Strategic Control and

Corporate Governance
Chapter Nine

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Strategic Control
Strategic control
the process of monitoring and correcting a
firms strategy and performance
Informational, behavioral

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Ensuring Informational
Control
Traditional control system
1. strategies are formulated and top
management sets goals
2. strategies are implemented
3. performance is measured against the
predetermined goal set

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Traditional Approach to
Strategic Control

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Traditional Approach
to Strategic Control
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
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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Contemporary Approach
to Strategic Control

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Informational Control
Deals with internal environment and
external strategic context
Key question
Do the organizations goals and strategies
still fit within the context of the current
strategic environment?

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Informational Control
Two key issues
Scan and monitor external environment
(general and industry)
Continuously monitor the internal
environment

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Effectiveness of Contemporary
Control Systems
1. Focus on constantly changing information that
has potential strategic importance.
2. The information is important enough to demand
frequent and regular attention from all levels of
the organization.
3. The data and information generated are best
interpreted and discussed in face-to-face
meetings.
4. The control system is a key catalyst for an
ongoing debate about underlying data,
assumptions, and action plans.
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Behavioral Control
Behavioral control is focused on
implementationdoing things right
Three key control levers
Culture
Rewards
Boundaries

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Reasons for an increased

emphasis on culture and rewards
1. The competitive
environment is
increasingly
complex and
unpredictable,
demanding both
flexibility and quick
response to its
challenges.

2. The implicit longterm contract

between the
organization and its
key employees has
been eroded.

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Building a Strong and

Effective Culture
Organizational culture
a system of shared values and beliefs that
shape a companys people, organizational
structures, and control systems to produce
behavioral norms.

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Building a Strong and

Effective Culture
Culture sets implicit boundaries (unwritten
standards of acceptable behavior)
Dress
Ethical matters
The way an organization conducts its
business

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Example: Wal-Mart
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.

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Sustaining an 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
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 business
units with multiple reward systems
May reflect differences among functional
areas, products, services and divisions

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Characteristics of Effective Reward

and
Evaluation Systems

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Setting Boundaries and

Constraints
Focus efforts on strategic priorities
Providing short-term objectives and action
plans
Specific and measurable
Specific time horizon for attainment
Achievable, but challenging

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Setting Boundaries and

Constraints
Improve operational efficiency and
effectiveness
Minimizing improper and unethical
conduct

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Organizational Control:
Alternative Approaches

9-25

Evolving from Boundaries

to Rewards and Culture
System of rewards and incentives 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

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Role of Corporate
Governance
Corporate governance
the relationship among various participants in
determining the direction and performance of
corporations.
primary participants are the shareholders, the
management, and the board of directors.

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The Modern Corporation

Corporation
A mechanism created to allow different
parties to contribute capital, expertise, and
labor for the maximum benefit of each party.

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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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Agency Theory: Two

Problems
1. The conflicting
goals of principals
and agents, along
with the difficulty of
principals to monitor
the agents, and

2. The different
attitudes and
preferences towards
risk of principals and
agents.

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Governance Mechanisms
Board of directors
a group that has a fiduciary duty to ensure
that the company is run consistently with the
long-term interests of the owners, or
shareholders, of a corporation and that acts
as an intermediary between the shareholders
and management.

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Governance Mechanisms
Shareholder activism
actions by large shareholders, both
institutions and individuals, to protect their
interests when they feel that managerial
actions diverge from shareholder value
maximization.

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External Governance
Control Mechanisms
External governance control
mechanisms
methods that ensure that managerial actions
lead to shareholder value maximization and
do not harm other stakeholder groups and
that are outside the control of the corporate
governance system.

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External Governance
Control Mechanisms

Market for corporate control

Auditors
Banks and analysts
Regulatory bodies
Media and public activists

9-36