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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.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives
After reading this chapter, you should be able to:
1. Understand the value of effective strategic control systems in strategy
implementation.
2. Identify the key difference between “traditional” and “contemporary”
control systems.
3. Explain the imperative for contemporary control systems in today’s
complex and rapidly changing competitive and general environments.
4. Identify the benefits of having the proper balance among the three
levers of behavioral control: culture, rewards and incentives, and
boundaries.
5. Identify the three key participants in corporate governance:
shareholders, management (led by the CEO), and the board of
directors.
6. Explain the role of corporate governance mechanisms in ensuring that
the interests of managers are aligned with those of shareholders from
both the United States and international perspectives.

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 Looking Ahead

Strategic Control and Corporate Governance.

Ensuring Informational Control: Responding
Effectively to Environmental Change.
Attaining Behavioral Control: Balance Culture,
Rewards, and Boundaries.
The Role of Corporate Governance.

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 Strategic Control

Consider …
Once strategy is formulated, it must be
implemented, and part of implementation is
establishing a mechanism for monitoring and
correcting organizational performance.
This control mechanism must be consistent
with the strategy the firm is following.
How does a firm make sure all key
stakeholders are moving in the right
direction?

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 Strategic Control Mechanisms
Strategic control involves monitoring
performance toward strategic goals and taking
corrective action when needed via effective
systems.
• Informational-control systems.
• Behavioral-control systems.
• Corporate governance.

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 Strategic Control: Traditional Approach
Model
The traditional approach to strategic control is
sequential.
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

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 Strategic Control: Traditional Approach

Traditional approach to strategic control =

feedback loop from performance measurement to
strategy formulation.
Involves lengthy time lags, “single-loop” learning.
Most appropriate when:
• Environment is stable and relatively simple.

• Objectives can be measured with certainty.

• There is little need for complex measures of

performance.

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 Strategic Control: Contemporary
Approach Model
Relationships between strategy formulation,
implementation, and control are highly interactive, utilizing:
• Informational control.
• Behavioral control.

Exhibit 9.2 Contemporary Approach to Strategic Control

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 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.

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 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.

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 Question 1

Top managers at ABC Company meet every

Friday to review daily operational reports and
year-to-date data. This is an example of:
A. Behavioral control.
B. Informational control.
C. Strategy formulation.
D. Strategy implementation.

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 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.

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 Informational Control: Characteristics

Informational control = ongoing process of

organizational learning.
Focus is on constantly changing information —
continuous monitoring, testing, review.
Data is interpreted and discussed face-to-face.
Ongoing debates challenge assumptions.
• Time lags are shortened.
• Changes are detected earlier.
• Speed and flexibility of response is enhanced.

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 Question 2

Which of the following is not one of the

characteristics of a contemporary control system?
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.
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.

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 Behavioral Control Model
Behavioral control = focused on
implementation — “doing things right.”
Influences the actions of employees via:
• Culture.
• Rewards.
• Boundaries.

Exhibit 9.3
Essential
Elements of
Behavioral
Control
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 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).

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 Behavioral Control: Role of Culture

Organizational culture sets implicit boundaries

regarding:
• Dress.
• Ethical matters.
• The way an organization conducts its business.

A strong culture:
• Leads to greater employee engagement.
• Provides a common purpose and identity.
• But can also introduce core rigidities.

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 Behavioral Control: Sustaining an
Effective Culture

Effective organizational cultures must be:

• Cultivated.
• Encouraged.
• Fertilized.

Organizational cultures can be maintained by:

• Storytelling.
• Rallies or pep talks by top executives.

© McGraw Hill
 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.

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 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.
• Behavior reinforced within subcultures may reflect
value differences in opposition to the dominant
culture.
• Reward systems may lead to information hoarding,
working at cross purposes.

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 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.
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 Behavioral Control: Boundaries 1

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.

© McGraw Hill
 Question 3
Rules and regulations, rather than culture or
rewards, would probably be used for strategic
control at what type of company?
A. Software developer.
B. Stock brokerage firm.
C. Manufacturer of mass-produced products.
D. High-tech research facility.

© McGraw Hill
 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.

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 Behavioral Control Systems: Situational
Factors
Approach Some 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 output.
that provide external constraints on • Most appropriate when tasks are
behavior. generally repetitive and routine.
• Little need for innovation or creative
activity.
Rewards: The use of performance- • Measurement of output and
base 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

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 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.
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 Corporate Governance: Agency Theory

Agency theory deals with the relationship

between principals and agents.

What to do when the goals of the principals and

agents conflict?

What to do when it is difficult or expensive for

the principal to verify what the agent is actually
doing?

What happens when the principal and the agent

have different attitudes and preferences toward
risk?

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 Corporate Governance Mechanisms

Corporate governance mechanisms — aligning

the interests of owners and managers through:
• A committed and involved Board of Directors.
• Shareholder activism 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

CEO also be chairman of the board of directors?

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 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.

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 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
strategic actions such as stock buy-back or selloff.

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 Corporate Governance Mechanisms:
Managerial Rewards and Incentives
Boards are responsible for managerial rewards
and incentives.
• Boards can require that CEOs become substantial
owners of company stock.
• Salaries, bonuses, and stock options can be
structured so as to provide rewards for superior
performance and penalties for poor performance.
• Dismissal for poor performance should be a
realistic threat.

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 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.

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 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.
• Securities and Exchange Commission (SEC).
• Media and public activists who influence public
perception.
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 International Corporate Governance
In countries other than the United States and the
UK, there is another perspective. Principal –
principal conflicts (as opposed to principal –
agent conflicts) involve:
• Concentrated ownership, or family ownership.
• Motivation to engage in expropriation of minority
shareholders for personal gain.
• Business groups who can take coordinated
action.
• Japanese keiretsus, Korean chaebols.

• Few external regulatory constraints.

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 End of Main Content

Because learning changes

everything. ®

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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.