STRATEGIC CONTROL: TRADITIONAL AND CONTEMPORARY APPROACHES

A Traditional Approach to Strategic Control The traditional approach to strategic control is sequential: (1) strategies are formulated and top management sets goals, (2) strategies are implemented, and (3) performance is measured against the predetermined goal set, as illustrated in Exhibit 1. Control is based on a feedback loop from performance measurement to strategy formulation, if the problem lies with incorrect assumptions upon which the strategy was based, or to strategy implementation if the problem lies with not with the strategy itself but with faulty implementation. This process typically involves lengthy time lags, often tied to a firm's annual planning cycle. Such traditional control systems, termed "single-loop" learning by Harvard's Chris Argyris, simply compare actual performance to a predetermined goal. They are most appropriate when the environment is stable and relatively simple, goals and objectives can be measured with a high level of certainty, and there is little need for complex measures of performance. Sales quotas, operating budgets, production schedules, and similar quantitative control mechanisms are typical. The appropriateness of the business strategy or standards of performance is seldom questioned.

Exhibit 1:

James Brian Quinn of Dartmouth College has argued that grand designs with precise and carefully integrated plans seldom work. Rather, most strategic change occurs incrementally one step at a time. Leaders should introduce some sense of direction, some logic in incremental steps. Similarly, McGill University's Henry Mintzberg has written about leaders "crafting" a strategy. Drawing on the parallel between the potter at her wheel and the strategist, Mintzberg pointed out that the potter begins work with some general idea of the artifact she wishes to create, but the details of design even possibilities for a different design emerge as the work

progresses. For businesses facing complex and turbulent business environments, the craftsperson's method helps us deal with the uncertainty about how a design will work out in practice and allows for a creative element. Mintzberg's argument, like Quinn's, questions the value of rigid planning and goal setting processes. Fixed strategic goals also become dysfunctional for firms competing in highly unpredictable competitive environments. Strategies need to change frequently and opportunistically. An inflexible commitment to predetermined goals and milestones can prevent the very adaptability that is required of a good strategy. Even organizations that have been extremely successful in the past can become complacent or fail to adapt their goals and strategies to the new conditions. An example of such a firm is General Motors (GM). For many decades, it was the leading firm in the automotive industry. As recently as 2006, it was recognized by Morgan Stanley as the top car producer. However, GM suffered from many underlying problems that were aggravated by the recent worldwide recession, which eroded demand for automobiles. A Contemporary Approach to Strategic Control Adapting to and anticipating both internal and external environmental change is an integral part of strategic control. The relationships between strategy formulation, implementation, and control are highly interactive, as suggested by Exhibit 2. It also illustrates two different types of strategic control: informational control and behavioral control. Informational control is primarily concerned with whether or not the organization is "doing the right things." Behavioral control, on the other hand, asks if the organization is "doing things right" in the implementation of its strategy. Both the informational and behavioral components of strategic control are necessary, but not sufficient, conditions for success. What good is a well-conceived strategy that cannot be implemented? Or what use is an energetic and committed workforce if it is focused on the wrong strategic target?

Exhibit 2:

John Weston is the former CEO of ADP Corporation, the largest payroll and tax-filing processor in the world. He captures the essence of contemporary control systems.

At ADP, 39 plus 1 adds up to more than 40 plus 0. The 40-plus-0 employee is the harried worker who at 40 hours a week just tries to keep up with what's in the "in" basket. ... Because he works with his head down, he takes zero hours to think about what he's doing, why he's doing it, and how he's doing it. ... On the other hand, the 39-plus-1 employee takes at least 1 of those 40 hours to think about what he's doing and why he's doing it. That's why the other 39 hours are far more productive. Informational Control Informational control deals with the internal environment as well as the external strategic context. It addresses the assumptions and premises that provide the foundation for an organization's strategy. Do the organization's goals and strategies still "fit" within the context of the current strategic environment? Depending on the type of business, such assumptions may relate to changes in technology, customer tastes, government regulation, and industry competition. This involves two key issues. First, managers must scan and monitor the external environment. Also, conditions can change in the internal environment of the firm, requiring changes in the strategic direction of the firm. These may include, for example, the resignation of key executives or delays in the completion of major production facilities. In the contemporary approach, information control is part of an ongoing process of organizational learning that continuously updates and challenges the assumptions that underlie the organization's strategy. In such "double-loop" learning, the organization's assumptions, premises, goals, and strategies are continuously monitored, tested, and reviewed. The benefits of continuous monitoring are evident time lags are dramatically shortened, changes in the competitive environment are detected earlier, and the organization's ability to respond with speed and flexibility is enhanced. Contemporary control systems must have four characteristics to be effective. 1. Focus on constantly changing information that has potential strategic importance. 2. The information is important enough to demand frequent and regular attention from all levels of the organization. 3. The data and information generated are best interpreted and discussed in face-to-face meetings. 4. The control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans. An executive's decision to use the control system interactively in other words, to invest the time and attention to review and evaluate new information sends a clear signal to the organization about what is important. The dialogue and debate that emerge from such an interactive process can often lead to new strategies and innovations. Behavioral Control

Behavioral control is focused on implementation doing things right. Effectively implementing strategy requires manipulating three key control "levers": culture, rewards, and boundaries (see Exhibit 3). There are two compelling reasons for an increased emphasis on culture and rewards in a system of behavioral controls.

Exhibit 3:

First, the competitive environment is increasingly complex and unpredictable, demanding both flexibility and quick response to its challenges. As firms simultaneously downsize and face the need for increased coordination across organizational boundaries, a control system based primarily on rigid strategies, rules, and regulations is dysfunctional. The use of rewards and culture to align individual and organizational goals becomes increasingly important. Second, the implicit long-term contract between the organization and its key employees has been eroded. Today's younger managers have been conditioned to see themselves as "free agents" and view a career as a series of opportunistic challenges. As managers are advised to "specialize, market yourself, and have work, if not a job," the importance of culture and rewards in building organizational loyalty claims greater importance. Each of the three levers culture, rewards, and boundaries must work in a balanced and consistent manner. Let's consider the role of each. Culture Organizational culture is a system of shared values (what is important) and beliefs (how things work) that shape a company's people, organizational structures, and control systems to produce behavioral norms (the way we do things around here). How important is culture? Very. Over the years, numerous best sellers, such as Theory Z, Corporate Cultures, In Search of Excellence, and Good to Great, have emphasized the powerful influence of culture on what goes on within organizations and how they perform. Collins and Porras argued in Built to Last that the key factor in sustained exceptional performance is a cult-like culture. You can't touch it or write it down, but it's there in every organization; its influence is pervasive; it can work for you or against you. Effective leaders

understand its importance and strive to shape and use it as one of their important levers of strategic control. Culture wears many different hats, each woven from the fabric of those values that sustain the organization's primary source of competitive advantage. Some examples are: Federal Express and Southwest Airlines focus on customer service. Lexus (a division of Toyota) and Hewlett-Packard emphasize product quality. Newell Rubbermaid and 3M place a high value on innovation. Nucor (steel) and Emerson Electric are concerned, above all, with operational efficiency. Rewards Reward and incentive systems represent a powerful means of influencing an organization's culture, focusing efforts on high-priority tasks, and motivating individual and collective task performance. Just as culture deals with influencing beliefs, behaviors, and attitudes of people within an organization, the reward system by specifying who gets rewarded and why is an effective motivator and control mechanism. Consider how Starbucks uses its stock option plan as an incentive to motivate its employees. By introducing a stock option plan called "bean stock" to managers, baristas, and other employees, Starbucks has turned every employee into a partner. Starbucks' managers began referring to all employees as partners, an appropriate title because all staff, including part-timers working at least 20 hours per week, were eligible for stock options after six months with the company. By turning employees into partners, Starbucks gave them a chance to share in the success of the company and make the connection between their contributions and the company's market value very clear. There was a pronounced effect on the attitudes and performance of employees because of the bean stock program. They began coming up with many innovative ideas about how to cut costs, increase sales, and create value. Generally speaking, people in organizations act rationally, each motivated by their personal best interest. However, the collective sum of individual behaviors of an organization's employees does not always result in what is best for the organization; individual rationality is no guarantee of organizational rationality. As corporations grow and evolve, they often develop different business units with multiple reward systems. They may differ based on industry contexts, business situations, stage of product life cycles, and so on. Subcultures within organizations may reflect differences among functional areas, products, services, and divisions. To the extent that reward systems reinforce such behavioral norms, attitudes, and belief systems, cohesiveness is reduced; important information is hoarded rather than shared, individuals begin working at cross-purposes, and they lose sight of overall goals. Such conflicts are commonplace in many organizations. For example, sales and marketing personnel promise unrealistically quick delivery times to bring in business, much to the dismay of operations and logistics; over-engineering by R&D creates headaches for manufacturing; and so on. Conflicts also arise across divisions when divisional profits become a key compensation criterion. As ill will and anger escalate, personal relationships and performance may suffer.

To be effective, incentive and reward systems need to reinforce basic core values, enhance cohesion and commitment to goals and objectives, and meet with the organization's overall mission and purpose. At General Mills, to ensure a manager's interest in the overall performance of his or her unit, half of a manager's annual bonus is linked to business-unit results and half to individual performance. For example, if a manager simply matches a rival manufacturer's performance, his or her salary is roughly 5 percent lower. However, if a manager's product ranks in the industry's top 10 percent in earnings growth and return on capital, the manager's total pay can rise to nearly 30 percent beyond the industry norm. Boundaries and Constraints In an ideal world, a strong culture and effective rewards should be sufficient to ensure that all individuals and subunits work toward the common goals and objectives of the whole organization. However, this is not usually the case. Counterproductive behavior can arise because of motivated self-interest, lack of a clear understanding of goals and objectives, or outright malfeasance. Boundaries and constraints can serve many useful purposes for organizations, including: Focusing individual efforts on strategic priorities. Providing short-term objectives and action plans to channel efforts. Improving efficiency and effectiveness. Minimizing improper and unethical conduct. In most environments, organizations should strive to provide a system of rewards and incentives, coupled with a culture strong enough that boundaries become internalized. This reduces the need for external controls such as rules and regulations. Benefits of the Contemporary Approach The contemporary approach to strategic control is based upon one primary objective: to learn and to incorporate that learning faster than the competition. Accomplishing this objective should provide a competitive advantage to the firm. While it is unlikely that any single event will provide a sustainable competitive advantage given the difficulty to prevent competitors from learning what the firm has already learned a firm effectively utilizing the contemporary approach may be able to obtain a series of competitive advantages, each relatively short-lived, that, collectively, can put the firm ahead of its competition, and keep it there. Relying on speed speed of learning and speed of implementing that learning can naturally lead to frequent missteps. However, the principal advantage of the contemporary approach over the traditional approach is that any mistakes are likely to be quickly recognized and corrected in the contemporary approach. Thus, the firm would need to make only relatively minor and incremental changes. Under the traditional approach, the firm may not recognize mistakes until much later, requiring the firm to undertake more significant corrective changes, which may well prove more costly and more difficult to effectively implement.