In Which Of The Following Organizations Will Strategic Controls Work The Best?

104 15.4 Types and Levels of Control

Learning Objectives

Know the difference between strategic and operational controls.
Understand the different types of controls.
Be able to differentiate between financial and nonfinancial controls.

Figure 15.4

3D_Jigsaw_Puzzle

Controls allow you to align the pieces with the big moving picture.

Recognizing that organizational controls can exist categorized in many ways, information technology is helpful at this point to distinguish between two sets of controls: (1) strategic controls and (ii) direction controls, sometimes chosen operating controls (Harrison & St. John, 2002).

Two Levels of Control: Strategic and Operational

Imagine that you are the captain of a send. The strategic controls make sure that your transport is going in the right direction; management and operating controls make sure that the ship is in good condition before, during, and subsequently the voyage. With that analogy in mind, strategic control is concerned with tracking the strategy as it is existence implemented, detecting whatsoever problem areas or potential problem areas suggesting that the strategy is incorrect, and making any necessary adjustments (Venkataraman & Saravathy, 2001). Strategic controls allow you lot to pace back and look at the big picture and make sure all the pieces of the flick are correctly aligned.

Unremarkably, a significant time span occurs between initial implementation of a strategy and accomplishment of its intended results. For instance, if you wanted to captain your ship from San Diego to Seattle you might need a crew, supplies, fuel, and and then on. Yous might also need to await until the weather lets yous make the trip safely! Similarly, in larger organizations, during the time you are putting the strategy into place, numerous projects are undertaken, investments are made, and deportment are undertaken to implement the new strategy. Meanwhile, the environmental situation and the house'southward internal situation are developing and evolving. The economy could be booming or perhaps falling into recession. Strategic controls are necessary to steer the firm through these events. They must provide some means of correcting direction on the basis of intermediate functioning and new information.

Operational control, in contrast to strategic command, is concerned with executing the strategy. Where operational controls are imposed, they function within the framework established by the strategy. Unremarkably these goals, objectives, and standards are established for major subsystems within the organization, such as business units, projects, products, functions, and responsibility centers (Mattews, 1999). Typical operational control measures include render on investment, net turn a profit, cost, and product quality. These control measures are substantially summations of finer-grained command measures. Corrective action based on operating controls may have implications for strategic controls when they involve changes in the strategy.

Types of Control

It is too valuable to empathize that, within the strategic and operational levels of control, there are several types of control. The first 2 types tin can be mapped across two dimensions: level of proactivity and outcome versus behavioral. The following table summarizes these along with examples of what such controls might look like.

Proactivity

Proactivity can exist defined as the monitoring of issues in a mode that provides their timely prevention, rather than later the fact reaction. In management, this is known as feedforward command; information technology addresses what can nosotros do ahead of time to help our program succeed. The essence of feedforward control is to see the problems coming in time to do something about them. For case, feedforward controls include preventive maintenance on machinery and equipment and due diligence on investments.

Tabular array xv.i Types and Examples of Command

Control Proactivity	Behavioral control	Outcome control
Feedforward command	Organizational culture	Market place demand or economic forecasts
Concurrent control	Hands-on management supervision during a projection	The existent-time speed of a production line
Feedback control	Qualitative measures of client satisfaction	Fiscal measures such every bit profitability, sales growth

Concurrent Controls

The process of monitoring and adjusting ongoing activities and processes is known as concurrent control. Such controls are non necessarily proactive, but they can forestall bug from becoming worse. For this reason, we often describe concurrent control as real-fourth dimension control because it deals with the present. An example of concurrent control might exist adjusting the water temperature of the water while taking a shower.

Feedback Controls

Finally, feedback controls involve gathering information about a completed action, evaluating that information, and taking steps to improve the similar activities in the hereafter. This is the to the lowest degree proactive of controls and is more often than not a ground for reactions. Feedback controls permit managers to use information on past operation to bring futurity operation in line with planned objectives.

Command as a Feedback Loop

In this latter sense, all these types of control function equally a feedback mechanism to assist leaders and managers make adjustments in the strategy, as possibly is reflected by changes in the planning, organizing, and leading components. This feedback loop is characterized in the following effigy.

Figure 15.5 Controls as Part of a Feedback Loop

Why might it be helpful for you to remember of controls as role of a feedback loop in the P-O-L-C process? Well, if you are the entrepreneur who is writing the concern program for a completely new business, then you would probable start with the planning component and work your style to controlling—that is, spell out how you lot are going to tell whether the new venture is on track. However, more often, y'all will be stepping into an organization that is already operating, and this means that a programme is already in identify. With the plan in place, information technology may be and then up to you to figure out the organizing, leading, or control challenges facing the system.

Upshot and Behavioral Controls

Controls also differ depending on what is monitored, outcomes or behaviors. Outcome controls are generally preferable when but ane or two performance measures (say, return on investment or return on assets) are good gauges of a business's health. Outcome controls are effective when there'southward little external interference between managerial decision making on the one paw and concern operation on the other. It also helps if piffling or no coordination with other business organization units exists.

Behavioral controls involve the direct evaluation of managerial and employee decision making, not of the results of managerial decisions. Behavioral controls necktie rewards to a broader range of criteria, such as those identified in the Counterbalanced Scorecard. Behavioral controls and commensurate rewards are typically more than appropriate when at that place are many external and internal factors that can touch the relationship between a managing director's decisions and organizational operation. They're also appropriate when managers must coordinate resources and capabilities beyond different business units.

Fiscal and Nonfinancial Controls

Finally, across the dissimilar types of controls in terms of level of proactivity and outcome versus behavioral, it is important to recognize that controls tin take on one of two predominant forms: financial and nonfinancial controls. Financial control involves the direction of a business firm'due south costs and expenses to control them in relation to budgeted amounts. Thus, management determines which aspects of its fiscal status, such as assets, sales, or profitability, are most of import, tries to forecast them through budgets, and so compares actual performance to budgeted performance. At a strategic level, total sales and indicators of profitability would be relevant strategic controls.

Without effective financial controls, the firm's performance can deteriorate. PSINet, for example, grew rapidly into a global network providing Internet services to 100,000 business accounts in 27 countries. However, expensive debt instruments such as junk bonds were used to fuel the firm's rapid expansion. According to a member of the firm's board of directors, PSINet spent most of its borrowed money "without the financial controls that should take been in identify (Woolley, 2001)." With a capital structure unable to support its apace growing and financially uncontrolled operations, PSINet and 24 of its U.S. subsidiaries somewhen filed for bankruptcy (PSINet, 2001). While we often call up of financial controls as a grade of result control, they can also be used equally a behavioral command. For instance, if managers must request approving for expenditures over a budgeted amount, then the financial control likewise provides a behavioral command machinery as well.

Increasing numbers of organizations have been measuring customer loyalty, referrals, employee satisfaction, and other such performance areas that are not financial. In contrast to financial controls, nonfinancial controls track aspects of the organisation that aren't immediately fiscal in nature but are expected to lead to positive functioning outcomes. The theory backside such nonfinancial controls is that they should provide managers with a glimpse of the organization's progress well earlier fiscal outcomes tin can be measured (Ittner & Larcker, 2003). And this theory does have some practical support. For case, GE has institute that highly satisfied customers are the best predictor of future sales in many of its businesses, and then it regularly tracks client satisfaction.

Key Takeaway

Organizational controls can take many forms. Strategic controls help managers know whether a chosen strategy is working, while operating controls contribute to successful execution of the electric current strategy. Inside these types of strategy, controls can vary in terms of proactivity, where feedback controls were the least proactive. Outcome controls are judged by the result of the organization'southward activities, while behavioral controls involve monitoring how the organization's members conduct on a daily basis. Financial controls are executed by monitoring costs and expenditure in relation to the organization'southward budget, and nonfinancial controls complement financial controls by monitoring intangibles like customer satisfaction and employee morale.

Exercises

What is the difference betwixt strategic and operating controls? What level of direction would be nearly concerned with operating controls?
If feedforward controls are the most proactive, then why do organizations demand or use feedback controls?
What is the difference between behavioral and effect controls?
What is the difference betwixt nonfinancial and financial controls? Is a financial command a behavioral or an outcome control?

References

Harrison, J. S., & St. John, C. H. (2002). Foundations in Strategic Management (2nd ed., 118–129). Cincinnati, OH: South-Western Higher.

Ittner, C., & Larcker, D. F. (2003, November). Coming upwardly curt on nonfinancial performance measurement. Harvard Business Review, two–viii.

Matthews, J. (1999). Strategic moves. Supply Management, iv(4), 36–37.

PSINet, retrieved January xxx, 2009, from PSINet announces NASDAQ delisting. (2001, June 1). http://www.psinet.com.

Venkataraman, South., & Sarasvathy, S. D. (2001). Strategy and entrepreneurship: Outlines of an untold story. In M. A. Hitt, R. E. Freeman, & J. Southward. Harrison (Eds.), Handbook of strategic direction (650–668). Oxford: Blackwell.

Woolley, Southward. (2001, May). Digital hubris. Forbes, 66–70.