discussion 12

12.3 - Types and Levels of Control

L E A R N I N G O B J E C T I V E S

1. Know the difference between strategic and operational controls.

2. Understand the different types of controls.

3. Be able to differentiate between financial and nonfinancial controls.

Recognizing that organizational controls can be categorized in many ways, it is helpful

at this point to distinguish between two sets of controls: (1) strategic controls and (2)

management controls, sometimes called operating controls. Harrison, J. S., & St. John, C. H.

(2002). Foundations in Strategic Management (2nd ed., 118–129). Cincinnati, OH: South-Western College.

Two Levels of Control: Strategic and Operational

Imagine that you are the captain of a ship. The strategic controls make sure that your

ship is going in the right direction; management and operating controls make sure that

the ship is in good condition before, during, and after the voyage. With that analogy in

mind, strategic control is concerned with tracking the strategy as it is being

implemented, detecting any problem areas or potential problem areas suggesting that

the strategy is incorrect, and making any necessary adjustments. Venkataraman, S., & Sarasvathy,

S. D. (2001). Strategy and entrepreneurship: Outlines of an untold story. In M. A. Hitt, R. E. Freeman, & J. S. Harrison

(Eds.), Handbook of strategic management (650–668). Oxford: Blackwell. Strategic controls allow you to step

back and look at the big picture and make sure all the pieces of the picture are correctly

aligned.

Ordinarily, a significant time span occurs between initial implementation of a strategy

and achievement 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 so on. You might

also need to wait until the weather lets you 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 actions are undertaken to

implement the new strategy. Meanwhile, the environmental situation and the firm’s

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 performance and new information.

Operational control, in contrast to strategic control, is concerned with executing the

strategy. Where operational controls are imposed, they function within the framework

established by the strategy. Normally these goals, objectives, and standards are

established for major subsystems within the organization, such as business units,

projects, products, functions, and responsibility centers. Matthews, J. (1999). Strategic moves. Supply

Management, 4(4), 36–37. Typical operational control measures include return on investment,

net profit, cost, and product quality. These control measures are essentially summations

of finer-grained control 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 also valuable to understand that, within the strategic and operational levels of

control, there are several types of control. The first two types 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 be defined as the monitoring of problems in a way that provides their

timely prevention, rather than after the fact reaction. In management, this is known

as feedforward control; it addresses what we can do ahead of time to help our plan

succeed. The essence of feedforward control is to see the problems coming in time to do

something about them. For instance, feedforward controls include preventive

maintenance on machinery and equipment and due diligence on investments.

Table 15.1 Types and Examples of Control

Control Proactivity Behavioral control Outcome control

Feedforward control Organizational culture Market demand or economic forecasts

Concurrent control

Hands-on management supervision during a project The real-time speed of a production line

Feedback control Qualitative measures of customer satisfaction Financial measures such as profitability, sales growth

Concurrent Controls

The process of monitoring and adjusting ongoing activities and processes is known

as concurrent control. Such controls are not necessarily proactive, but they can prevent

problems from becoming worse. For this reason, we often describe concurrent control as

real-time control because it deals with the present. An example of concurrent control

might be adjusting the water temperature of the water while taking a shower.

Feedback Controls

Finally, feedback controls involve gathering information about a completed activity,

evaluating that information, and taking steps to improve the similar activities in the

future. This is the least proactive of controls and is generally a basis for reactions.

Feedback controls permit managers to use information on past performance to bring

future performance in line with planned objectives.

Control as a Feedback Loop

In this latter sense, all these types of control function as a feedback mechanism to help

leaders and managers make adjustments in the strategy, as perhaps is reflected by

changes in the planning, organizing, and leading components. This feedback loop is

characterized in the following figure.

Figure 12.5 Controls as Part of a Feedback Loop

Why might it be helpful for you to think of controls as part of a feedback loop in the P-O-

L-C process? Well, if you are the entrepreneur who is writing the business plan for a

completely new business, then you would likely start with the planning component and

work your way to controlling—that is, spell out how you are going to tell whether the

new venture is on track. However, more often, you will be stepping into an organization

that is already operating, and this means that a plan is already in place. With the plan in

place, it may be then up to you to figure out the organizing, leading, or control

challenges facing the organization.

Outcome and Behavioral Controls

Controls also differ depending on what is monitored, outcomes or behaviors. Outcome

controls are generally preferable when just one 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’s little external interference between

managerial decision making on the one hand and business performance on the other. It

also helps if little or no coordination with other business units exists.

Behavioral controls involve the direct evaluation of managerial and employee decision

making, not of the results of managerial decisions. Behavioral controls tie rewards to a

broader range of criteria, such as those identified in the Balanced Scorecard. Behavioral

controls and commensurate rewards are typically more appropriate when there are

many external and internal factors that can affect the relationship between a manager’s

decisions and organizational performance. They’re also appropriate when managers

must coordinate resources and capabilities across different business units.

Financial and Nonfinancial Controls

Finally, across the different types of controls in terms of level of proactivity and outcome

versus behavioral, it is important to recognize that controls can take on one of two

predominant forms: financial and nonfinancial controls. Financial control involves the

management of a firm’s costs and expenses to control them in relation to budgeted

amounts. Thus, management determines which aspects of its financial condition, such

as assets, sales, or profitability, are most important, tries to forecast them through

budgets, and then 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 have been in place.” Woolley, S. (2001, May). Digital hubris. Forbes, 66–70. With a

capital structure unable to support its rapidly growing and financially uncontrolled

operations, PSINet and 24 of its U.S. subsidiaries eventually filed for bankruptcy.

Retrieved January 30, 2009, from PSINet announces NASDAQ delisting. (2001, June 1). http://www.psinet.com While we

often think of financial controls as a form of outcome control, they can also be used as a

behavioral control. For instance, if managers must request approval for expenditures

over a budgeted amount, then the financial control also provides a behavioral control

mechanism 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 organization

that aren’t immediately financial in nature but are expected to lead to positive

performance outcomes. The theory behind such nonfinancial controls is that they

should provide managers with a glimpse of the organization’s progress well before

financial outcomes can be measured. Ittner, C., & Larcker, D. F. (2003, November). Coming up short on

nonfinancial performance measurement. Harvard Business Review, 2–8. And this theory does have some

practical support. For instance, GE has found that highly satisfied customers are the

best predictor of future sales in many of its businesses, so it regularly tracks customer

satisfaction.

K E Y T A K E A W A Y

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 current strategy. Within 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’s activities, while behavioral

controls involve monitoring how the organization’s members behave on a daily basis.

Financial controls are executed by monitoring costs and expenditure in relation to the

organization’s budget, and nonfinancial controls complement financial controls by

monitoring intangibles like customer satisfaction and employee morale.

R E F L E C T I O N S

1. What is the difference between strategic and operating controls? What level of

management would be most concerned with operating controls?

2. If feedforward controls are the most proactive, then why do organizations need or use

feedback controls?

3. What is the difference between behavioral and outcome controls?

4. What is the difference between nonfinancial and financial controls? Is a financial control

a behavioral or an outcome control?

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