part 3 Strategic Implementation
Chapter 9
Strategic Control and Corporate Governance……………………..
278 (9-2)
Ensuring Informational Control: Responding Effectively to
Environmental Change…………………………………………………………….……..280 (9-4)
A Traditional Approach to Strategic Control……………………………………………………….…280 (9-4)
A Contemporary Approach to Strategic Control……………………………..….……….…………281 (9-4)
Attaining Behavioral Control: Balancing Culture,
Rewards, and Boundaries……………………………………………………………..…282 (9-6)
Building a Strong and Effective Culture……………………………………………….…….………...283 (9-8)
Motivating with Rewards and Incentives………………………………………………….…………...284 (9-10)
Setting Boundaries and Constraints…………………………………………………..…….……….….288 (9-13)
Behavioral Control in Organizations: Situational Factors…………………..……….…………290 (9-15)
Evolving from Boundaries to Rewards and Culture…………………………….………….………291 (9-15)
The Role of Corporate Governance………………………………………………….292 (9-16)
The Modern Corporation: The Separation of Owners
(Shareholders) and Management
…………………………………………………………………………………………..….……….…..293 (9-16)
Governance Mechanisms: Aligning the Interests of Owners and Managers……………….294 (9-17)
CEO Duality: Is it Good or Bad?…………………………………………………………….…………..300 (9-22)
External Governance Control Mechanisms……………………………………………………….…..302 (9-22)
Corporate Governance: An International Perspective…………………………………………….305 (9-26)
Issue for Debate……………………………………………………………..….…………...307 (9-28)
Reflecting on Career Implications……………………………………..…….………308 (9-28)
Summary……………………………………………………………………………….……….308 (9-30)
Chapter 9
Strategic Control and Corporate Governance
Summary/Objectives
The purpose of this chapter is to explain how strategic control systems may be used to
effectively implement strategies. As the first of the four chapters in Part 3 of the text, it
introduces students to the issues surrounding implementation and leadership. It includes both
traditional and contemporary approaches to control, and outlines informational (e.g., monitoring,
performance milestones) and behavioral (e.g., rewards, culture, boundaries) techniques for
achieving control, as well as for corporate governance. The chapter is organized into three
sections:
1. Informational control: We describe contrasting approaches to information control.
The first is termed “traditional” and emphasizes setting objectives and standards,
and controlling by comparing performance to achievements. The second is
“contemporary” in which conditions are continually monitored and strategy is
modified in an interactive fashion to adapt to changing conditions.
2. Behavioral control: We introduce the role of cultures, rewards and incentives,
boundaries, and how firms must achieve a proper balance between these forces in
order to maintain strategic control.
3. We explain the role of corporate governance in ensuring that managerial and
shareholder (owner) interests are aligned. Examples of effective and ineffective
governance are given and we address three mechanisms for effective governance:
committed and involved board of directors; shareholder activism; and effective
managerial rewards and incentives. We also propose several external control
mechanisms: the market for corporate control, auditor, banks and analysts, the
media, and public activists. We close this section with a discussion of corporate
governance from an international perspective.
Lecture/Discussion Outline
The introductory case in LEARNING FROM MISTAKES focuses on the corporate
governance problems that have plagued Tesco, a British-based global retailer. Tesco was facing
strong competitive pressures in its home and global markets, but things got worse in 2014 when
a series of accounting irregularities in the firm became public. The scandal that ensued
highlighted weaknesses in Tesco’s corporate governance.
Discussion Question 1: What changes should Tesco make to avoid future, similar scandals?
Response:
This question allows the instructor to highlight key issues of corporate governance
covered in the chapter. Specifically, Tesco can use behavioral control elements to improve its
overall governance structure. This can include an emphasis on an ethical culture regarding
In addition to behavioral controls, the firm could take a series of actions to improve its
corporate governance. They could structure stock-based compensation for senior managers that
trigger a longer-term focus and claw back provisions. By making stock options unexercisable for
Discussion Question 2: To what degree do you think the scandal at Tesco was related to how the
firm had been performing?
Response guidelines: It is no surprise that the alleged accounting misrepresentations
occurred in years the firm was facing competitive pressures and decreased financial
performance. Research by Jared Harris and Phil Bromiley has demonstrated that accounting
This chapter focuses on how management can develop and use effective strategic control.
The first two sections address:
1. informational control (the ability to respond effectively to change)
2. behavioral control (the appropriate balance and alignment among an
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
I. Ensuring Informational Control: Responding Effectively to
Environmental Change
This section addresses “traditional” and “contemporary” approaches to informational
control. Although both have the same purpose—using information to select, monitor, and
A 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
Examples of control systems that rely on feedback controls include sales quotas,
Discussion Question 3: What is the value of feedback systems that compare performance
to objectives?
Point out that the traditional process can often be time-consuming and that many firms
Discussion Question 4: Under what conditions might a traditional sequential control
system be inadequate? (in cases where factors in the internal and external environment
change very slowly)
B. A 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
Notice in EXHIBIT 9.2 that both informational and behavioral controls are needed for the
contemporary approach. Informational controls ask whether the organization is “doing the right
Discussion Question 5: What is the advantage of continuously monitoring and updating
information controls?
The SUPPLEMENT below provides a more recent example of why a contemporary
Extra Example: Managing through a Down Period—Changing Goals
Firms must be especially diligent in their control systems during down periods. One of the key concerns is that firms
will stop doing what they’re already doing right. To prevent this, according to senior consultant Ram Charan and
Fortune Editor Geoffrey Colvin, it is important for companies to remember three of the most important
fundamentals for keeping any business successful:
1. The first is to maintain a clear-eyed view of reality, no matter how unpleasant it is or how it may differ
from what you expected. It is amazing how many companies chase after management fads when times are
good but refuse to change when the environment changes dramatically. When the economy slows or a
firm’s prospects dip, firms need to wipe their whiteboard clean and rethink strategy based on what’s
realistically achievable. Firms should ask, how are we going to be No. 1 in a new environment? In other
words, how do we continue to do the right things?
2. The second is continual, day-by-day insistence on improving productivity. In other words, companies need
to ask if they are doing things right. In an economic or market slowdown, productivity typically goes down,
leading some executives to conclude that it is unavoidable in bad times. It’s not. In fact, improving
productivity during a downturn puts a company in a stronger competitive position when things turn up
again.
3. The third fundamental is to stay focused on people. The quality of the people a company hires is often its
only major source of competitive advantage. Yet when times get tough, many companies ease up on
recruiting, figuring a slow economy will drive more applicants their way. They also spend less on training
as a way to raise profits quickly without doing immediate damage to the business. But the long-term
damage can be devastating. If you were an airline, would you postpone aircraft maintenance for six
months? Of course not. People also change and grow and even become obsolete if quality is not
maintained.
Source: Charan, R., & Colvin, G. 2001. Managing for the slowdown. Fortune, February 5: 79–88.
Discussion Question 6: What kind of information controls can companies use to
accurately assess the environment, evaluate productivity, and improve the quality of the
work force?
Emphasize that contemporary control systems—which require continually monitoring
numerous information sources and result in rapid revisions to corporate strategies or direction—
The SUPPLEMENT below emphasizes that old systems often have to be updated. It
describes the methods that Praxair recently used to overhaul its budget process and make it more
timely.
Extra Example: Creating a Responsive Budget Process
In many companies, budgeting involves a ten-week cycle. Besides being overly drawn-out, the process can often
cause problems if lower level managers propose budgets that consider only their own priorities and not the
company’s overall situation. Then, in budget negotiations, top managers typically ask for more ambitious goals,
while lower level managers shoot for targets they know they can hit. The result is silo thinking and compromise.
Praxair implemented a speedier and more comprehensive system to address this issue. The process begins with the
company’s overall goal, articulated by top management and based on the big-picture environment. Managers from
each unit then state, in a maximum of 50 budget lines, the most important things they believe the firms must
accomplish to achieve that goal. Then, the critical 20 to 30 people get together and openly discuss key actions and
assumptions for each unit. With information technology, managers can see the effects of changes to the budget
instantly. The horse trading goes on for about three days and in the end, everyone understands the total picture and
collaboration between units becomes easier.
Source: Charan, R., & Colvin, G. 2001. Managing for the slowdown. Fortune, February 5: 79–88.
Discussion Question 7: What are some examples of other information control systems
that could benefit from the type of processes used by Praxair?
Discussion Question 8: What are some examples from other companies of interactive
information control systems?
STRATEGY SPOTLIGHT 9.1 discusses how the perceptions of managers and employees
differ in regard to whether their firms rely primarily on traditional or contemporary controls, with
II. Attaining Behavioral Control: Balancing Culture,
Rewards, and Boundaries
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
Point out that there are two reasons why behavioral controls are important for strategic
managers today.
1. Increasingly complex and unpredictable environments make it important that all
2. Today’s work force includes younger managers who see themselves as free
agents. Traditional controls such as rules and regulations typically will not
The SUPPLEMENT below illustrates how poor behavioral controls can lead to tragedy.
It discusses the inadequate controls that played a key part in BP’s 2005 refinery disaster that took
Extra Example: Poor Behavioral Controls at BP’s Refinery in Texas
The Chemical Safety Board, a U.S. government agency that investigates industrial disasters, had long believed that
BP’s executives did not spend enough time and money on the safety of their employees. Its latest report on the
subject, released in March, 2007, was no different: It claimed that such failings contributed to the explosion in 2005
at BP’s refinery in Texas City, Texas.
Consultants investigating frequent breakdowns at the refinery wrote in 2002: “Budget cuts were imposed on the
previous year’s spend and did not take into account the specific needs of the refinery… The prevailing culture at the
Texas City Refinery was to accept cost reductions without challenge and not to raise concerns when operational
integrity was compromised.”
In 2002, an employee noted in an internal email: Orders to slash costs by 25 percent seem “to have been taken
literally” by those in charge of Texas City, whereas managers elsewhere “knew how to play the BP game” He refers
to a colleague who thinks “the top level in London need to understand the consequences of their orders.”
An internal audit of Health, Safety and Environment (HSE) throughout BP, released in 2004, discovered
“widespread tolerance of non-compliance with basic HSE rules…poor implementation of HSE management
systems…lack of leadership competence and understanding to effectively manage all aspects of HSE…(and)
insufficient monitoring of key HSE processes.”
Several employees at Texas City complained that “managers were not nearly worried enough about the ‘real’
dangers and ‘too worried about seat belts’,” according to another set of consultants. Others griped that it was
“acceptable to avoid costs related to integrity management because the consequences might occur later, on someone
else’s watch.” Consultants also said they had “never heard so many people say they were personally afraid of
injury.” Sadly, there was in an email written by an employee a few weeks after the disaster: “It’s a shame what had
to happen to get us to where we recommended we go several years back.”
Source: Anonymous. 2007. In their own words… The Economist. March 24: 74.
Discussion Question 9: How could such a tragedy have been prevented? (Address
behavioral controls of culture, rewards, and boundaries. You might also raise broader
leadership and ethical issues.)
A. Building a Strong and Effective Culture
Culture refers to the shared values, unspoken understandings, and sense of purpose within
and positive, it can be a powerful force for accomplishing company goals.
Discussion Question 10: What makes an organizational culture strong? What are some
examples of companies with a strong culture?
Discussion Question 11: What would be the effect on an organization if its culture were
“negative” rather than “positive?” What are some examples of companies that have a
negative culture?
1. The Role of Culture
Point out that a company’s culture is often what makes it unique compared to other firms
in an industry. This uniqueness gives workers a sense of “specialness.” It may also influence
Discussion Question 12: What are some of the other examples of culture that give
companies a sense of uniqueness or set them apart in the mind of employees or
customers?
The SUPPLEMENT below addresses the importance of culture at Nucor in maintaining
Extra Example: Culture Keeps Company Strong During an Economic Downturn
U.S. Steelmaker Nucor is known for its unique culture. Former Chair Ken Iverson (1925–2002), who transformed a
failing nuclear instruments company into a successful chain of steel minimills, established principles that are the key
to Nucor’s success: no executive parking spaces or dining rooms; everyone flies coach and gets the same health
insurance and benefits package. In other words, Nucor is frugal, fraternal, and egalitarian.
Keeping with the tradition of not laying off employees or cutting benefits, Chairman Daniel DiMicco faced the
challenge of maintaining a strong culture in the face of a slumping economy in 2008. Some Nucor employees
switched from their normal roles into roles where they cleaned bathrooms and mowed lawns. The firm’s bonus-
driven pay plan saw dramatic cuts in paychecks because of deep production losses—plants were running at 50
percent capacity and many of Nucor’s employees were working half-time.
Because of the strong emphasis on operational efficiency, paying for performance lies at the heart of Nucor’s
culture. Steel mill workers earn weekly bonuses based on how many steel sheets or beams their group turns out. The
bonuses account for two-thirds of take-home pay. “We pay weekly because spouses will perform a good kick in the
butt if you have an off week,” says DiMicco.
How did DiMicco sustain the fair and efficient culture that has made Nucor strong? Besides shunning layoffs,
DiMicco became a vocal spokesman in support of buying U.S. steel and requiring China, which accounts for 30
percent of U.S steel purchases, to abide by the rules of the World Trade Organization. He also fought cap-and-trade
legislation that could have added $50 to the cost of a ton of U.S. steel.
Nucor has seen its sales nearly double since the depths of the recession in 2009, but its profits are still less than half
of what they were before the recession. It is still a struggle, but Nucor appears to be retaining its culture. They still
haven’t had a layoff since 1984, and 88 percent of employees responding to a survey support the job DiMicco is
doing as CEO.
Source: Helman, C. 2009. Test of mettle. Forbes, May 11: 81–82; www.nucor.com; www.glassdoor.com
Discussion Question 13: Given changing economic conditions, is there a potential
downside to companies that rely on a strong culture to maintain behavioral control?
2. Sustaining an Effective Culture
Companies use many different techniques to foster a positive culture and create an
environment that is fun and motivating. Another advantage of a strong culture is that it builds
STRATEGY SPOTLIGHT 9.2 discusses the power of pictures and stories in building a
customer-centric culture.
Discussion Question 14: Think about companies you have worked for? How could these
companies use pictures and stories to build a customer-centric culture?
The SUPPLEMENT below describes how the leadership of Sears created a dysfunctional
structure and culture that played a major role in Sears’ long decline.
Extra Example: The Destructive Competitive Culture at Sears
Eddie Lampert, the man who engineered a $12 billion takeover of Sears in 2008, had a bold vision for the culture of
Sears. Believing in the benefits of competition, Lambert set out to build an organizational culture that emphasized
performance and competitiveness. He felt the best way to do this was to divide Sears into 30 independent units,
including product-based divisions (e.g., apparel, tools, appliances), support services (e.g., HR, IT), brand divisions
(e.g., Kenmore, Craftsman, DieHard), and specialized e-commerce and retail divisions. While many corporations
have product divisions, Lambert went farther and gave each division its own board of directors and emphasized
internal profit and loss competition between divisions. Lambert would oversee it all, using advanced data analytics
to receive timely and precise information on each division’s performance and trouble spots.
The result was that a destructive culture emerged in the firm where the divisions openly competed and undercut each
other. For example, the appliances division began to promote outside brands over the Sears-owned Kenmore brand.
Also, product divisions competed vigorously with each other for space in stores and in advertising brochures. A
proposal to cut prices on Sears’ food and drink offerings to build customer traffic in stores failed because other
product divisions would have had to sacrifice some of their own profits. Firm wide decisions, such as holiday
operating hours and content of the weekly advertising flyers, became nearly impossible since business units felt little
interest in reaching agreement on common goals or initiatives, instead preferring to prioritize their own objectives.
Source: Kimes, M. 2013. At Sears, Eddie Lampert’s Warring Division Model Adds to the Troubles. bloomberg.com.
July 11: np; Nisen, M. 2013. Billionaire Eddie Lampert Is Running Sears Like the Coliseum, and It’s a Disaster.
Businessinsider.com. July 11: np.
Discussion Question 15: Why did Lampert’s decision to create independent divisions
lead to such a destructive culture in Sears?
Emphasize that recreation and “fun parties” are not the only way companies cultivate and
maintain a strong culture. In fact, the company leadership is one of the most important sources of
Teaching Tip: Ask students how they define organizational culture and how it can be a
source of competitive advantage that can be sustainable over time. Point out that it is
particularly important in the knowledge economy for several reasons: it helps to
B. Motivating with Rewards and Incentives
Reward systems specify who gets rewarded and why. They can have a powerful influence
on individual performance and overall firm outcomes. Reward systems need to be closely linked
We provide the example of how Not Your Average Joes, a Massachusetts’ restaurant
Discussion Question 16: Are you familiar with other firms that have different incentives
and rewards for individuals at different hierarchical levels? Is the reward system
effective? Why? Why not?