StraMa Ch9

CHAPTER 9
STRATEGIC CONTROL – process pf monitoring and correcting firm’s strategy and performance.
TWO CENTRAL ASPECTS OF STRATEGIC CONTROL
1. INFORMATIONAL CONTROL – the ability to respond effectively to environmental change.

2. BEHAVIORAL CONTROL – the appropriate balance and alignment among a firm’s culture, rewards and
boundaries.
RESPONDING EFFECTIVELY TO ENVIRONMENTAL CHANGE
TWO BROAD TYPES OF CONTROL SYSTEM
1. TRADITIONAL APPROACH – a sequential method of organizational control in which:

a. Strategies are formulated and top management sets goal
b. Strategies are implemented
c. Performance is measure against the predetermined goal set
Most appropriate when:
 Environment is stable and relatively simple,

 Goals and objectives can be measure with certainty
 Little need for complex measure of performance
Even organizations that have been extremely successful in the past can become complacent or fail to adapt their
goals and strategies to the new conditions.
Example: AIG once, one of the largest and most sophisticated insurance firms in the world with $110 billion in
annual sales, failed to minimize the potential for over concentration of risk by poor use of its information control
systems.
2. CONTEMPORARY CONTROL SYSTEM – continually monitoring the environments, both internal and external.
Identifying trends and events that signal the need to revise strategies, goals and objectives.
 INFOMRATION CONTROL – a method of organizational control in which firm’s gathers and analyzes
information form the internal and external environment in order to obtain the best fit between the
organization’s goals and strategies and strategic environment concerned with whether the organization
is “doing the right things” or not (effectiveness).
 BEHAVIORAL CONTROL – is a method of organizational control in which a firm influence the actions of
employees through culture, rewards and boundaries (3 key control levers). Concerned with whether the
organization is “doing things right” in the implementation of its strategy or not (efficiency).
EFFECTIVENESS OF CONTEMPORARY CONTROL SYSTEMS
a. Focus on constantly changing information that has potential strategic importance.

b. The information is important enough to demand frequent and regular attention from all levels of the
organization.
c. The data and information generated are best interpreted and discussed in face-to-face meetings.
d. The control system is a key catalyst for an ongoing debate about underlying data, assumptions and
action plans
REASONS FOR AN INCRESED EMPHASIS ON CULTURE AND REWARDS
 The competitive environment is increasingly complex and unpredictable, demanding both flexibility and
quick response to its challenges.
 The implicit long-term contract between the organization and its key employees has been eroded.
BUILDING A STRONG AND EFFECTIVE CULTURE
ORGANIZATIONAL CULTURE – a system of shared values and belief that shape a company’s people,
organizational structures, and control systems to produce behavioral norms. Culture sets implicit boundaries
(unwritten standards of acceptable behavior).
 Sustaining an effective culture – it must be cultivated, encouraged and fertilized. Storytelling is one-way
effective cultures are maintained. Pep talks by top executives also serve to reinforce a firm’s culture.
 Rewards and incentive systems represent a powerful means of influencing an organization’s culture,
focusing efforts on high-priority task and motivating individuals and collective task performance. It can
be an efficient motivator and control mechanism.
 Potential downside – subcultures may arise in different business units with multiple reward systems and
it may reflect differences among functional areas, products, services, and divisions.
 Incentive and reward systems need to reinforce basic core values, enhance cohesion and commitment
to goals and objectives and meet with the organization’s overall mission and purpose.
Example: a lot of Wal-Mart’s success was attributed to the strong and pervasive culture at the company, which
was developed and nurtured by founder Sam Walton. In over four decades of operation. Wal-Mart managed to
retain most of the elements of culture it had when it first started out, as well as the entrepreneurial spirit which
often drives startup companies to success.
CHARACTERISTICS OF EFFECTIVE REWARD AND EVAULUATION SYSTEMS
 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
 The compensation system is perceived as fair and equitable
 The structure is flexible; it can adapt to changing circumstances.
Boundaries and constraints can serve many useful purposes for organizations including:
 Focus efforts on priorities

 Providing short-term objectives and action plan
o Specific
o Measurable
o Time horizon must be specific for attainment
o Achievable but challenging
 Improve operational efficiency and effectiveness
 Minimizing improper and unethical conduct
EVOLVING FROM BOUNDARIES TO REWARDS AND CULTURE
System of rewards and incentive coupled with a strong culture
 Hire the right people

 Training plays a key role
 Managerial role models are vital
 Reward systems clearly aligned with organizational goals and objectives
ROLE OF CORPORATE GOVERNANCE
CORPORATE GOVERNANCE – the relationship among various participants in determining the direction and
performance of corporations and the primary participants are the shareholders, the management, and the
board of directors.
CORPORATION – a mechanism created to allow different parties to contribute capital, expertise, and labor for
the maximum benefit of each party.
 The shareholders/investors can participate in the profits of the enterprise without taking direct
responsibility for the operations. They have the right to elect directors who have the fiduciary (held in
trust) obligation to protect their interest.
 Shareholder Activism – actions by large shareholders, both institutions and individuals, to protect their
interest when they feel that managerial actions diverge from shareholders value maximization.
 Management can run the company without the responsibility of personally providing the funds.
 Board of Directors – a group that has a fiduciary duty to ensure that the company is running consistently
with the long-term interests of the owners, or shareholders, of a corporation and that acts as in
intermediary between the shareholders and management.
AGENCY THEORY – a theory of relationship between principals and their agents with emphasis on two problems
namely:
i. The conflicting goals of principals and agents along with the difficulty of principals to monitor the agents
ii. The different attitudes and preferences towards risk of principals and agents
EXTERNAL GOVERNANCE CONTROL MECHANISMS – methods that ensuring the managerial action will lead to
shareholder value maximization and do not harm other stakeholder groups and that are outside the control of
the corporate governance system.
MARKET FOR CORPORATE CONTROL – an external control mechanism in which shareholders dissatisfied with a
firm’s management sell their shares.

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CHAPTER 9

TWO CENTRAL ASPECTS OF STRATEGIC CONTROL

1. INFORMATIONAL CONTROL – the ability to respond effectively to environmental change.

RESPONDING EFFECTIVELY TO ENVIRONMENTAL CHANGE

TWO BROAD TYPES OF CONTROL SYSTEM

1. TRADITIONAL APPROACH – a sequential method of organizational control in which:

Most appropriate when:

 Environment is stable and relatively simple,

EFFECTIVENESS OF CONTEMPORARY CONTROL SYSTEMS

a. Focus on constantly changing information that has potential strategic importance.

REASONS FOR AN INCRESED EMPHASIS ON CULTURE AND REWARDS

BUILDING A STRONG AND EFFECTIVE CULTURE

CHARACTERISTICS OF EFFECTIVE REWARD AND EVAULUATION SYSTEMS

 Objectives are clear, well understood and broadly accepted

 Focus efforts on priorities

EVOLVING FROM BOUNDARIES TO REWARDS AND CULTURE

System of rewards and incentive coupled with a strong culture

 Hire the right people

ROLE OF CORPORATE GOVERNANCE

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