Strategy Implementation –

Controls, Organizational Culture,

and Corporate Governance

UNCW-CSB MGT455 Spring 2009

Based on DL&E, Ch. 9 and other sources
Prof. Carlos L. Rodriguez
Outline
 Strategy implementation and
Strategic Control Systems
 Informational Control
 Behavioral Control
 Culture, Rewards, and Boundaries
 Corporate Governance
 Governance Mechanisms
 Recent Issues re:
Control and Governance
 A combination of:
 Pressures from the capital markets
 ‘suspension of disbelief’…
 Inadequate internal control systems
 Greedy, unmonitored, and unethical
executives
 Passive, manipulated boards of directors
 Ineffective market mechanisms for
corporate governance
Strategy Implementation
 Three basic tools:
 An organizational structure to distribute
tasks among employees and group
together activities
 A set of control systems to keep
managers informed
 An organizational culture to provide
employees with sets of values to guide
behavior
Control Systems – Basic Approaches
 Traditional approach
 Sequential
 Formulation, Implementation, Measurement,
Control (and feedback)
 Strategies, goals and objectives are
usually not revised until the end of the
measurement period (time lags)
 Appropriate when:
 Environment is stable
 Goals and performance are easily measured
Control Systems – Basic Approaches
 Contemporary approach
 Continuous monitoring of internal and
external environments, for the
identification of trends
 Requires interactive relationship among
strategy formulation, implementation,
and control (organizational learning)
 Environmental scanning is key
 Assumes that environments are
essentially dynamic
Effective Control Systems
 Key Characteristics:
 Accurate
 Providing reliable information
 Timely
 Providing current information
 Flexible
 Capturing information in a way that allows
managers to respond/act/decide
Contemporary Approach
 Two types of control systems
 Informational Control
 Concerned with whether or not the
organization is “doing the right things”
 Is there still a ‘fit’ between the firm’s strategy
and the current competitive environment?
 Behavioral control
 Concerned with whether or not the
organization is “doing things right” in the
implementation of its strategy
Behavioral Control Systems
 Impossibility of relying on rigid rules
due to environmental dynamism
 Shorter employee tenure
 Less organizational loyalty

The importance of balancing culture,

rewards, and boundaries
 Organizational Culture
 System of values and beliefs that shapes
 People – Structure - Control systems
 ‘The way things are done here’
 Examples of companies with great cultures
 By setting implicit boundaries, it can
 Establish (unwritten) standards of behavior
 Reduce monitoring costs
 Organizational Culture
 Effective cultures are
 Created
 Encouraged
 Maintained
 The role of leadership and socialization
 The importance of appropriate rewards
and incentive systems
 To motivate and monitor behavior
Rewards and Incentive Programs
 Clear and well accepted goals
 Rewards linked to performance
 But make sure you are really rewarding the desired
performance (examples from ‘On the Folly…’)
 Accepted standards for performance
measurement
 Prompt feedback
 Fair compensation system
 Adaptable general structure
 But also:
 Well-known boundaries and constraints…
‘On the Folly of Rewarding A, while
Hoping for B’ (S. Kerr, AME 1995)
 Politicians and ‘pork’
 ‘Going home’: WWII vs. Vietnam
 Health Care Costs: Excessive exams vs. Risk
of Malpractice Suit
 In Government:
 Cost-plus type contracts and budget allocation
policies (next year’s budget as a f of this year’s
expenditures)
 Whistleblowing: employees receive 30% of
amount of reported fraud (no stated limit)
 An Insurance Company: ‘performance’ as low
rates of complaint from policyholders
 Boundaries and Constraints
 The more effectively culture and incentive
systems work, the less you are going to need
boundaries (budgets, manuals, etc)
(But you shouldn’t get rid of them entirely…)
 They keep the organization focused
 Priorities and Short-term goals
 They help in the decisions re. allocation of resources
 They establish limits to spending and to possible
unethical behaviors
But they are more effective in certain types of
environments and for specific organizations
Behavioral Controls in Use
 Professional organizations
 Emphasis on culture (values and norms)
 Companies where output/performance is
easily measurable/observable
 Reliance on rewards systems
 Bureaucratic organizations
 Dependence on set of explicit rules
 Advantages and ways of moving from
boundaries to rewards systems and culture
 Having the boundaries internalized…
 Controls and Strategy Types
 Choice of the appropriate set of controls
depends on the firm’s strategies at the
business and corporate levels
 Business-level Strategies
 Cost-leadership: strict cost controls,
structured tasks, rewards and incentives
based on measurable output
 Differentiation: behavioral controls
emphasizing creativity and collaboration,
rewards and incentives to create the right
culture
 Controls and Strategy Levels
 Corporate-level Strategies
 Related Diversification
 High interdependence (to create synergies)
 Rewards systems to foster cooperation and
sharing
 Unrelated Diversification
 Low/no interdependencies
 Financial indicators at the unit level
The Balanced Scorecard
 Provides a meaningful integration of many
issues that come into evaluating a firm’s
performance
 Increasingly used system
 Four key perspectives
 How do customers see us? (customer
perspective)
 What must we excel at? (internal perspective)
 Can we continue to improve and create value?
(innovation and learning perspective)
 How do we look to shareholders? (financial
perspective)
The Balanced Scorecard
 Customer Perspective
 Time
 Quality
 Performance and service
 Cost
 Internal Perspective
 Processes (e.g., Cycle time, Quality, Employee
skills, Productivity)
 Decisions and Actions
 Coordination
 Resources and capabilities
The Balanced Scorecard
 Innovation and Learning Perspective
 Introduction of new products and services
 Greater value for customers
 Increased operating efficiencies
 Financial Perspective
 Profitability
 Growth
 Shareholder value
 Increased market share
 Reduced operating expenses
 Higher asset turnover
Strategy and Corporate Governance
 Relationship among shareholders,
management (led by the CEO), and the
board of directors
 Roles and characteristics of each
 An issue of aligning interests, created by
the separation between ownership and
management
 Information asymmetry and opportunism
 The Agency problem and Agency Theory
 Strong corporate governance is associated
with superior financial performance
Examples of Agency Issues
 Bad managerial behavior
 On-the-job consumption
 Excessive compensation
 ‘Empire building’: growth vs. profitability
 Diversification to reduce risk
 BoD issues
 CEO duality
 Insider x outsider balance (director independence)
 Current trends: active, heterogeneous, committed,
and involved BoDs
Other Governance Mechanisms
(to monitor managerial behavior)
 Shareholder activism
 Right to influence on the direction of
corporations
 Especially effective in the case of large
and institutional shareholders
 Managerial incentives
 Stock compensation: benefits and issues
 Rewards should be tied to long-term
financial performance of the organization
External Mechanisms of Corporate
Governance
 Market for corporate control and the
takeover constraint
 External auditors
 Financial institutions and reputational
issues
 Regulatory bodies
 SEC and NYSE requirements, and SOX
 Media and other public activists (?)
Major Provisions of Sarbanes-Oxley
Act of 2002
 Auditors
 Barred from certain types of nonaudit work
 Not allowed to destroy records for five years
 Lead partners auditing a firm should be changed
at least every five years
 CEOs and CFOs
 Must fully reveal off-balance sheet finances
 Vouch for the accuracy of information revealed
 Executives
 Must reveal the sale of shares in firms they
manage
 Are not allowed to sell shares when other
employees cannot