his week we focus on how management can develop and use effective strategic control. The first two discussions below address:
Informational control (the ability to respond effectively to change), and, Behavioral control (the appropriate balance and alignment among an organization’s culture, reward, and boundaries). The third section, focuses on strategic control from a broader perspective – Corporate governance. Here, we focus on a firm’s need to assure that the elected representatives (board of directors) of the owners of the firm (shareholders) ensure that the firm’s executives (the management team – headed by the Chief Executive Officer) strive to fulfill their fiduciary duty of maximizing long-term shareholder value.
Our readings address “traditional” and “contemporary” approaches to informational control. Although both have the same purpose – using information to select, monitor, and implement effective strategies – they have a different impact on employees and organizational outcomes. Also, as environmental conditions become more complex or unpredictable, the need for contemporary approaches to informational control increases.
Traditional Approach to Strategic Control – With a traditional approach to strategic control, goals and objectives are set, strategies are implemented, and performance is compared to the desired standards. Then there is a feedback loop in which information about how performance compares to goals is used to revise strategies. Thus, it is a highly sequential process. Examples of control systems that rely on feedback controls include sales quotas, operating budgets, and production schedules. Traditional process can often be time consuming and many firms only update budgets or other control devices once a year during annual planning meetings. Thus, it may be best suited for environments that are relatively simple and stable.
Contemporary Approach to Strategic Control – Because business conditions typically change rapidly, information controls are needed that can quickly adjust. With contemporary controls, an organization’s assumptions, goals, and strategies are continuously monitored, tested, and reviewed. Thus, anticipating and adapting to change is built into the control process. Both informational and behavioral controls are needed for the contemporary approach. Informational controls ask whether the organization is “doing the right things.” Behavioral controls, by contrast, ask whether the organization is “doing things right.” With this framework, therefore, you can illustrate how the combination of effectiveness (“doing the right things”) and efficiency (“doing things right”) applies in the context of strategic controls.
Behavioral control is an approach to implementing strategy that relies on three behavioral forces or “levers” – culture; rewards and incentives; and, boundaries. The aim is to use these levers to evoke appropriate actions in the workforce and also to maintain a proper balance between these three factors. Depending on the type of organization and the business environment, the way these forces are manipulated may vary in order to achieve goals with the greatest degree of efficiency. There are two reasons why behavioral controls are important for strategic managers today.
Increasingly complex and unpredictable environments make it important that all workers respond quickly. Reward systems and culture provide an implicit type of coordination mechanism.
Today’s work force includes younger managers who see themselves as free agents. Traditional controls such as rules and regulations typically will not motivate such employees. Effective behavioral controls are needed to build loyalty and commitment.
Finally, we focus on the need for both shareholders (the owners of the corporation) and their elected representatives – the board of directors – to actively ensure that management fulfills its overriding purpose: increasing long-term shareholder value. As noted by Robert Monks and Nell Minow, two of the leading scholars in corporate governance, the primary participants in corporate governance are: (1) the shareholders, (2) the management (led by the Chief Executive Officer), and (3) the board of directors. In recent years, there have been many instances of poor corporate governance. Corporate governance can be defined as the relationship between the various participants in determining the direction and performance of the corporation. The primary participants include shareholders, management (led by the chief executive officer), and the boards of directors. There are several internal and external mechanisms that can serve to align managerial interests and shareholder interests. The internal mechanisms include a committed and involved board of directors, shareholder activism, and effective managerial incentives and rewards. The external mechanisms include the market for corporate control, banks and analysts, regulators, the media, and public activists.
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