strategic control corp governance
TRANSCRIPT
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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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9-3Copyright 2006 by McGraw-Hill Ryerson, Inc. All rights reserved.
Learning Objectives
After reading this chapter, you should
have a good understanding of:
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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9-4Copyright 2006 by McGraw-Hill Ryerson, Inc. All rights reserved.
Learning Objectives
After reading this chapter, you should
have a good understanding of:
5. The role of corporate governancemechanisms in ensuring that the interestsof managers are aligned with those ofshareholders.
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9-5Copyright 2006 by McGraw-Hill Ryerson, Inc. All rights reserved.
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
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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 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
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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
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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
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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
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Informational Control
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
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Informational Control
Strategies
Assumptions
Premises
Goals
The Firms
Continuously Monitor Test Review
Contemporary
Control System
Update and challenge the
assumptions
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Behavioural Control
Behavioural control is focused on
implementationdoing things right
Three key control levers
Culture
Rewards
Boundaries
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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
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Characteristics of Effective Contemporary
Control Systems
Control system must focus on
Constantly changing information
Information identified by managers
as having potential strategicimportance
Changing
information
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Characteristics of Effective Contemporary
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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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
Changing
information
Importantinformation
Interpretation
and discussion
of information
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Characteristics of Effective Contemporary
Control Systems
Control system is a key catalyst
for ongoing debate
Underlying data
Assumptions
Action plans
Changing
information
Importantinformation
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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Building a Strong and Effective Culture
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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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
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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Motivating with Rewards and Incentives
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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Motivating with Rewards and Incentives
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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Separation of Owners (Shareholders) and
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
Separation of Owners (Shareholders) and
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Separation of Owners (Shareholders) and
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