Strategic control

Organizational control

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 Strategic control: overview
• Making necessary changes in firm
activities in accordance with the strategic
plan
– Focused on entire organization or major
departments

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 Strategic control: overview
• Informational control
– Monitoring external and internal environments
and “fit” between the two
– Ability to respond effectively to environmental
change
– Traditional practice contrasts with
contemporary approach

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 Strategic control: overview
• Behavioral control
– Ensuring behavior consistent with
organizational goals and objectives
– Balance among firm’s culture, rewards, and
boundaries

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 Corporate governance: overview
• Alignment of managerial and shareholder
interests
• Internal corporate governance
“mechanisms”
– Board of directors: represents shareholders’
interests
– Activist shareholders: actively pursue
maximization of value
– Managerial rewards and incentives: alignment
with goals of shareholders
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 Corporate governance: overview
• External corporate governance
“mechanisms”
– Market for corporate control
– Auditors
– Banks and analysts
– Media
– Public activists

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 Strategic control: Why?
• Ensure that organizational direction is
consistent with external environmental
conditions and internal organizational
capabilities – organizational fit with
organizational context (informational
control)

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 Strategic control: Why?
• Ensure that behavior of organizational
members is consistent with organizational
goals and objectives (behavioral control
and corporate governance)

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 Informational control
• Organizational ability to respond
effectively to environmental change
• Two broad types: traditional and
contemporary

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Informational control: Traditional
• Feedback approach: corrective action taken only
at end of time period
• Single loop learning

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Informational control: Traditional
• Lengthy time lags with rather rigid
planning and goal-setting processes
• Most appropriate in stable, simple
environments where goal attainment is
measured with relative certainty and
simplicity

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Informational control: contemporary
• More realistic view of environment and
organizations
• Continual monitoring of external and
internal characteristics for need to adjust
plans
• Continual check for “fit” of organizational
plans with current strategic environment
• “Are we doing the right thing?”
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Informational control: contemporary
• Two key activities
– Scanning and monitoring external
environment
– Scanning and monitoring internal changes
• Continually update assumptions on which
strategies are based

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Informational control: contemporary
The Firm’s
Update and challenge the
assumptions
Assumptions

Premises
Contemporary Continuously
Control System • Monitor
• Test Goals
• Review

Strategies

Source: Dess et al. 7e

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 Informational control: focus on
strategic plans

• Ensuring that strategic direction is consistent

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Behavioral control: 3 key
components

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 Emphasis on culture and
rewards
• Increasing organic nature of organizations
means strict rules, policies, and
regulations are ineffective
• Decreased commitment between
organizations and members means culture
is the only real “glue” that binds members
to an organization

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 Culture
• System of shared values (what (“things”)
are/is important)
• and beliefs (about how things work)
• that leads to behavioral norms (how things
are done)
• Represents “invisible boundaries”

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 Culture
• Sets implicit boundaries – unwritten
standards – of conduct (attire, ethics,
conduct of business)
• Strength of culture reduces costs of
monitoring behavior

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 Sustaining culture
• Normally instituted at time of
organizational founding and maintained by
subsequent organizational leaders
• Cultivated, encouraged, and fertilized
• Sustained through rituals, stories,
language, and symbols

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 Rewards and incentives as
motivators
• Potential downsides
• Individual rationality does not necessarily
lead to organizational rationality
• Organizational subcultures - differences in
values, beliefs, and norms within
organizations - create potential for conflict

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 Rewards and incentives
• Incentives are designed to motivate and
reinforce behavior toward achieving goals
but often have unintended consequences

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 Effective reward and incentive
programs
• Reinforce basic core values and enhance
commitment to overall organizational goals
and objectives
• Correctly identify the goal and reinforce
with rewards and incentives

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 Boundaries and constraints
• Boundaries and constraints are necessary
because people don’t always act in
accordance with organizational goals and
objectives
– Self-interest, lack of clear understanding of
organizational goals and objectives, outright
misbehavior

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 Boundaries and constraints
• Focus efforts on strategic priorities
• Provide short-term objectives and action
plans
• Improve overall efficiency and
effectiveness
• Minimize improper and unethical conduct

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 Situational factors in behavior
control
• Balance and emphasis on culture,
rewards, and boundaries varies with the
organizational context
– Professional organizations depend on culture
and boundaries of profession (e.g.,
accountants)
– Type of output strongly influences
measurement (sales tied to commissions)

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 Situational factors in behavior
control
• Balance and emphasis on culture,
rewards, and boundaries varies with the
organizational context
– Bureaucratic organizations depend heavily on
formal rules and regulations
– Innovative organizations depend on high
degree of autonomy
• Better encouraged through culture
• Boundaries impede creativity and innovation

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 Recap
• Culture provides implicit proscriptions on
behavior
• Boundaries provide explicit proscriptions
on behavior
• Rewards designed to align behavior with
organizational goals

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 Evolving from boundaries to
rewards and culture
• Recruiting, hiring, training, and retention
• Managerial role models
• Clear alignment of rewards with goals and
objectives

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Corporate governance as strategic
control
• Modern corporation characterized by
separation of ownership and control
• Corporate governance
– Internal and external arrangements to align
managers’ and shareholders’ interests
– Primary participants: shareholders, managers,
board of directors

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 Major parties to a corporation
• Shareholders – principals
– Contribute capital and risk in exchange for
participation in profits
– No direct responsibility or involvement in
operations and with limited liability
– Elect directors to act with fiduciary care to
protect their interests

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 Major parties to a corporation
• Managers control the firm without
providing capital investment but risk their
continued employment and income
• Act as agents of the principals
(shareholders)

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 Agency relationship in modern
corporation
• Goals of principals and agents may
conflict
– Principals (shareholders) want return on
investment
– Agents (managers) want to maintain income
• Shareholders cannot easily monitor
managers’ actions (imperfect information)
• “When the cat’s away, the mice may play.”

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 Distribution of risk in modern
corporation
• Shareholders
– Bear residual risk (what’s remaining after
liquidation)
– Desire high firm risk while reducing portfolio
risk through stock portfolio diversification
• Managers
– Bear employment risk: only one source of
income
– Desire reduced firm risk: risk averse
– May diversify firm to reduce employment risk
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 Resolving potential conflicts of
interest
• Governance mechanisms: arrangements
to align interests of shareholders and
managers
– Board of directors
– Active shareholders
– Executive compensation (rewards and
incentives)

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 Board of directors
• Represents shareholders
– Fiduciary: one entrusted with property for
benefit of another
– Oversees management of firm through CEO
oversight
• Hire, compensate, evaluate, fire CEO
• Ratify and monitor CEO’s strategies
• Provide advice and counsel to CEO

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 Board of directors
• 10-12 members often with firm-relevant
experience
• Considerable work experience (30-40
years)
• 2-3 CEOs from other firms
• 2-3 insiders (firm managers/officers)
• Directors hold 2-3 other directorships,
have served roughly 11 years, and are
close to 60 years old
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 Active shareholders
• Dispersion of ownership in modern
corporation means most owners have little
power
• Concentration of ownership among fewer
individuals increases power of those
individuals
• Large ownership stakes held by
institutional investors and blockholders
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 Institutional investors
• Mutual funds (e.g., T. Rowe Price, Fidelity
Investments)
• Pension funds (CalPERS, TIAA-CREF)
• Insurance companies
• University endowments
• Bank trusts

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 Institutional investors and
blockholders
• Institutional investors own 50% of Fortune
500 and nearly 70% of Fortune 100
• Potentially exert considerable influence on
corporate strategy and policies

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 Executive compensation
• Aligning executive rewards and incentives
with shareholders’ interests
• Salary – non-contingent pay
• Bonus, stock options – contingent pay
– Pay for performance
– Often results in pay without performance

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 Executive compensation
• Effective executive compensation difficult
to design and administer
– Long time lag between decisions and results
– Cause and effect relationships unclear

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 Corporate governance
mechanisms
• Attempt to align managerial actions with
interests of shareholders
– Board of directors: monitors CEO
– Large, active shareholders monitor CEO
– Executive compensation seeks to align
managerial rewards and incentives with
shareholders’ interests
• Primarily internal governance mechanisms

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 External governance
mechanisms
• Market for corporate control
• Auditors
• Regulatory bodies
• Banks and analysts
• Public activists

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 Market for corporate control
• Purchase and sale of public corporations
on open market through purchase of stock
• Operates when actors in financial markets
sense that management and board are
“asleep at the wheel”

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 Market for corporate control
• Reacts to managerial opportunistic
behavior
– Shirking: ineffective performance
– On the job consumption: lavish spending,
company jets, expensive parties
– Excessive product market diversification
• Increases firm size thereby increasing
compensation

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 Market for corporate control
• Market for corporate control may constrain
opportunistic behavior
• Managers may initiate anti-takeover tactics
to deter outside takeover
– Poison pills/shark repellent: reduce firm net
worth
– Greenmail: buying off potential acquirer
– Golden parachutes: generous severance
packages for departing managers

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 Auditors
• External accountants who verify financial
records
• Independent of management
• Certified by other profession accountants
• May not maintain full independence

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 Banks and analysts
• Banks
– Commercial and investment banks carrying
debt of focal firm
• Stock analysts
– Research firms and industries
– Recommend to buy, sell, or hold
– Not always unbiased in recommendations

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 Regulation
• Securities and Exchange Commission
• Sarbanes-Oxley: rules regarding financial
reporting and external auditing
• Stock exchanges: NYSE, NASDAQ/AmEx

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 Media and public activists
• Business press
• Public activists (e.g., Ralph Nader, Erin
Brokovich)

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 Recap
• Corporate governance
– Internal and external arrangements to align
managers’ and shareholders’ interests
• Potentially conflicting goals
– Internal arrangements
• Board of directors
• Active, large shareholders
• Executive compensation
– External arrangements: market for corporate
control, auditors, etc.
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 Summary
• Strategic control: Control of firm direction
consistent with external conditions
– Informational control: ongoing monitoring of
external and internal conditions and of
strategy formulation
– Behavioral control
• Ensuring behavior of organizational members is
consistent with goals and objectives
• Culture, rewards, boundaries

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 Corporate governance
• Control of firm direction by owners, their
representatives, and interested publics
– Separation of ownership and control creates
potential for conflict between owners and
managers
• Board and large shareholders oversee
management; compensation creates
rewards and incentives
• External parties also monitor management

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