Chapter 9

1. Chapter 9 Strategic Control and Corporate Governance

2. Strategic Control vs. Control • Automotive cruise control

3. Strategic Spotlights • Key terms: • Backdating option grants • Inventory write-off • Wall street “punished” • Market cap

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. 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

6. Traditional Approach to Strategic Control • Process has 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. Contemporary Approach to Strategic Control • Relationships between strategy formulation, implementation and control are highly interactive • Two different types of control • Informational control • Behavioral control Informational control Behavioral control

8. Contemporary Approach to Strategic Control • Informational control • Concerned with whether or not the organization is “doing the right things” • Behavioral control • Concerned 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

9. Informational Control • Deals with internal and external environments • Key question • “Do the organization’s goals and strategies still ‘fit’ within the context of the current strategic environment?” • Two key issues • Scan and’ monitor external environment (general and industry) • Continuously monitor the internal environment

10. Contemporary Information Control • Considers constantly changing information • Looks for data that is important enough to share with all levels of management • Is interpreted through face-to-face meetings of managers, peers and subordinates • Becomes central in debating underling assumptions, data and action plans

11. Traditional approach Emphasizes comparing outcomes to predetermined strategies and fixed rules Contemporary approach A balance between Culture Rewards Boundaries Behavioral Control: Balancing Culture, Rewards, and Boundaries

12. 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 firm’s • People • Organizational structures • Control systems • Organizational culture produces • Behavioral norms (the way we do things around here)

13. The role of culture 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 • Culture acts as a means of reducing monitoring costs

14. The role of culture Sustaining an effective culture 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

15. Corporate Culture: Examples • McDonnell Douglas • Ford • Dresser • Franklin Electric

16. 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

17. Motivating with Rewards and Incentives • Creating effective reward and incentive programs • 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 • Compensation “system” is perceived as fair and equitable • Structure is flexible; it can adapt to changing circumstances

18. 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 • Short-term action plans • Specific • Can be implemented • Individual managers held accountable for implementation of action plans

19. Action Plans (ref. pg. 312-314) “Action plans are critical to the implementation of chosen strategies. Unless action plans are specific (what), there may be little assurance that managers have thought through all of the resource requirements (how) for implementing their strategies. In addition, unless plans are specific, managers may not understand what needs to be implemented or have a clear time frame (when) for completion. Finally, individual mangers (who) must be held accountable for the implementation of action plans.

20. Developing Meaningful Action Plans: MSA Aircraft Interior Products, Inc. Objectives (Excerpted) 1. Achieve sustained and profitable growth over the next three years: 20 percent annual growth in revenues 12 percent pretax profit margins 18 percent return on shareholders’ equity 2. Expand the company’s revenues through the development and introduction of two or more new products capable of generating revenues in excess of $8,000,000 per year by 2005. 3. Continue to aggressively expand market opportunities and applications for the Accordia line of window-shade assemblies, with the objective of sustaining or exceeding a 20 percent annual growth rate for at least the next 3 years.

21. Aircraft Interior Products, Inc.

22. Rules as Controls • Stable and predictable environment • Employees are unskilled and interchangeable • Consistency is critical in product or service • The risk of non-conforming is high

23. 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

24. Shareholders Management (led by CEO) Management (led by CEO) Board of Directors 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

25. Shareholders Management (led by CEO) Separation of Owners (Shareholders) and Management • Shareholders (investors) • Own the company • Participate in the profits of the enterprise • Limited involvement in the company’s affairs • Management • Runs the company • Does not personally have to provide the funds

26. Shareholders Management (led by CEO) Board of Directors Separation of Owners (Shareholders) and Management • Board of directors • Elected by shareholders • Fiduciary obligation to protect shareholder interests

27. 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

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

29. Major Provisions of Sarbanes-Oxley Act • Auditors • Barred from certain types of nonaudit work • Not allowed to destroy records for five years • Lead partners auditing a firm should be changed at least every five years • CEOs and CFOs • Must fully reveal off-balance sheet finances • Vouch for the accuracy of information revealed • Executives • Must promptly reveal the sale of shares in firms they manage • Are not allowed to sell shares when other employees cannot

30. Evolving Boundaries, Rewards, Culture • Hire the right people • Training • Managerial role models • Reward systems aligned with organizational goals.