Strategic Control and Restructuring Chapter 8 Strategic Control and Restructuring

The Strategic Management Process Internal and External Analysis Strategy Formulation (corporate and business level) Strategic Direction Strategy Implementation and Control Strategic Restructuring

Strategic Control System A system to support managers in - assessing whether the organization’s strategy is accomplishing goals as intended - identifying areas needing attention From the perspective of top executives, a strategic control system is a system to support managers in assessing the relevance of the organization's strategy to its progress in the accomplishment of its goals, and when discrepancies exist, to support areas needing attention" 1Many existing control systems are based almost exclusively on accounting measures such as return on investment (ROI). According to some control experts, accounting-based measures are "too late, too aggregated, and too distorted to be relevant for managers' planning and control decisions." The chief problem with using accounting information to control operations--managing by remote control--is the tendency for businesses to lose sight of the processes by which people and customers make a company competitive and profitable.

Types of Control Feedback - Provides managers with performance information so that they can make adjustments if necessary Concurrent - Provides real-time information used to control organizational processes Feedforward - Helps managers anticipate changes in the external and internal environments

(including targets and concurrent controls) time Strategies Stakeholders and Environment FEEDFORWARD CONTROL Missions and Goals Implementation (including targets and concurrent controls) time Strategies Performance Comparison of Performance with Targets The learning processes associated with both feedforward and feedback control form the basis for changes to strategic direction, strategies, implementation plans or even the targets themselves, if they are found to be unreasonable given current conditions. Comprehensive strategic control systems should include feedback, feedforward and concurrent controls. A comprehensive strategic control system should provide feedback for on-going, iterative adjustments in direction, resources allocations, and management priorities. Discussion Prompt: Identify some examples of formal and informal feedback, concurrent, and feedforward control systems that you encounter in your daily life. Consider course grading and progress in your degree program, your performance evaluations on your first job, and your reading of traffic patterns as you drive to a particular destination. Assessment of Cause and Effect FEEDBACK CONTROL

Feedback Controls Budgets Ratio Analysis Goal Setting and Evaluation Surveys Audits Examples of feedback controls include budgets, financial ratios, goal setting and evaluation, etc.

Elements in a Feedback Control System Establishment of broad goals based on strategic direction Identification of key result areas for each broad goal Establishment of specific targets and time frames Assignment of responsibility Development of an action plan Follow up with each manager Effective feedback controls are one way to help ensure that the strategies are indeed moving the organization in an appropriate direction. They create specific objectives or targets, which ensures that managers at various levels and areas in the organization understand the plans and strategies that guide organizational decisions. Feedback control systems motivate managers to pursue organizational interests as opposed to purely personal interests, because they know they will be held accountable for the results of their actions. Feedback control systems help managers decide when and how to intervene in organizational processes by identifying areas that require further attention. Without good control systems, managers can fall into the trap of spending too much time dealing with issues and problems that are not particularly important to the future of the organization.

Concurrent Controls Process Controls Behavioral Controls Statistical Process Control Real-time Inventory Control Behavioral Controls Bureaucratic Controls Rules and Procedures Policies--general guides to action Clan Control Socialization processes that dictate appropriate behavior Concurrent controls are very similar to feedback controls, except that the time horizon is shortened to “real time.” Some of the most common types of concurrent controls are those associated with production and service processes and with quality standards. Another category of concurrent controls is associated with control of behavior. Within an organization, managers must depend on employees to perform their duties properly, even when management is not around. Behavioral controls work to encourage employees to comply with organizational norms and procedures.

Feedforward Control Systems Environmental discontinuities (major, unexpected changes) make good feedforward controls necessary and important Feedforward controls – The firm analyzes information from stakeholders, the industry and the broad environment to predict potential changes Premise Control – evaluates whether information used to establish strategies and goals is still valid Feedforward control systems help managers predict changes that may occur in their external and internal environments, based on analysis of inputs from stakeholders and the broad environment. Good feedforward control systems are important because of environmental discontinuities, which are major, unexpected changes in the social, economic, technological and political environments that necessitate change within organizations. Feedforward controls are an integral part of the strategic management process advanced in this book. Much of the distinction between the “strategic planning” of the 1960s and 1970s and the “strategic management” of today is the recognition of the importance of excellent control systems. Premise control, a type of feedforward control, involves periodically assessing the assumptions, or premises, that underlie strategic choices. The periodic reevaluation of assumptions is a foundation concept in the iterative, on-going assessment of the environment in strategic management. Premise control helps organizations avoid situations in which their established strategies and goals are no longer appropriate.

Comprehensive Strategic Control Systems Rapidly advancing technologies make continuous improvements through control systems a possibility Information generated should be an important and recurring item to be addressed by top management Control process should be given frequent attention at all levels Data from system should be discussed in face-to- face meetings Continually challenge the underlying data, assumptions and strategies Effective feedback controls are one way to help ensure that the strategies are indeed moving the organization in an appropriate direction. They create specific objectives or targets, which ensures that managers at various levels and areas in the organization understand the plans and strategies that guide organizational decisions. Feedback control systems motivate managers to pursue organizational interests as opposed to purely personal interests, because they know they will be held accountable for the results of their actions. Feedback control systems help managers decide when and how to intervene in organizational processes by identifying areas that require further attention. Without good control systems, managers can fall into the trap of spending too much time dealing with issues and problems that are not particularly important to the future of the organization.

National Cultures National cultures can be distinguished on the basis of: Power distance - degree to which members of society accept uneven power distribution Individualism/collectivism – degree to which the focus of society is on individual or group Masculine/feminine – degree to which society draws strong distinctions between gender roles Uncertainty avoidance – degree to which members of society are tolerant of uncertainty and ambiguity Confucian dynamics – degree to which decisions are focused on the long term vs. the short term Effective feedback controls are one way to help ensure that the strategies are indeed moving the organization in an appropriate direction. They create specific objectives or targets, which ensures that managers at various levels and areas in the organization understand the plans and strategies that guide organizational decisions. Feedback control systems motivate managers to pursue organizational interests as opposed to purely personal interests, because they know they will be held accountable for the results of their actions. Feedback control systems help managers decide when and how to intervene in organizational processes by identifying areas that require further attention. Without good control systems, managers can fall into the trap of spending too much time dealing with issues and problems that are not particularly important to the future of the organization.

National Cultures and Control Systems Influence of national cultures on characteristics of control systems: Power distance high – focus on outcomes Power distance low – focus on adherence to plan Individualism – individual rewards Collectivism – team-based rewards Masculine – value on achievement, heroism and material success Feminine – value on relationships and quality of life Uncertainty avoidance – control over management risk taking Uncertainty tolerance – less rule based Long-term oriented – focus on sales growth and customer satisfaction Short-term oriented – focus on profits Effective feedback controls are one way to help ensure that the strategies are indeed moving the organization in an appropriate direction. They create specific objectives or targets, which ensures that managers at various levels and areas in the organization understand the plans and strategies that guide organizational decisions. Feedback control systems motivate managers to pursue organizational interests as opposed to purely personal interests, because they know they will be held accountable for the results of their actions. Feedback control systems help managers decide when and how to intervene in organizational processes by identifying areas that require further attention. Without good control systems, managers can fall into the trap of spending too much time dealing with issues and problems that are not particularly important to the future of the organization.

The Strategic Management Process Internal and External Analysis Strategy Formulation (corporate and business level) Strategic Direction Strategy Implementation and Control It is well known that no strategy or organization design works indefinitely. If a firm is successful with its strategies, that success alone will create a need for change, because the increases in sales volume and organization size will demand different management methods and organization structures. What is just as typical, however, is for customers, competitors, and technologies to interact to create a changing business environment, which will require that the organization make changes also. Researchers have observed that as organizations evolve over time they tend to move through a period of convergence, followed by a period of reorientation or radical adjustment, with a continuation of the convergence-reorientation cycle over time. During the convergence stage, the organization makes minor adaptive changes to strategies, but for the most part follows a consistent approach. Managers develop certain mental models, or mindsets, about how the industry and the organization work. As long as the premises that underlie these mental models do not change, the mental models represent useful experience that should be brought to bear on decisions. When premises do change, however, the established mental models may prevent the executives, managers, and employees from recognizing the need for change at all. A reorientation is a significant realignment of organization strategies, structure, and processes with the new environmental realities. Strategic Restructuring

Restructuring Approaches Refocusing Assets : Downscoping Retrenchment: Turnaround strategy, often involving downsizing (workforce reductions) Chapter XI Reorganization Leveraged Buyout (LBO) Changes to Organizational Design (structural reorganization) Restructuring typically involves a renewed emphasis on the things an organization does well, combined with a variety of tactics to revitalize the organization and strengthen its competitive position. Refocusing corporate assets is generally viewed favorably by external stakeholders such as the financial community. Refocusing entails trimming businesses that are not consistent with the strategic direction of the organization. This type of refocusing is often called downscoping. Simple sell-offs are quickly being replaced by another form of divestiture called a spin-off. Refocusing may also involve new acquisitions or new ventures to round out a corporate portfolio or add more strength in an area that is essential to corporate distinctive competencies. Retrenchment is a turnaround strategy. It can involve such tactics as work force reductions, closing unprofitable plants, outsourcing unprofitable activities, implementation of tighter cost or quality controls, or new policies that emphasize quality or efficiency. The evidence is mounting that downsizing does not reduce expenses as much as desired, and that sometimes expenses may actually increase. Studies have shown that the "surviving" employees experience feelings of guilt and fear, which may hurt productivity or organizational loyalty. An organization that is in serious financial trouble can voluntarily file for Chapter XI protection under the Federal Bankruptcy Code: Chapter XI provides a proceeding for an organization to work out a plan or arrangement for solving its financial problems under the supervision of a federal court. One of the major disadvantages of Chapter XI is that, after filing, all subsequent managerial decisions of substance must be approved by a court. Leveraged buyouts (LBOs) involve the private purchase of a business unit by managers, employees, unions or private investors. They are called leveraged because much of the money that is used to purchase the business unit is borrowed from financial intermediaries (often at higher-than-normal interest rates). Some researchers have discovered that LBOs stifle innovation and research and development, similar to mergers and acquisitions. Organizational structure, which was discussed in detail in Chapter 6, can be a potent force in restructuring efforts. In an effort to increase control, some organizations are actually splitting their operations into multiple, public corporations. Discussion Prompt: Some management scholars argue that major restructuring efforts are an indication of the failure of management to correctly employ strategic control systems and to effectively management the organization. If What do you think?

Challenge of the Future Trends: Technological advancements, including communications and the Internet Globalization Blended cultures, diverse and mobile labor pools New companies from emerging markets More educated, demanding customers Increased concern about governance and social responsibility Technological advancements are making time zones, national boundaries, and the physical location of management increasingly unimportant. Improvements in transportation and communications, coupled with increasing standards of both education and living in most nations of the world are making the physical location of business facilities less important than in the past. People are exposed to the same music, news, fashions, and movies—which is working to blend national cultures. As customers become more educated and improve their standard of living around the world, they will become more demanding of manufacturers. The same technologies that are allowing improved education and communications—inexpensive computers, wireless communications, and internet access—are also making it easier for new entrepreneurial start-ups to enter and destabilize established industries.

Challenge of the Future Implications for industries: Lower entry barriers in many industries Faster imitation Collapsing product-life cycles A global retail marketplace A highly educated, increasingly mobile global labor market. More demanding customers Increased pressure to adhere to global standards of social responsibility So what does the future hold? Lower entry barriers in many industries, faster imitation, collapsing product-life cycles, a global retail marketplace, a highly educated, increasingly mobile global labor market.

Challenge of the Future Challenges for managers: retaining valuable employees creating and preserving competitive advantage holding back new entrants serving increasingly demanding customers choosing and timing technology investments at a time when change is so rapid major shocks associated with terrorism, new diseases and wars Managers will face challenges in several areas—retaining valuable employees, creating and preserving competitive advantage, holding back new entrants, serving increasingly demanding customers, choosing and timing technology investments at a time when change is so rapid.