This document discusses strategic control and corporate governance. It describes strategic control as consisting of informational control, which involves ongoing monitoring of the external environment and strategy, and behavioral control, which ensures employee behavior aligns with goals through culture, rewards and boundaries. Corporate governance aims to align manager and shareholder interests through internal mechanisms like boards of directors and executive compensation, and external mechanisms like markets and regulations. The key is balancing the interests of managers, who control firms, with shareholders, who own firms but are separated from control.

1. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
Chapter
Nine
Implementing Strategy:
Achieving Effective
Strategic Control

2. Dr.PHEA V.,2010
Strategic control
Organizational control

3. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
After studying this chapter, you should have
a good understanding of:
• The value of effective strategic control systems in strategy
implementation
• The key difference between “traditional” and “contemporary”
control systems
• The imperative for “contemporary” control systems in today’s
complex and rapidly changing competitive and general
environments
• The benefits of having the proper balance among the three
levers of behavioral control _ culture, rewards and
incentives/boundaries
• How a strong and positive culture and reward system can lessen
the need for boundaries
• Why there is no “one best way” to design strategic control
systems and the important contingent roles of business- and
corporate-level strategies
Learning
Objectives
TRANSPARENCY-76

4. Dr.PHEA V.,2012
Strategic control: overview
• Making necessary changes in firm activities
according to the strategic plan
Focused on entire organization or major
departments(e.g. commence value chance : PA&SA)
Informational control(The key difference between
“traditional” and “contemporary” control systems)
Behavioral control_ method of organizational control in which
a firm influences the actions of employee through Culture, rewards,
and boundaries(The benefits of having the proper balance among
the three levers) :

5. Dr.PHEA V.,2012
Strategic control: overview
Informational control:
– Monitoring External and Internal environments
and “fit” between the two {for trends & events that
signal the need to make modifications(change) to
a firm’s strategies , goals, and objectives}.
– Ability to respond effectively to environmental
change(based on Act fast and the ability to adapt to changing demands in
accordance with customer needs and other outside pressures(Uncertainty).
Adding source: Responsive Organization, ch.9 of PM, Batman.. )
Two broad types :Traditional practice contrasts
with contemporary approach

6. Dr.PHEA V.,2012
IC: Traditional(Mechanism)
• Feedback approach: corrective action taken only at
end of time period _ formal feedback
• Single loop learning(informal feedback _ compare actual
performance to the predetermined goal set (establish
standardization ,monitoring ,compare and correct action )
Exhibit 9.1 Traditional Approach to SC

7. Dr.PHEA V.,2010
IC: Traditional (cont.): Advantage
Lengthy time lags(interval) with rather rigid
planning and goal-setting processes(clarity of steps _
BC principles): Achievement organization’s Vision
Most appropriate in stable, simple
environments where goal attainment is
measured with relative certainty and simplicity
(programming decision)

8. Dr.PHEA V.,2010
IC: contemporary
• More realistic view of environment(I&E) and
organizations(organization’s goals(OG) and strategies(S)
still fit with current strategic environment? Consistently F&I):
Continual monitoring of external and internal
characteristics for need to adjust plans (to obtain the best
fit between OG&S)_ S. formulation
Continual check for “fit” of organizational plans with
current strategic environment_ S. imple-tion
• “Are we doing the right thing?”

9. Dr.PHEA V.,2010
IC: contemporary
• Two key activities(Methodological Preliminary
Assessment):
– Scanning and monitoring external environment(ch.2)
– Scanning and monitoring internal changes(ch.3)
Forecasting issue will be changing in the
future(Manager gain information)

10. So, IC_ focus on strategic
plans(conclusion)
• Ensuring that strategic direction is consistent with
environmental conditions (GE&CE)
 Thus, IC is primarily concerned with the organization
is “doing the right things”_ base on double traditional
feedback approach & contemporary.

11. Dr.PHEA V.,2010
Strategic control: overview
Behavioral control_ method of organizational control in which a
firm influences the actions of employee through Culture, rewards, and
boundaries :
– Ensuring behavior consistent with organizational goals and
objectives (BCS , MBO and Bureaucratic Control)
– Balance and alignment among firm’s culture, rewards, and
boundaries (Argument that organization’s strong, positive culture and rewards systems can
rely less on boundaries, such as bureaucracy principles )

12. Behavioral control: focus on
strategic actions
• Behavioral Control _ method of organizational control in which
a firm influences the employee performance through
Culture, Rewards, and Boundaries (BCS,MBO&BC)
 Ensuring that behavior is consistent with organizational overall
goals and objectives(Doing things right): Means BCS, MBO & BC.

13. Behavior Control Systems(BCS)
Managers must motivate and shape(form)
employee behavior to meet organizational goals
and objectives.
 Direct Supervision: managers who directly manage
workers and can teach, reward, and correct(base on
Informal feedback_ Major departments):
 Very expensive since only a few workers can be managed
by 1 manager.(-)
 Hard to do in complex job settings.(-)
 Can demotivator (negative influence to motivation)
workers who desire more autonomy.(+)

14. Management by Objectives(MBO)
 MBO_ Evaluates workers by attainment of specific
objectives: (Performance appraisal)
 Goals are set at each level of the firm.
 Goal setting is participatory with manager AND worker.
 Reviews held looking at progress toward goals ( cost
&benefit analyst):
 Pay raises and promotions are tied to goal attainment.
 Teams are also measured in this way with goals and
performance measured for the team.(Strategic Planning
had examined, but how a bout outcome? )

15. Bureaucratic Control(BC)
 Control through a system of rules and standard operating
procedures (SOPs) that shape the behavior of divisions,
functions, and individuals.(+)
 Rules and SOPs tell the worker what to do.
 Standardized actions so outcomes are predictable.
 Still need output control to correct mistakes.(Policy)
 Problems of Bureaucratic Control: (-)
 Rules easier to make than delete. Leads to “red tape”
 Firm can become too standardized and not flexible.
 Best used for routine problems (certainty),but uncertainty
lead to fail.

16. Dr.PHEA V.,2010
Emphasis on culture(C) and
rewards(R)
• Increasing organic nature of organizations means
strict rules, policies, and regulations are ineffective
(uncertainty : CE.).So use R&C to align individual &
OG becomes increasingly important.
• Decreased commitment between organizations and
members means culture is the only real “glue” that
binds members to an organization
 Strength of culture reduces costs of monitoring
behavior

17. Culture & Managerial Action:
Consider the four functions of management:
 Planning: in innovative firms, the culture will encourage all
managers to participate.
 Slow moving firms focus on the formal process rather than the
decision.
 Organizing: Creative firms will have organic, flexible
structures.
 Probably very flat decisions with delegated authority.
 Leading: encourage leading by example.
 Top managers take risks and trust lower managers.
 Controlling: innovative firms choose controls that match the
structure.

18. Dr.PHEA V.,2010
Recap
• Culture provides implicit proscriptions on
behavior
• Boundaries provide explicit proscriptions
on behavior
• Rewards designed to align behavior with
organizational goals

19. Dr.PHEA V.,2010
Growing from boundaries to
rewards and culture
• Recruiting, hiring, training, and retention
• Managerial role models
• Clear alignment of rewards with goals and
objectives

20. Dr.PHEA V.,2010
Corporate governance: overview
• Alignment(regulation) of managerial(board of
directors) and shareholder interests ( the balance of control
between the stakeholders and managersstakeholders and managers or directors of an organization).
Internal corporate governance “mechanisms”
– Board of directors: represents shareholders’
interests( by shareholders)
– Activist shareholders(owners): actively pursue
maximization of value( shareholders' purpose)
– Managerial rewards and incentives: alignment with
goals of shareholders

21. Dr.PHEA V.,2010
Corporate governance: overview
External corporate governance“mechanisms”
– Market for corporate control(capital market)
– Banks and analysts
– Media
– Public activists
– Auditors

22. Dr.PHEA V.,2010
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

23. Dr.PHEA V.,2010
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

24. Dr.PHEA V.,2010
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)

25. Dr.PHEA V.,2010
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.”

26. Dr.PHEA V.,2010
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

27. Dr.PHEA V.,2010
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)

28. Dr.PHEA V.,2010
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

29. Dr.PHEA V.,2010
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

30. •Dr.PHEA V.,2010
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

31. Dr.PHEA V.,2010
Institutional investors
• Mutual funds (e.g., T. Rowe Price, Fidelity
Investments)
• Pension funds (CalPERS, TIAA-CREF)
• Insurance companies
• University endowments
• Bank trusts(доверительные операции банков)

32. Dr.PHEA V.,2010
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

33. Dr.PHEA V.,2010
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

34. Dr.PHEA V.,2010
Executive compensation
• Effective executive compensation difficult
to design and administer
– Long time lag between decisions and results
– Cause and effect relationships unclear

35. Dr.PHEA V.,2010
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

36. Dr.PHEA V.,2010
External governance
mechanisms
• Market for corporate control
• Auditors
• Regulatory bodies
• Banks and analysts
• Public activists

37. Dr.PHEA V.,2010
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”

38. Dr.PHEA V.,2010
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

39. Dr.PHEA V.,2010
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

40. Dr.PHEA V.,2010
Auditors
• External accountants who verify financial
records
• Independent of management
• Certified by other profession accountants
• May not maintain full independence

41. Dr.PHEA V.,2010
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

42. Dr.PHEA V.,2010
Regulation
• Securities and Exchange Commission
• Sarbanes-Oxley: rules regarding financial
reporting and external auditing
• Stock exchanges: NYSE, NASDAQ/AmEx

43. Dr.PHEA V.,2010
Media and public activists
• Business press
• Public activists (e.g., Ralph Nader, Erin
Brokovich)

44. Dr.PHEA V.,2010
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.

45. Dr.PHEA V.,2010
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

46. Dr.PHEA V.,2010
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

47. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
Formulate
Strategies
Formulate
Strategies
Implemen
t
Strategies
Implemen
t
Strategies
Strategic
Control
Strategic
Control
Exhibit 9.1
Traditional Approach to Strategic Control
TRANSPARENCY-77

48. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
Contemporary Approach to Strategic
Control
Exhibit 9.2
TRANSPARENCY-78
Implement
Strategies
Implement
Strategies
Informational
Control
Behavioral
Control
Formulate
Strategies
Formulate
Strategies
Strategic
Control
Strategic
Control

49. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
Essential Elements of Strategic Control
Boundaries
Culture Rewards
Exhibit 9.3
TRANSPARENCY-79

50. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
Action Plan for Objective #3
Description
Primary
Responsibility Target Date
1. Develop and implement 2002 marketing plan, including specific
plans
for addressing Falcon 20 retrofit programs, and expanded sales of
cabin shells.
R.H. Plenge
(V.P. Marketing)
December 15, 2001
2. Negotiate new supplier agreement with Gulfstream Aerospace. M. Spraggins
(President)
March 1, 2002
3. Continue and complete the development of the UltraSlim window and
have a fully tested and documented design ready for production at a
manufacturing cost of less than $900 per unit.
D.R. Pearson
(V.P. Operations)
June 15, 2002
4. Develop a window design suitable for L-1011 and similar wide-body
aircraft and have a fully tested and documented design ready for
production at a manufacturing cost comparable to the current Boeing
window.
D.R. Pearson
(V.P. Operations)
September 15, 2002
Exhibit 9.4
TRANSPARENCY-80

51. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
Developing Meaningful Action Plans:
MSAAircraft Interior Products, Inc.
MSAAircraft Interior Products, Inc., is a San Antonio, Texas-based manufacturing firm founded
in 1983 by Mike Spraggins and Robert Plenge. The firm fulfills a small but highly profitable niche
in the aviation industry with two key products. The Accordia line consists of patented, light-
weight, self-contained window-shade assemblies. MSA’s interior cabin shells are state-of-the-art
assemblies that include window panels, side panels, headliners, and suspension-system structures.
MSA’s products have been installed on a variety of aircraft such as the Gulfstream series, Cessna
Citation aircraft, and Boeing’s 727, 737, 757, and 707 series aircraft.
Much of MSA’s success can be attributed to carefully articulated action plans that are consistent
with the firm’s mission and objectives. During the past 5 years the firm has increased its sales and
profits at an annual rate of 15 to 18 percent. It has also been successful in adding many prestigious
companies to its customer base. Below are excerpts from MSA’s mission statement and objectives
as well as the action plans to achieve its objective of a 20 percent annual increase in total sales.
Mission Statement (Excerpted)
• Be recognized as an innovative and reliable supplier of quality interior products for the high-end,
personalized transportation segments of the aviation, marine, and automotive industries.
• Design, develop, and manufacture interior fixtures and components that provide exceptional value
to the customer through the development of innovative designs in a manner that permits decorative
design flexibility while retaining the superior functionality, reliability, and maintainability of well-
engineered factory-produced products.
• Grow, be profitable, and provide a fair return, commensurate with the degree of risk, for owners
and stockholders.
Source For purpose
of confidentiality,
some of the
information
presented in this
application has been
disguised. We would
like to thank
company
management and Mr.
Joseph Picken,
consultant, for
providing us with the
information used in
this application.
Strategy
Spotlight 9.4
Continued
TRANSPARENCY-
81a

52. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
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.
MSA’s action plans are supported by detailed month-by-month budgets as well as strong financial
incentives for their executives. Budgets are prepared by each individual department and include all
revenue and cost items. Managers are motivated by their participation in a profit-sharing program and
the firm’s two founders each receive a bonus equal to 3 percent of total sales.
Source For purpose of
confidentiality, some of the
information presented in this
application has been
disguised. We would like to
thank company management
and Mr. Joseph Picken,
consultant, for providing us
with the information used in
this application.
Strategy
Spotlight 9.4
Transparency 80: “Action Plan” for Objective #3.
(Exhibit 9.4)
TRANSPARENCY-
81b

53. CHAPTER 9
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
Summary of Relationships Between Control
and Business- and Corporate-Level Strategy
Level of Strategy
Type of
Strategy
Need for
Interdependence
Primary Type of
Rewards and
Controls
Business-Level Overall cost
Leadership
Low Quantitative
Business-Level Differentiation High Qualitative
Corporate-Level Related
Diversification
High Qualitative
Corporate-Level Unrelated
Diversification
Low Quantitative
Exhibit 9.5
TRANSPARENCY-82