Strategic Control and Corporate Governance

Presented by :
Hassaan Ajmal Ahtisham Maan Zain Nisar Faisal Khalid

Presented to :
Col. Manzoor Iqbal Awan
16/04/2012

Not one best way to set up a control system for an organization Effective controls, as with other elements of strategy, are dependent on many factors How business-level and corporate-level strategies create needs for different strategic controls ?

Two major generic strategiesoverall cost leadership and differentiationrequire fundamentally different approaches to control, rewards, and incentive systems OVERALL COST LEADERSHIP

This strategy requires that companies pay close attention to every element of cost

Tight cost controls measure

Frequent and comprehensive reports to monitor the cost of inputs and outputs Highly structured tasks and responsibilities Incentives mainly based on financial targets

- DIFFERENTIATION

This strategy requires that companies pay close attention to the development of unique product and service offerings involving innovation and creativity

Hard to evaluate success using hard behavioral measures

Qualitative and intangible incentives may be needed to reward the kind of specialized design work and scientific expertise to successfully differentiate

Employ Innovative and creative expertise Those who can identify vital elements of complexity, creative designs, critical thinking and marketing decisions Proper behavioral performance measures Qualitative & intangible incentives and rewards unlike in Cost Leadership strategy

- 3M Example - A system in which experimentation is encouraged and managers are not penalized for product failures

Related Diversification Involves coordination across multiple product lines in order to enjoy the synergies of relatedness Rewards linked to overall behaviors such as teamwork and communication rather than short-term objectives only

- Unrelated Diversification

Most successful when each company or division in a portfolio of businesses is entrepreneurial and competes with others for resources and rewards

Corporate policy involves top-down budgeting

Rewards & Incentives are based on financial performance

- Cost strategies and unrelated diversification

Low interdependence Reward and control systems focus more on financial indicators

- Differentiation or related diversification

High and Intense interdependencies among functional

areas and business units

Sharing of resources is crucial and critical Synergies are the main highlights Focus more on behavioral performance indicators

Level of Strategy

Types of Strategy Need for Interdependence Overall Cost Leadership Differentiation Related Diversification Unrelated Diversification Low High High Low

Primary Type of Rewards and Controls Financial Behavioral Behavioral Financial

Business Level Business Level Corporate Level Corporate Level

Methods that ensure that managerial actions lead to shareholder value maximization and do not harm other stakeholder groups and that are outside the control of the corporate governance system

Market for corporate control Auditors Banks and analysts Regulatory bodies Media and public activists

Sarbanes-Oxley Act

Auditors Barred from certain types of non-audit work Not allowed to destroy records for five years Lead partners auditing a firm should be changed at least every five years CEOs and CFOs Must fully reveal off-balance sheet finances Vouch for the accuracy of information revealed Executives Must promptly reveal the sale of shares in firms they manage Are not allowed to sell shares when other employees cant