External governance control mechanisms include

chapter 9

Strategic Control and Corporate Governance

After reading this chapter, you should have a good understanding of the following learning objectives:

LO9.1 The value of effective strategic control systems in strategy implementation.

LO9.2 The key difference between “traditional” and “contemporary” control systems.

LO9.3 The imperative for “contemporary” control systems in today’s complex and rapidly changing competitive and general environments.

LO9.4 The benefits of having the proper balance among the three levers of behavioral control: culture, rewards and incentives, and boundaries.

LO9.5 The three key participants in corporate governance: shareholders, management (led by the CEO), and the board of directors.

LO9.6 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.

Learning from Mistakes

Hewlett-Packard (HP) is one of the largest firms in the world and also one of the most dysfunctional. Sitting #10 on the Fortune 500 list with $120 billion in sales in 2012, it is a titan in the computer hardware market.1 However, it is a struggling titan that lost $12.6 billion in 2012, in contrast to earnings of almost $9 billion only two years earlier. But HP’s struggles go back much farther than the last two years. Their inability to effectively respond to the dramatic shifts that have transformed the computing industry in the last several years has been, at least partly, driven by their toxic corporate governance culture.

The dynamics in the board of directors has resembled a soap opera for over 10 years. Going back to 2002, HP’s CEO, Carly Fiorina, was pushing hard for HP to acquire one of its main rivals, Compaq. Standing in her way to get this deal done was Walter Hewitt, the son of one of the firm’s founders. The members of the board took sides in this debate and started leaking corporate secrets to the press to bolster their side of the argument. HP eventually did acquire Compaq, but the toxic culture in the boardroom was set.

Fiorina stayed at the helm of HP until early 2005, when she was forced out by the board—but only after board

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members leaked documents damaging to Fiorina in the press. She was replaced by Mark Hurd, but the troubles with the board continued. The chairwoman of the board was accused in 2006 of hiring private investigators to obtain the phone records of board members and reporters to try to get at the root of leaks from the board. The scandal was investigated by both the State of California and the U.S. Congress and resulted in Patricia Dunn, the chairwoman, being forced from her position. Hurd, the firm’s CEO, was fired in 2010 when it came to light that he had an inappropriate affair with a subordinate and had charged expenses related to his affair to the firm. His departure only served to exacerbate the tension on the board. He had been dismissed on a 6-4 vote by the board, and the tension between the pro- and anti-Hurd factions on the board spilled over to the search for his replacement. It got so bad that some board members refused to be in the same room with other directors. The board settled on Leo Apotheker to replace Hurd, but only after the search firm vetting Apotheker didn’t fully disclose issues related to Apotheker that led to his firing from his position of co-CEO at SAP, an enterprise software firm. Apotheker lasted all of 11 months as CEO at HP before he was fired, receiving a $13.2 million dollar severance package from the board. He was replaced by Meg Whitman, the former CEO of eBay, in 2011.

All of the drama in the boardroom has had a devastating effect on HP’s businesses. The strategic direction of the firm has been inconsistent over time, moving from traditional hardware, to mobile devices, to computing services, and finally to cloud computing. HP announced it was planning to spin off its PC business only to quickly move away from that plan once the market reacted to the announcement by pummeling the firm’s stock. The drama also infested the rest of the company. Both Apotheker and Whitman have had to deal with employees leaking important and damaging information to the press, much like the board has done for years. As a result, there has been very little information sharing within the organization, because no one knows who they can trust and who will leak important information to the press.

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Discussion Questions

1. What are the most significant problems with HP’s board?

2. How do we see the problems with the board of directors damaging HP’s ability to compete in its markets?

We first explore two central aspects of strategic control :2 (1) informational control, which is the ability to respond effectively to environmental change, and (2) behavioral control, which is the appropriate balance and alignment among a firm’s culture, rewards, and boundaries. In the final section of this chapter, we focus on strategic control from a much broader perspective—what is referred to as corporate governance. 3 Here, we direct our attention to the need for a firm’s shareholders (the owners) and their elected representatives (the board of directors) to ensure that the firm’s executives (the management team) strive to fulfill their fiduciary duty of maximizing long-term shareholder value. As we just saw in the HP example, poor corporate governance can result in significant loss of managerial attention and of the ability to manage major strategic issues.

strategic control

the process of monitoring and correcting a firm’s strategy and performance.

LO9.1

The value of effective strategic control systems in strategy implementation.

Ensuring Informational Control: Responding Effectively to Environmental Change

We discuss two broad types of control systems: “traditional” and “contemporary.” As both general and competitive environments become more unpredictable and complex, the need for contemporary systems increases.

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 9.1.

traditional approach to strategic control

a sequential method of organizational control in which (1) strategies are formulated and top management sets goals, (2) strategies are implemented, and (3) performance is measured against the predetermined goal set.

Control is based on a feedback loop from performance measurement to strategy formulation. 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.4 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.5

James Brian Quinn of Dartmouth College has argued that grand designs with precise and carefully integrated plans seldom work.6 Rather, most strategic change proceeds incrementally—one step at a time. Leaders should introduce some sense of direction, some logic in incremental steps.7 Similarly, McGill University’s Henry Mintzberg has written about leaders “crafting” a strategy.8 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.

LO9.2

The key difference between “traditional” and “contemporary” control systems.

EXHIBIT 9.1 Traditional Approach to Strategic Control

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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.

LO9.3

The imperative for “contemporary” control systems in today’s complex and rapidly changing competitive and general environments.

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 9.2. 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?

informational control

a method of organizational control in which a firm gathers and analyzes information from the internal and external environment in order to obtain the best fit between the organization’s goals and strategies and the strategic environment.

behavioral control

a method of organizational control in which a firm influences the actions of employees through culture, rewards, and boundaries.

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.9

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, as we discussed in Chapter 2. Also, conditions can change in the internal environment of the firm, as we discussed in Chapter 3, 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,

EXHIBIT 9.2 Contemporary Approach to Strategic Control

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changes in the competitive environment are detected earlier, and the organization’s ability to respond with speed and flexibility is enhanced.

STRATEGY SPOTLIGHT

9.1

HOW DO MANAGERS AND EMPLOYEES VIEW THEIR FIRM’S CONTROL SYSTEM?

Top executives of organizations often assert that they are pushing for more contemporary control systems. The centralized, periodic setting of objectives and rules with top-down implementation processes is ineffective for organizations facing heterogeneous and dynamic environments. For example, Walmart has, in recent years, realized its top-down, rule-based leadership system was too rigid for a firm emphasizing globalization and technological change. Like many other firms, Walmart is moving to a more decentralized, values-based leadership system where lower-level managers make key decisions, keeping the values of the firm in mind as they do so.

Managers of firms see the need to make this transition, but do lower-level managers and workers see a change in the control systems at their organizations? To get at this question, the Boston Research Group conducted a study of 36,000 managers and employees to get their views on their firm’s control systems. Their findings are enlightening. Only 3 percent of employees saw their firm’s culture as “self-governing,” in which decision making is driven by a “set of core principles and values.” In contrast, 43 percent of employees saw their firm as operating using a top-down, command-and-control decision process, what the authors of the study labeled as the “blind obedience” model. 53 percent of employees saw their firm following an “informed acquiescence” model where the overall style is top-down but with skilled management that used a mix of rewards and rules to get the desired behavior. In total, 97 percent of employees saw their firm’s culture and decision style as being top-down.

Interestingly, managers had a different view. 24 percent of managers believed their organizations used the values-driven, decentralized “self-governing” model. Thus, managers were eight times more likely than employees to see the firm employing a contemporary, values-driven control system. Similarly, while 41 percent of managers said that their firm rewarded performance based on values and not just financial outcomes, only 14 percent of employees saw this.

The cynicism employees expressed regarding the control systems in their firms had important consequences for the firm. Almost half of the employees who had described their firms as “blind obedience” firms had witnessed unethical behavior in the firm within the last year. Only one in four employees in firms with the other two control types said they had witnessed unethical behavior. Additionally, only one-fourth of the employees in “blind obedience” firms would blow the whistle on unethical behavior, but this rate went up to nine in ten if the firm relied on “self-governance.” Finally, the impressions of employees influence the ability of the firm to be responsive and innovative. 90 percent of employees in “self-governing” and 67 percent of employees in “informed acquiescence” firms agreed with the statement that “good ideas are readily adopted by my company.” Less than 20 percent of employees in “blind obedience” firms agreed with the same statement.

These findings indicate that managers need to be aware of how the actions they take to improve the control systems in their firms are being received by employees. If the employees see the pronouncements of management regarding moving toward a decentralized, culture-centered control system as simply propaganda, the firm is unlikely to experience the positive changes they desire.

Sources: Anonymous. 2011. The view from the top and bottom. Economist, September 24: 76; and Levit, A. 2012. Your employees aren’t wearing your rose colored glasses. Openforum.com , November 12: np.

Contemporary control systems must have four characteristics to be effective.10

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. Strategy Spotlight 9.1 discusses how managers and employees each see the control systems at work in their companies and some of the consequences of those impressions.

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LO9.4

The benefits of having the proper balance among the three levers of behavioral control: culture, rewards and incentives, and boundaries.

Attaining Behavioral Control: Balancing Culture, Rewards, and Boundaries

Behavioral control is focused on implementation—doing things right. Effectively implementing strategy requires manipulating three key control “levers”: culture, rewards, and boundaries (see Exhibit 9.3). There are two compelling reasons for an increased emphasis on culture and rewards in a system of behavioral controls.11

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.12 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.

Building a Strong and Effective 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).13 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, 14 , have emphasized the powerful influence of culture on what goes on within organizations and how they perform.

organizational culture

a system of shared values and beliefs that shape a company’s people, organizational structures, and control systems to produce behavioral norms.

Collins and Porras argued in Built to Last that the key factor in sustained exceptional performance is a cultlike culture.15 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.16 Effective leaders understand its importance and strive to shape and use it as one of their important levers of strategic control.17

EXHIBIT 9.3 Essential Elements of Behavioral Control

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The Role of Culture 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:

• FedEx and Amazon focus on customer service.

• Lexus (a division of Toyota) and Apple emphasize product quality.

• Google and 3M place a high value on innovation.

• Nucor (steel) and Walmart are concerned, above all, with operational efficiency.

Culture sets implicit boundaries—unwritten standards of acceptable behavior—in dress, ethical matters, and the way an organization conducts its business.18 By creating a framework of shared values, culture encourages individual identification with the organization and its objectives. Culture acts as a means of reducing monitoring costs.19

Strong culture can lead to greater employee engagement and provide a common purpose and identity. Firms have typically relied on economic incentives for workers, using a combination of rewards (carrots) and rules and threats (sticks) to get employees to act in desired ways. But these systems rely on the assumption that individuals are fundamentally self-interested and selfish. However, research suggests that this assumption is overstated.20 When given a chance to act selfishly or cooperatively with others, over half choose to cooperate, while only 30 percent consistently choose to act selfishly. Thus, cultural systems that build engagement, communication, and a sense of common purpose and identity would allow firms to leverage these collaborative workers.

Sustaining an Effective Culture Powerful organizational cultures just don’t happen overnight, and they don’t remain in place without a strong commitment—both in terms of words and deeds—by leaders throughout the organization.21 A viable and productive organizational culture can be strengthened and sustained. However, it cannot be “built” or “assembled”; instead, it must be cultivated, encouraged, and “fertilized.”22

Storytelling is one way effective cultures are maintained. Many are familiar with the story of how Art Fry’s failure to develop a strong adhesive led to 3M’s enormously successful Post-it Notes. Perhaps less familiar is the story of Francis G. Okie.23 In 1922 Okie came up with the idea of selling sandpaper to men as a replacement for razor blades. The idea obviously didn’t pan out, but Okie was allowed to remain at 3M. Interestingly, the technology developed by Okie led 3M to develop its first blockbuster product: a waterproof sandpaper that became a staple of the automobile industry. Such stories foster the importance of risk taking, experimentation, freedom to fail, and innovation—all vital elements of 3M’s culture.

Rallies or “pep talks” by top executives also serve to reinforce a firm’s culture. The late Sam Walton was known for his pep rallies at local Walmart stores. Four times a year, the founders of Home Depot—former CEO Bernard Marcus and Arthur Blank—used to don orange aprons and stage Breakfast with Bernie and Arthur, a 6:30 a.m. pep rally, broadcast live over the firm’s closed-circuit TV network to most of its 45,000 employees.24

Southwest Airlines’ “Culture Committee” is a unique vehicle designed to perpetuate the company’s highly successful culture. The following excerpt from an internal company publication describes its objectives:

The goal of the Committee is simple—to ensure that our unique Corporate Culture stays alive…. Culture Committee members represent all regions and departments across our system and they are selected based upon their exemplary display of the “Positively Outrageous Service” that won us the first-ever Triple Crown; their continual exhibition of the “Southwest Spirit” to our Customers and to their fellow workers; and their high energy level, boundless enthusiasm, unique creativity, and constant demonstration of teamwork and love for their fellow workers.25

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Motivating with Rewards and Incentives

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.26 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.27 The managers at Not Your Average Joe’s, a Massachusett’s-based restaurant chain, changed their staffing procedures both to let their servers better understand their performance and to better motivate them.28 The chain uses sophisticated software to track server performance—both in per customer sales and customer satisfaction as seen in tips. Highly rated servers are given more tables and preferred schedules. In shifting more work and better schedules to the best workers, the chain hopes to improve profitability and motivate all workers.

reward system

policies that specify who gets rewarded and why.

The Potential Downside While they can be powerful motivators, reward and incentive policies can also result in undesirable outcomes in organizations. At the individual level, incentives can go wrong for multiple reasons. First, if individual workers don’t see how their actions relate to how they are compensated, they can be demotivating. For example, if the rewards are related to the firm’s stock price, workers may feel that their efforts have little if any impact and won’t perceive any benefit from working harder. On the other hand, if the incentives are so closely tied to their individual work, they may lead to dysfunctional outcomes. For example, if a sales representative is rewarded for sales volume, she will be incentivized to sell at all costs. This may lead her to accept unprofitable sales or push sales through distribution channels the firm would rather avoid. Thus, 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.

Reward and incentive systems can also cause problems across organizational units. 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; overengineering 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.

Creating Effective Reward and Incentive Programs 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.29

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.30 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.

Effective reward and incentive systems share a number of common characteristics.31 (see Exhibit 9.4). The perception that a plan is “fair and equitable” is critically important.

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The firm must have the flexibility to respond to changing requirements as its direction and objectives change. In recent years many companies have begun to place more emphasis on growth. Emerson Electric has shifted its emphasis from cost cutting to growth. To ensure that changes take hold, the management compensation formula has been changed from a largely bottom-line focus to one that emphasizes growth, new products, acquisitions, and international expansion. Discussions about profits are handled separately, and a culture of risk taking is encouraged.32 Finally, incentive and reward systems don’t all have to be about financial rewards. Recognition can be a powerful motivator. For example, at Mars Central Europe, they hold an event twice a year in which they celebrate innovative ideas generated by employees. Recognition at the “Make a Difference” event is designed to motivate the winners and also other employees who want to receive the same recognition.33

EXHIBIT 9.4 Characteristics of Effective Reward and Evaluation Systems

• 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.

The key is for managers to find a mix of incentives that motivates employees. Gordon Bethune, the former CEO of Continental Airlines used the following analogy.34

“I own a twelve-hundred-acre ranch, and it’s got a seventy-acre lake. It’s wonderful. And do you know, in spite of all that, I still have to use bait when I fish? Can you believe it? The point is there’s got to be something in it for the fish, and it’s up to me to know what the fish like. It’s not up to them. So maybe if I learn enough about the fish and what they like, they might be easier to get in the boat and provide me a little recreation.”

Setting 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.35 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:

boundaries and constraints

rules that specify behaviors that are acceptable and unacceptable.

• 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.

Focusing Efforts on Strategic Priorities Boundaries and constraints play a valuable role in focusing a company’s strategic priorities. For example, several years ago, IBM sold off its PC business as part of its desire to focus its business on computing services. Similarly, Pfizer sold its infant formula business as it refocused its attention on core pharmaceutical products.36 This concentration of effort and resources provides the firm with greater strategic focus and the potential for stronger competitive advantages in the remaining areas.

Steve Jobs would use white boards to set priorities and focus attention at Apple. For example, he would take his “top 100” people on a retreat each year. One year, he asked the group what 10 things Apple should do next. The group identified ideas. Ideas went up on the board, then got erased or revised; new ones were added, revised, and erased. The group argued about it for a while and finally identified their list of top 10 initiatives. Jobs proceeded to slash the bottom seven, stating, “We can only do three.”37

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Boundaries also have a place in the nonprofit sector. For example, a British relief organization uses a system to monitor strategic boundaries by maintaining a list of companies whose contributions it will neither solicit nor accept. Such boundaries are essential for maintaining legitimacy with existing and potential benefactors.

Providing Short-Term Objectives and Action Plans In Chapter 1 we discussed the importance of a firm having a vision, mission, and strategic objectives that are internally consistent and that provide strategic direction. In addition, short-term objectives and action plans provide similar benefits. That is, they represent boundaries that help to allocate resources in an optimal manner and to channel the efforts of employees at all levels throughout the organization.38 To be effective, short-term objectives must have several attributes. They should:

• Be specific and measurable.

• Include a specific time horizon for their attainment.

• Be achievable, yet challenging enough to motivate managers who must strive to accomplish them.

Research has found that performance is enhanced when individuals are encouraged to attain specific, difficult, yet achievable, goals (as opposed to vague “do your best” goals).39

Short-term objectives must provide proper direction and also provide enough flexibility for the firm to keep pace with and anticipate changes in the external environment, new government regulations, a competitor introducing a substitute product, or changes in consumer taste. Unexpected events within a firm may require a firm to make important adjustments in both strategic and short-term objectives. The emergence of new industries can have a drastic effect on the demand for products and services in more traditional industries.

Action plans are critical to the implementation of chosen strategies. Unless action plans are specific, there may be little assurance that managers have thought through all of the resource requirements for implementing their strategies. In addition, unless plans are specific, managers may not understand what needs to be implemented or have a clear time frame for completion. This is essential for the scheduling of key activities that must be implemented. Finally, individual managers must be held accountable for the implementation. This helps to provide the necessary motivation and “sense of ownership” to implement action plans on a timely basis. Strategy Spotlight 9.2 illustrates how Marks and Spencer puts its sustainability mission into action by creating clear, measurable goals.

Improving Operational Efficiency and Effectiveness Rule-based controls are most appropriate in organizations with the following characteristics:

• Environments are stable and predictable.

• Employees are largely unskilled and interchangeable.

• Consistency in product and service is critical.

• The risk of malfeasance is extremely high (e.g., in banking or casino operations).40

McDonald’s Corp. has extensive rules and regulations that regulate the operation of its franchises.41 Its policy manual from a number of years ago stated, “Cooks must turn, never flip, hamburgers. If they haven’t been purchased, Big Macs must be discarded in 10 minutes after being cooked and French fries in 7 minutes. Cashiers must make eye contact with and smile at every customer.”

Guidelines can also be effective in setting spending limits and the range of discretion for employees and managers, such as the $2,500 limit that hotelier Ritz-Carlton uses to empower employees to placate dissatisfied customers. Regulations also can be initiated to improve the use of an employee’s time at work.42 CA Technologies restricts the use of email during the hours of 10 a.m. to noon and 2 p.m. to 4 p.m. each day.43

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STRATEGY SPOTLIGHT

9.2 ENVIRONMENTAL SUSTAINABILITY

BREAKING DOWN SUSTAINABILITY INTO MEASURABLE GOALS

Marks & Spencer (M&S) laid out an ambitious goal in early 2010 to become “the world’s most sustainable retailer” by 2015. To meet this goal, M&S needed to substantially change how it undertook nearly all of its business operations. To make this process more tractable and to provide opportunities to identify a range of actions managers could take, M&S developed an overarching plan for its sustainability efforts, dubbed Plan A. They called it Plan A because, as M&S managers put it, when it comes to building environmental sustainability, there is no Plan B. Everyone in the firm needed to be committed to the one vision. In this plan, M&S identified three broad themes.

• Aim for all M&S products to have at least one Plan A quality.

• Help our customers make a difference to the social and environmental causes that matter to them.