2. Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e 9 Strategic Control and Corporate Governance

3. 9- 3 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.

4. 9- 4 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

5. 9- 5 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

6. 9- 6 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

7. 9- 7 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

8. 9- 8 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

9. 9- 9 Informational Control Contemporary Control System Continuously Monitor Test Review Update and Challenge the assumptions The Firm’s Assumptions PremisesGoalsStrategies

10. 9- 10 Behavioral Control Behavioral control is focused on implementation— doing things right Three key control “levers” -Culture -Rewards -Boundaries

11. 9- 11 Behavioral Control: Balancing Culture, Rewards, and Boundaries Contemporary approach - A balance between Culture Rewards Boundaries Traditional approach -Emphasizes comparing outcomes to predetermined strategies and fixed rules Adapted from Exhibit 9.3 Essential Elements of Strategic Control

12. 9- 12 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

13. 9- 13 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

14. 9- 14 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

15. 9- 15 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

16. 9- 16 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)

17. 9- 17 External Governance Control Mechanisms Market for corporate control Auditors Banks and analysts Regulatory bodies (Sarbanes-Oxley Act in 2002) Media and public activists