Prof. JAA Lazenby Dept of Business Management

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1 STRAT 11 STRATEGIC CONTROL Prof. JAA Lazenby Dept of Business Management Learning Outcomes After completing this unit you should be able to: Strategic control as a component of the strategic management process The different types of strategic control The design of a strategic control system The role of the balanced scorecard in strategy implementation and control Strategic control and corporate governance Benchmarking, total quality management and reengineering as ways to sustain a competitive advantage through continuous improvement 1. Introduction The preceding units of this study material dealt with the first two phases of the strategic management process strategy formulation and strategy implementation. This unit introduces the next phase in the strategic management process, namely strategic control and evaluation. In a stable, predictable business environment characterised by evolutionary change, strategic control can be seen as the last phase of the strategic management process. However, in order to sustain a competitive advantage in a dynamic, uncertain environment characterised by rapid change, organisations should aim for continuous improvement through its strategic management process. In other words, once an effectively formulated strategy has been successfully implemented, controlled and evaluated, organisations need to review their strategic choices to remain competitive over the long-term. Thus strategic management does not end in the strategic control phase. In this unit the importance of strategic control as a component of the strategic management process is described. The different types of strategic control are introduced and guidelines to the designing of a strategic control system are discussed. The balanced scorecard is a valuable strategic control tool that aids continuous improvement. Total quality management and reengineering are two other approaches to continuous improvement briefly reviewed in this unit. 2. Strategic control 2.1 Strategic control as a component of the strategic management process Strategic control provides feedback to the formulation and implementation phases of the strategic management process. This feedback indicates the adjustments an organisation will need to make in order to align itself better with its environment and improve the likelihood of successful strategy implementation. Strategic control or strategy evaluation results may lead to changes in the choice or strategy or to changes in how the strategy is 103

2 STRATEGIC AND CHANGE MANAGEMENT being implemented. The results could also lead to changes in both the formulation and implementation phases or may require no changes at all. Strategic control can be linked to strategy implementation by using the short-term objectives as a basis for performance measurements. In the same way the resource allocation plan or budget can be used to monitor strategic progress. Reward systems are often tied to the results of the strategic control process. Once again, it is clear that the strategic management process is interrelated and that actions and decisions in one phase impact on the other phases. Strategic control is in essence the phase of the strategic management process that concentrates on evaluating the chosen strategy in order to verify if the results produced by the strategy are those intended. Strategies focus on the long-term future and time elapses between the formulation and implementation of a strategy and the achievement of its intended results. During this time lapse organisations make investments and undertake projects to implement the chosen strategy and there may be changes in both the external and internal environments that could affect the chosen strategy. It is therefore important for managers, on the one hand, to ensure that the organisation s implementation activities are performed effectively and efficiently, and on the other hand to continually be aware of deviations from the strategic plan in order to take corrective action. Thus strategic control has two focal points: firstly to review the content of the strategy and secondly to evaluate and control the implementation process. Strategic control differs from organisational or traditional managerial control in several ways. Traditional management control focuses on the implementation process in all its detail, whereas strategic control focuses on the key success factors of the strategy. Operational control focuses on the short-term and strategic control focuses on the longterm. In traditional or operational control, action is only taken after deviations to performance measures have occurred, whereas strategic control is concerned with guiding the action as the strategy takes place and where the end results are still several years away. Strategic control is an important component of the strategic management process as chosen strategies can become obsolete as the organisation s environment changes. Strategic control identifies and interprets critical events, or change triggers, in the external environment that require response of the organisation. Timely strategy evaluation can alert management to deviations and problems, or potential problems that may require corrective action. Strategic control should initiate managerial questioning of performance, assumptions and expectations in order to determine to what extent the organisation is achieving its short-term objectives. It is important that strategy evaluation is performed on a continuous basis and not at the end of specified periods of time. 2.2 Types of strategic control As mentioned earlier, strategic control has two focal points, namely to evaluate the content of the strategy and to monitor strategy implementation activities. There are four types of strategic control that organisations can use, namely premise control, strategic surveillance, special alert control and implementation control. The first three are used to review the content of a strategy and the latter is used to evaluate strategy implementation. 104 Centre for Business Dynamics, School of Management, UFS 2012

3 STRAT 11: Strategic Control Premise control A chosen strategy is based on certain assumptions or premises made during the strategy formulation phase. Strategic planners need to make assumptions for two reasons: firstly it is very seldom that detailed information on all the factors that may influence the choice of the strategy is available to the strategic planners. Secondly it is necessary to simplify the complexity of the organisations environment by making assumptions or premises. Strategy formulation premises are primarily based on environmental and industry factors. Premise control is used to systematically and continuously check whether the premises and assumptions on which the strategy is based are still valid. If a key premise is no longer valid, a change in strategy may be required. Premise control is a focused type of strategic control Strategic surveillance The second type of strategic control that reviews the content of a strategy is that of strategic surveillance. During strategy formulation and implementation the organisation narrows its focus to a relatively few number of factors. Strategic surveillance is a type of strategic control whereby the organisation monitors and interprets a broad range of events both external and internal to the organisation not previously identified that may affect the course of its strategy. It is a broad or unfocused type of strategic control. It is based on the idea that important yet unanticipated information may be discovered by a general monitoring of multiple information sources. These sources could include conferences, conversations, journals such as the Financial Mail and The Economist or newspapers such as the Business Day or the Mail and Guardian Special alert control Special alert control is the thorough, and often rapid, reconsideration of the organisation s strategy because of a sudden, unexpected event. For example, the 11 th of September terrorist attacks on the World Trade Centre in New York triggered immediate and intense reassessment of various airline organisations strategies. Some of Sasol s strategic business units may reconsider their strategic choice in light of the second Gulf War. Special alert control is a focused type of strategic control that supports strategic surveillance and premise control in reviewing the content of a chosen strategy Implementation control The strategy implementation process consists of various activities, initiatives and programs that occur over a period of time. These may entail appointing key people, restructuring the organisation, allocating resources, performing certain functional tasks related to the strategy and developing reward systems. Implementation control is the type of control that must be exercised as the implementation process unfolds. The purpose of implementation control is twofold. Firstly it provides managers information regarding the success of the implementation process in terms of anticipated performance levels and secondly it indicates if the basic strategic direction needs to be altered. Implementation control is enabled through operational control. Centre for Business Dynamics, School of Management, UFS

4 STRATEGIC AND CHANGE MANAGEMENT Strategic control evaluates the organisation over an extended period whereas operational control provides feedback over shorter time periods, such as months, quarters and so forth. Operational control systems usually take four steps common to all post-action control: 1. Set standards of performance 2. Measure actual performance 3. Identify deviations from standards set 4. Initiate corrective action Operational systems evaluate the progress of strategy implementation through monitoring the achievement of short-term objectives. Examples of operational control systems include budgets, schedules and key success factors. Budgets, as a resource allocation plan, help coordinate operations and set standards against which action can be measured. Scheduling determines the timing of resource allocations and the sequence of implementation activities, both that are determinants of successful strategy implementation. Key success factors identify performance areas that are of greatest importance in implementing the organisation s strategies. These must have measurable performance indicators and should receive constant management attention. 2.3 Designing a strategic control system Traditionally organisations made use of management and operational control to ensure that managers and employees acted in accordance with the established strategic plan. Within these systems measures were set, performance was measured, deviations were identified and corrective action was taken. The performance measurement results provided a feedback loop to strategy formulation that typically involved a lengthy time lag. Strategies were then accordingly adapted. If deviations occurred, these were corrected without questioning if the planned results are still viable or desirable or if the methods used to achieve the planned objectives were still appropriate. In today s turbulent business environment characterised by speed and change organisations need to be able to review and adapt their strategies as it becomes necessary. The main objective of a strategic control system is to identify critical events that impact on the strategy. These events are often referred to as change triggers to which the organisation responds in order to improve strategy implementation. An effective strategic control system should trigger the appropriate response at the appropriate time. In other words, managers should not react with strategic change if the situation does not call for it nor should managers fail to recognise the need for strategic change in situations where it already exists. It follows that an effective strategic control system should provide accurate, timely information that provides an updated, true picture of the organisation s performance and be flexible enough to allow managers to respond to change triggers. A strategic control system should be designed in such a way that managers are able to review the content of the strategy and evaluate implementation progress. Using the balanced scorecard as a strategic control framework or tool ensures that both focal points of strategic control are incorporated into one system. 106 Centre for Business Dynamics, School of Management, UFS 2012

5 STRAT 11: Strategic Control 3. Sustaining competitive advantage through continuous improvement In order to achieve strategic success over the long-term, organisations should perform all strategic management activities within the context of continuous improvement. Organisations can achieve continuous improvement through the adoption of practices such as benchmarking, total quality management and reengineering. 3.1 Benchmarking Benchmarking is the comparison of selected performance measures or operational processes against some challenging yardsticks. These yardsticks could be comparisons to the organisation s own history, against key competitors in the industry or against bestin-class performers. Organisations should have a strong commitment to benchmarking their activities against best-in-industry or best-in-world performers. Subsequently these best practices should be incorporated into strategy implementation efforts and strategic control systems. Another way in which organisations can achieve continuous improvement is through the adoption of the philosophy of total quality management (TQM). 3.2 Total quality management Total quality management (TQM) focuses on designing and delivering quality products to customers and can dramatically improve organisational performance. Following World War II, TQM was developed and implemented in Japanese organisations by Dr. W. Edwards Deming and Dr. Joseph Juran. After the success of Japanese and German manufacturing companies, the TQM philosophy became the cornerstone of quality programmes in both large and small organisations during the last few decades. Total quality management can be defined as a culture; inherent in this culture is a total commitment to quality and attitude expressed by everybody s involvement in the process of continuous improvement of products and services, through the use of innovative scientific methods (Melnyk & Denzler, 1996: 295). From this definition the four base principles of TQM are identified: The first principle is a commitment to quality. TQM success requires a fundamental belief and commitment to quality at four different levels. The entire workforce must make a commitment to producing quality products; each individual in the organisation must make a commitment to customers; top management must be committed to TQM; and the entire organisation, including its suppliers, needs to be committed to quality as a whole. The second foundation of TQM is the use of scientific tools, technologies and methods to assist managers in making systematic changes in processes and products. Thirdly TQM requires total involvement in the quality undertaking through teamwork and empowerment. People from different functional areas in the organisation have different perspectives. By bringing people from the various functional areas together to form a team the decision-making process is enriched. Empowerment gives employees who have direct contact with the problem the power and authority to identify the problem and then formulate and implement solutions to the problems. Centre for Business Dynamics, School of Management, UFS

6 STRATEGIC AND CHANGE MANAGEMENT The fourth basic principle of TQM is continuous improvement, also referred to as kaizen. TQM requires the organisation and its members to improve on something every day. Improvement should be never-ending. 3.3 Reengineering Another popular approach to ensure continuous strategic success in the 21 st century is that of reengineering or business process engineering. Through business process engineering (BPR), an organisation is re-organised in a way that it creates value for the customers by eliminating barriers that create distance between employees and customers. Processes are reengineered with the question how can we re-organise the way we do our work to provide the best quality and the lowest-cost goods and services to the customer in mind. Processes are focused on customer needs rather than specific tasks or functional areas. Reengineering and TQM are interrelated and complementary. Once business processes have been reengineered TQM principles can be used to continuously improve the new processes and finding better ways to manage task and roles. 4. Conclusion Strategic control is an essential component of the strategic management as it is the phase that evaluates the chosen strategy. If the results produced by the strategy are not those intended, corrective action needs to be taken. However, in the contemporary business environment characterised by revolutionary change, it has become important to not only modify the strategy as necessary, but also to question the validity of the assumptions on which the strategy is based. Thus both single-loop and double-loop learning should take place. The balanced scorecard, a popular strategic management tool, plays a valuable role in both single and double-loop strategic learning. Within the context of strategic control, benchmarking, total quality management and reengineering have become part of the strategic control toolkit. Organisations wishing to sustain competitive advantage through continuous improvement should incorporate these concepts into the strategic control and evaluation systems. It is important to bear in mind that the strategic management process is an interrelated process. A strategy formulation decision will impact on a strategy implementation decision, which will in turn impact on a strategic control decision. The strategic management process does not stop with the strategic control phase; and in turn strategic control decisions will impact on strategy formulation and implementation decisions. Discussion questions Discuss the manner in which the strategic control in an organisation can influence the implementation of strategy. Discuss the strategic control in your organisation and refer to the impact that it has on your strategic approach. 108 Centre for Business Dynamics, School of Management, UFS 2012

7 STRAT 11: Strategic Control Sources EHLERS & LAZENBY Strategic Management. THOMPSON & STRICKLAND Strategic Management: Concepts and Cases. Centre for Business Dynamics, School of Management, UFS