ØRallies or pep talks by top executives 8 -21

Question Rewards and incentive systems are all of the following except: a) b) c) d) They are powerful means of influencing an organization’s culture They are focused efforts on low-priority tasks They can motivate individual and collective task performance They can be an effective motivator and control mechanism 8 -22

Motivating with Rewards and Incentives § Rewards and incentive systems ØPowerful means of influencing an organization’s culture ØFocuses efforts on high-priority tasks ØMotivates individual and collective task performance ØCan be an effective motivator and control mechanism 8 -23

Motivating with Rewards and Incentives § Potential downside ØSubcultures may arise in different business units with multiple reward systems ØMay reflect differences among functional areas, products, services and divisions ØShared values may emerge in subculture in opposition to patterns of the dominant culture ØReward systems may lead to information hoarding, working at cross purposes 8 -24

Motivating with Rewards and Incentives § Creating effective reward and incentive programs ØObjectives are clear, well understood and broadly accepted ØRewards are clearly linked to performance and desired behaviors ØPerformance measures are clear and highly visible 8 -25

Motivating with Rewards and Incentives § Creating effective reward and incentive programs (Cont. ) ØFeedback is prompt, clear, and unambiguous ØCompensation “system” is perceived as fair and equitable ØStructure is flexible; it can adapt to changing circumstances 8 -26

Example: That’s Management § Goal - Motivate your team to deliver immediate results § How - incentives and rewards, clear goals, and a passionate attitude about winning § Never stop thinking about developing your people § Internal training programs or outside courses, give different experiences and stretch assignments, and encourage risk taking www. businessweek. com/perm/content/07_08/b 4022108. htm? chan=search 8 -27

Setting Boundaries and Constraints § Focus efforts on strategic priorities § Norman Augustine’s four criteria ØBe high-tech ØBe systems-oriented ØDeal with large customers ØBe in growth businesses 8 -28

Setting Boundaries and Constraints § Short-term action plans ØSpecific ØCan be implemented ØIndividual managers held accountable for implementation of action plans § Short-term objectives ØSpecific and measurable ØSpecific time horizon for attainment ØAchievable, but challenging ØProvide proper direction, but be flexible when faced with need to change 8 -29

Setting Boundaries and Constraints § Improving Efficiency and Effectiveness ØRule-based controls characteristics üEnvironments are stable and predictable üEmployees are largely unskilled and interchangeable üConsistency in product and service is critical üRisk of malfeasance is extremely high 8 -30

Question Which of the following types of controls is most appropriate in an organization where consistency in product and service is critical? a) Bureaucratic controls b) Systematic controls c) Cultural controls d) Rule-based controls 8 -31

Organizational Control: Alternative Approaches Approach Culture: a system of unwritten rules that forms an internalized influence over behavior. Rules: Written and explicit guidelines that provide external constraints on behavior. Some Situational Factors § Often found in professional organizations § Associated with high autonomy § Norms are the basis for behavior § Associated with standardized output § Tasks are generally repetitive § and routine § Little need for innovation or creative activity 8 -32

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 8 -33

Evolving from Boundaries to Rewards and Culture § Organizations should strive to have boundaries internalized ØSystem of rewards and incentives coupled with a strong culture üHire the right people (already identify with the firm’s dominant values) üTrain people in the dominant cultural values üHave managerial role models üReward systems clearly aligned with organizational goals and objectives 8 -34

Example § Stock-option stashes grew 47% from the previous year for CEO’s § Soaring stock-option growth indicates CEOs pay is directly related to their good performance § Watson Wyatt believes the compensation package offered to CEO’s is in accordance with the job market § If the board of a company could hire someone to do the job for less, they would hire that individual Source: Clark, Hannah. “Stock-Option Stashes for CEOs, ” Forbes, February 28, 2007. 8 -35