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CHAPTER 9

Strategic Control and

Corporate Governance

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
Strategic Control: Traditional Approach Model

The traditional approach to strategic control is sequential.

1.

1. Strategies are formulated, goals are set.

2. Strategies are implemented.
3. Performance is measured against predetermined goals.

Exhibit 9.1 Traditional Approach to Strategic Control

Strategic Control: Traditional Approach

Traditional approach to strategic control =

feedback loop from performance
measurement to strategy formulation.
Involves lengthy time lags, “single-loop”
e.g. covid case so sudden to tackle unlike ageing problem.
learning.
Most appropriate when:
.

•
Environment is stable and relatively simple.
•
Objectives can be measured with certainty.
Strategic Control: Contemporary Approach Model

Relationships between strategy formulation,

implementation, and control are highly interactive, utilizing:
.

• Informational control.
• Behavioral control.

Correct strategy, Ensure relevant update info so

How to ensure ppl follow ur strategy
the strategy are good enough

Exhibit 9.2 Contemporary Approach to Strategic Control

Strategic Control: Contemporary Approach

Informational control = Is the organization “doing

the right things”?

Behavioral control = Is the organization “doing

things right” in the implementation of its
strategy?

Both types of control are necessary, but not

sufficient, conditions for success.
Strategic Control: Contemporary Approach
Effectiveness
Contemporary control systems using informational
control are effective when:
.

•
Focus is on constantly changing information
that has potential strategic importance.
•
Information is important enough to demand
frequent and regular attention from all
levels.
•
Data and information are interpreted and
discussed in face-to-face meetings.
•
Control system is a catalyst for ongoing debate
about underlying data, assumptions and plans.
Informational Control: Characteristics

Informational control = ongoing process of

organizational learning.

Ongoing debates challenge assumptions.

.

•
Time lags are shortened.
•
Changes are detected earlier.
•
Speed and flexibility of response is enhanced.
Informational Control: Issues

Informational control deals with both the internal

and external environment.
Is the organization “doing the right things”?
Do the organization’s goals and strategies still
“fit” within the context of the current strategic
environment?
Two key issues:
.

•
Scan and monitor the external environment.
•
Continuously monitor the internal environment.
Question 2

Which of the following is not one of the

characteristics of a contemporary control system?
A.

A. It is a key catalyst for an ongoing debate about

underlying data, assumptions, and action plans.
B. It must focus on constantly changing information
that is strategically important. =discussion
C. It circumvents the need for face-to-face meetings
among superiors, subordinates, and peers.
D. It generates information that is important enough
to demand regular and frequent attention.
Behavioral Control Model
Asm
Behavioral control = focused on implementation —
“doing things right.”
Influences the actions of employees via:
.
e.g. AIA will accept ideas to upper management, open minded
•
Culture.
•
Rewards.
•
Boundaries.

Exhibit 9.3
Essential
Elements of
Behavioral
Control
Behavioral Control: 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, and control systems.
Organizational culture produces behavioral
norms (the way we do things around here).
Behavioral Control: Rewards

Reward systems and incentive programs:

.

•
Powerful means of influencing an organization’s
culture.
•
Focusing efforts on high-priority tasks.
•
Motivating individual and collective task
performance.
•
Can be an effective motivator and control
mechanism.
Behavioral Control: Downside of Reward Systems

Potential downsides to reward systems:

.

•
Individual actions are not related to
compensation; employees are rewarded for the
wrong things.
•
Different business units have differing rewards
systems.
Behavioral Control: Reward Systems Characteristics

Effective reward systems share common

characteristics.
.

•
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.
Behavioral Control: Boundaries 1 New rules

Boundaries and constraints can be useful in:

.

•
Focusing individual efforts on strategic
priorities.
•
Providing short-term objectives and action
plans to channel employee efforts by:
•

•
Setting specific, measurable objectives, including
a specific time horizon for attainment.
•
Making them achievable, yet challenging enough
to motivate.
•
Holding individual managers accountable for
implementation.
Behavioral Control: Boundaries 2

Boundaries and constraints can also:

.

•
Improve efficiency and effectiveness through rule-
based controls, appropriate when:
•

•
Environments are stable and predictable.
•
Employees are largely unskilled and interchangeable.
•
Consistency in product and services is critical.
•
The risk of malfeasance is extremely high.
•
Minimize improper and unethical conduct via:
•

•
Explicit rules.
•
Policies that contain an ethical code of conduct.
Question 3

Rules and regulations, rather than culture or

rewards, would probably be used for strategic
control at what type of company?
A.

A. Software developer.
B. Stock brokerage firm.
C. Manufacturer of mass-produced products.
D. High-tech research facility.
Behavioral Control Systems: Situational Factors

Culture: A system of unwritten rules •

Often found in professional
that forms an internalized influence organizations.
over behavior. •
Associated with high autonomy.
•
Norms are the basis for behavior.
Rules: Written and explicit guidelines •
Associated with standardized
that provide external constraints on output.
behavior. •
Most appropriate when tasks are
generally repetitive and routine.
•
Little need for innovation or creative
activity.
Rewards: The use of performance-base •
Measurement of output and
incentive systems to motivate. performance is rather
straightforward.
•
Most appropriate in organizations
pursuing unrelated diversification.
•
Rewards may be used to reinforce
other means of control.

Exhibit 9.5 Organizational Control: Alternative Approaches

Corporate System: Corporate Governance

The strategic control mechanism corporate governance

focuses on relationships among:
.

•
Shareholders.
•
Management (led by the CEO).
•
Board of Directors.
Assumes the separation of owners (shareholders)
and management in a modern corporation.
Asks how corporations can succeed (or fail) in
aligning managerial motives with:
.

•
Interests of the shareholders.
•
Interests of the board of directors.
Corporate Governance Mechanisms

Corporate governance mechanisms — aligning

the interests of owners and managers
through: Non executive directors: too utopia ideas
.

•
A committed and involved Board of Directors.
•
Shareholder activism(very influential) and active
engagement.
•
Managerial rewards and incentives.
•

•
Contract-based outcomes — reward and
compensation agreements that align management and
stockholder interests.
•
Making a decision about CEO duality — should the
Corporate Governance Mechanisms: Board of
Directors Effectiveness
An effective Board of Directors should:
.

•
Become active, critical participants.
•
Discuss forward-looking strategic issues.
•
Evaluate CEOs against high performance
standards.
•
Practice director independence.
•

•
Benefits of outsider dominance include broader access to
knowledge, independent oversight of strategy.
•
Disadvantages include less direct operational information,
less opportunity to build relationships with non-board
member executives who then lack access to this strategic
insight.
Corporate Governance Mechanisms: Shareholder
Activism
Shareholder activism assumes the following:
Individual shareholders have rights.
.

•
To sell stock, vote the proxy, bring suit for damages, get
information, receive residual rights following the company’s
liquidation.
Collectively, shareholders have power.
.

•
To direct the course of corporations, file shareholder action
suits, demand key issues be brought up for proxy votes.
Institutional investors can be aggressive.
.

•
By pressuring the firm to change leadership or undertake
Corporate Governance Mechanisms: CEO Duality?

Unity of command: (in favor of) duality:

.

•
Provides clear focus.
•
Eliminates confusion and conflict.
•
Enhances a firm’s responsiveness.
•
Enables quick decisions based on first-hand
knowledge
Agency theory: (in favor of) separation.
.

•
Safeguards against corruption or incompetence.
•
Removes conflict of interest, especially regarding
CEO succession.
External Corporate Governance Mechanisms

EXTERNAL governance control mechanisms:

•
The market for corporate control — if shareholders sell,
stock value declines, increases possibility of
takeover.
•

•
Takeover constraint – fear of acquisition by hostile raider.
•
Auditors who verify the firm’s books.
•
Banks and analysts who conduct in-depth studies of
firms.
•
Governmental regulatory bodies that require disclosure
of financial information.
•