30 Strategic Control

1.      Learning Outcome

2.      Introduction

3.      Strategic Control Process

4.      Barriers to Evaluation & Control

5.      Types of Strategic Control

6.      Methods of Control

7.      Summary

1.      Learning Outcome

After completing this module the students will be able to understand:

•  The nature and importance of strategic evaluation and control
• The barriers in the path of strategic control process
• The types of strategic control
• The methods of control

2.  Introduction

Strategic control is the terminal part of the strategic management process (Fig. 1). The control function holds its own importance in the process of strategic management. It is necessary, however, to introduce the process of strategy evaluation and control at the early stages of its implementation so as to take timely corrective measures if required, for achieving the desired goals and objectives of the corporation. The process of control is crucial as the internal and external factors of business environment may not follow the trends as anticipated at time of planning the strategy. For example: In 2010, Airtel as part of its international expansion strategy acquired the African operations of Kuwait-based Mobile Telecommunications Company referred to as Zain Group.

Image Source: http://images.clipartpanda.com/self-control-clipart-14551.jpg

At that time the business in India was tough. About 14 operators were competing in a strictly regulated environment that lowered the profit margin in the industry. Anticipating that Africa had almost everything similar to India, Airtel exported its high volume/low cost business model to Africa, where operators used a fixed cost/high tariffs approach so as to rewrite its success story in the African market. No doubt that the combined African population was ten times that of India’s population, had a telecom penetration of 40%

Fig. 1: Strategic Management Process

that was increasing at a good rate and had far more spectrum available but Airtel could not gain a strong footing in Africa as planned. The falling African currency, low average revenue per user (ARPU), high cost structures coupled with high debt burden back home for the acquisition of Zain group led to more troubles than the achievements for Airtel. Meanwhile, the India telecom industry started to show the signs of growth with the launch of 3G & 4G services leading to steady rise in data revenues giving Airtel an opportunity for growth back home. Therefore, Airtel has to a adopt control systems to generate revenues from its African operations and make it profitable. This could include new network partners, IT (information technology) hardware and software partners, new network designs among others or the company may have to exit from not-so- promising African countries and to remain focused on markets like Kenya and Nigeria that hold high potential in the future.

Image Source: http://topnews.in/files/Bharti-Airtel-Zain_1.jpg

3.   Strategic Control Process

Strategic Control Process is the course of action for determining what is being accomplished and enabling the manager to take a corrective measure in case of any failure or deviations so that performance remains on the path of progress. Thus, strategic control engulfs the evaluation and is perpetual rather than periodical in nature. According to P. Drucker, ‘Strategic control maintains equilibrium between ends and means, output and efforts’.

The strategic control process consists of three phases: Evaluation criteria; Performance evaluation and Feedback. The first phase i.e. the evaluation criteria can be done both quantitative as well as qualitative. The quantitative criteria of evaluation lay stress on the data which is a post facto analysis for the performance evaluation where the actual results are compared with the expected results. If there happen to be significant variations in the performance, the corrective measures are taken to meet the set objectives. While, the qualitative evaluation and control of strategy is a real time process where the performance is monitored and mid way corrective actions are taken.

It is worth noting that if undesired performance results from the inappropriate use of the strategic management process, operational managers must know about it so that they can correct the employee activities. While, if the undesired performance results are the outcome of the processes themselves than both the top management and the operational managers, must know about it so that mid way corrections are taken or they could develop new implementation programs.

4.   Barriers to Evaluation and Control

The process of strategic evaluation and control is not that simple and plain. There fall certain hurdles or barriers in the path of strategy evaluation and control that are discussed as below:

4.1 Resistance to Evaluation: Any change in the business processes or activities may perhaps invite resistance from different quarters within an organization. Whenever, a strategy is formulated and implemented, certain quarters like employees or strategic business unit may develop a resistance for the

same. This resistance is generally because measurement of performance in strategic formulation and implementation is always perceived as one’s own performance by an individual or group of individuals involved in these activities or the processes. It is interesting to note that the evaluation of strategy is not distinguished from the evaluation of an individual or the group of individuals involved in the implementation of strategy. Therefore, it is important to understand that the evaluation of strategy is to ascertain whether the strategy formulated is moving in the right direction or not rather than the individual employee’s contribution towards the strategic implementation.

4.2 Short-term Orientation: A strategy followed by an organization comprises of two different targets i.e. short-term and long-term. If the corporation’s short-term target does not coincides with that of long-term strategy target, the corporation may start giving importance to the short-term targets overlooking the long-term objectives so that compliance is made in the short run. This misalignment of the short-term objectives may lead to short fall in implementing the strategy and resulting to variation in the strategy evaluation. Therefore, the short-termism approach has to be avoided for successful strategic control in the process of strategic management.

4.3 The Limits of Control: What should be the upper and lower limits of control? This remains a general dilemma of any control system. Though it is not impossible but is the toughest task undertaken by the strategist to determine the upper and lower limits of control. Imposing excess of control may lead to negative effect on to the performance of the employees in the organization. As a result the employees may

not use the best of their potential and may lack creativity. On the contrary, too less a control too makes the employees non-serious about their performance thus, making the process of evaluation & control ineffective and sometimes redundant. In order to overcome the above mentioned barriers to evaluation and control, the organizations have to make its people believe in its objectives at the very first step. The strategic intent of the organization has to be well communicated across all levels within the organization and its stakeholders outside the organization. Moreover, the best way to eliminate or reduce the impact of barriers to evaluation & control is to change the attitude of people i.e. to limit the problem by increasing the perception of problems.

Titan- Edge is a perfect example that how the company made its team believes that they could design the world’s slimmest watch back in 2002. The catchphrase of ‘we will do what the Swiss cannot’ kept the people at Titan going and the world’s slimmest watch was born. It was the first time ever that an Indian watch company pushed the boundaries to design and manufacture indigenously the slimmest watch, thereby gaining an entry into the Guinness Book of World Records. Ten years later, the new generation Edge 2012, was lighter than ever before at 36 grams, by using a skeletal structure encased in titanium- a new age material used in aircraft and spacecraft. The new EDGE was the slimmest and lightest watch in the universe. Its form and proportions are very contemporary. The watches have sapphire crested top and bottom, unique construction houses 1.15mm movement between 2 layers of sapphire which reduces overall thickness of watch to 4mm only (Source: http://titaninnovationnewsletter.com/skeletal-edge-red-dot-award/).

5.   Types of Strategic Controls

There are four types of strategic controls that are discussed as follows:

5.1 Premise Control: Business strategy is based on the assumptions that how things will occur in the future. Premise control allows the top management of the corporation to examine whether these assumptions will continue to hold true with the implementation of the strategy or not. Therefore, premise control helps the management to take corrective actions at the appropriate time and discontinue the original strategy that was based on invalid assumptions. These presumptions may relate to the changing government policies, environmental factors such as inflation, interest rates and social changes or by industry factors such as competitors, suppliers and barriers to entry. For example: Titan Company Limited (TCL) formerly known as Titan industries Limited had a successful jewelry purchase schemes named as Tanishq, Golden Harvest Scheme (GHS). This scheme helped the company to boost its sales in

times when the price of gold was on rise. Under this scheme, the consumers were allowed to make eleven equal monthly payments towards the purchase of jewelry, where the final & twelfth installment was being made by the company itself. With the total accumulated amount the customer was finally allowed to make purchase of the jewelry post twelve months. This scheme was convenient for the consumers for making purchase of gold jewelry as it was based on systematic investment and gave a run to other financial products in the market as far as returns were concerned. However, with the newly enacted Companies Act, which became a law on 1st April 2014, certain new rules were introduced, specifically under Explanation to Section 2(1) (b) of the Companies (Acceptance of Deposit) Rules, 2014 which appeared to bring such schemes also under the definition of Public Deposits. TCL was now constrained to comply with this new law immediately and was required to wind off the level of “deposits” (as these were termed now) in its current form. This meant that TCL was constrained to stop accepting any further installments from the existing account holders also. Tanishq later revised it ‘Golden Harvest Scheme’ which was discontinued earlier because of the new Companies Act. The new Act put a limit on the returns offered by the companies to deposit holders to 12 per cent and capped the total amount of deposits to 25 per cent of their net worth. The revised scheme now complied with the new law. (Source: https://www.tanishqgoldenharvest.co.in/ online/oldschemeclosure).

 

5.2 Strategic Surveillance Control: Premise control and implementation control are looked upon as

more specific by nature whereas surveillance control is more generalized and overarching control. A

company has to protect its business from the external threats that may hinder the success of the strategy

implemented.  Strategic   surveillance   controls allow   the  management    to monitor multiple sources  for these  threats.  The  managers  may safeguard the strategy by continually updating themselves  about    the  industry specific information through trade journals & magazines, attending trade conference etc.

Exhibit 4: AIRTEL- Open Network

Exhibit 1: AIRTEL- Open Network

5.3 Special Alert Control: This control is based on the trigger mechanism designed to enable rapid response to any unexpected or sudden events that may pose threat to the strategy implemented. Such a control is       based       on       the        immediate reassessment of the strategy formulated in a given contingency. For example: The country’s largest commercial vehicle manufacturer Tata Motors had to shut production of its truck for the fourth time in 2013 as it struggled because of falling retail demand. The company had done it to avoid piling up of inventory with its dealers. The three- day block closure was planned to ensure alignment of production with demand so as to bring the costs under control that could have been elevated because of piling of inventory and to maintain the health of the ecosystem (‘Falling demand forces Tata Motors to shut truck plant’ Business Standard, 14 January 2013), Exhibit 3.

5.4 Implementation Control: Once a strategy is formulated, it has to be implemented. As the managers take the necessary steps to put the strategy in action, implementation control is used to review whether the original plan, programs, and projects are being well implemented and the corporation is glided through its pre-determined objectives or not. Milestone reviews is another tool used in for implementation control. The milestone reviews allow the managers to determine the critical points in strategy implementation in terms of events, resources or even time. Exhibit 4; showcase an open email to the Airtel customer from the CEO, Bharti Airtel Limited, where an attempt is being made by the company to provide the best network through its new initiative – Open Network. Through this initiative, the company provides its network information to its customers so that they could tell Airtel where the gaps are. This would help the company to improve its coverage and provide an experience like no other in the industry. The company acknowledges that there a coverage holes in India and are still a challenge. At some locations the company need to install new towers, while at some others, towers have been forcibly shut down. Such implementation control will help company like Airtel to optimally utilize its infrastructure and achieve its objective of being the best network service provider in India.

6.   Methods of Control

There are various methods/tools/techniques used in strategic control system. These methods are adopted by the organizations based on types of control required. No doubt, most of these methods are related to financial control and neglect the non-financial parameters. The financial reporting system provides the information of how a company has performed in the past but offers little information about how it might performance in the future. Some of these methods are discussed briefly in the following sections of the module so as to develop a basic understanding of various control methods.

6.1 Budgets and Budgetary Controls: Budgeting has been accepted as one of the efficient method of short-term planning and control. Though, it is employed in large business organizations but the small businesses are also using it at least in some informal manner. Budget is defined as ” A financial and/or quantitative statement, prepared and approved prior to define period of time, of the policy to be persued during that period for the purpose of attaining a given objective” by the Chartered Institute of Management Accountants, England. Therefore, a budget is taken as a document that usually deals the allocation of resources to different units with the organization and is classified under the three different modes:

Time: Annual budgets, quarterly budgets, monthly budgets, zero base budgets, etc.

Functional: Human resources, materials, marketing & sales, research & development, administration, etc.

Flexibility: To evaluate the performance at different volume levels or capacity utilization, sensitivity to key parameters, etc.

Image Source: http://www.expertmanagementtraining.com/wp-content/uploads/2014/08/Financial-Budgets-Budgetary-Control-Alt.jpg

Further, budgetary control is the process of establishment of budgets relating to various activities and comparing the actual performance with the budgeted figures for calculating the deviations if any. It is to be noted that budgetary control is not possible without budgets.

6.2 Ratio Analysis: Ratio analysis is a form of financial statement analysis, used to obtain a quick snapshot of a firm’s performance in various key areas. It is used to measure the company’s operating and financial performances such as efficiency, liquidity, solvency and profitability. The trend of various ratios is studied over a period of time to check whether the strategy pursued so far is proceeding in the right direction or not.

Quantifying the 5Cs; Character, Capacity, Capital, Collateral and Conditions is a step forward in the process of strategic evaluation and control. These five parameters are discussed in brief as follows:

Character: It represents the firm’s moral and ethical approach towards it stakeholder especially creditors. Firm’s repayment performance on past and current debts is considered as a measure to check this parameter.

Capacity: It refers to company’s capability to maintain both profitability and solvency. Measures such as historic and present adequacy of working capital, income statements showcasing a history of good profit margins, analyze of income and expenses and realistic evaluation of current income generating capacity are important in evaluating this factor.

Capital: Capital is the long-term borrowings, shareholders’ funds, and working capital borrowings and collectively represents the wealth of the business. The relevant ratios that determine the health of the company are: Liquidity ratios; Current ratio, Solvency ratios; Debt-to-Equity ratio, Debt-to-Asset ratio.

Collateral: Growth strategy is the most popular strategy. The companies that do business in growing industries must expand to survive for which monetary resources are absolutely necessary. For raising the required capital the companies negotiate for long and short-term borrowings from the current &   prospective shareholders. In such situations the collaterals becomes the essential requisite and the extent of collateral therefore reflects the firm’s capacity for borrowing. Net Realizable Value (NRV) is an important measure to check the collateral parameter.

Conditions: Every industry undergoes a business cycle which includes recession, depression, recovery and boom. These cycles affect the financial standing of the company. The performance of the corporation during these periods calls for the appropriateness of the strategy being implemented and taking any mid-course correction for the strategy employed.

6.3 Audits: Audit is another method of control. An audit is the process by which the financial statements of a organization are evaluated so as to ensure that these are accurate representation of the transactions the organization claims for. The audits can be done both internally and externally. Internal audits are done by employees of the organization while external audits are conducted by independent agencies outside the firm.

6.4 Time-related Control Methods: Critical Path Method (CPM) and Programme Evaluation and Review Technique (PERT) are the most popular graphical and analytical methods used in the strategic control process. These tools help the management to take remedial action and get the project back on course. The techniques take recognition of three factors that influence successful achievement of program objectives i.e. time, resource and technical performance specifications.

7.   Summary

A well thought strategy is of no purpose till its objectives are achieved as intended. Therefore, the strategy formulation and implementation should be followed up by strategic evaluation and control. It henceforth becomes important to know whether the strategy implemented has been assiduously following the intent and adhering to the time frame that was originally proposed. It is also important to note that strategic control engulfs the evaluation and is perpetual rather than periodical in nature. The phase of evaluation includes understanding the influence of internal and external environmental factors on the strategy during the time horizon of its implementation. This evaluation has to be supported by a proper control system so as to provide the necessary mid-course correction or modification of the strategy employed. Moreover, it becomes imperative for the managers to understand the barriers in the path of strategy evaluation and control and overcoming these hurdles could help accomplishing the targeted strategy.

Further, the strategic control can be classified under four heads: premise controls, implementation control, strategic surveillance control and special alert control. There are various methods/tools of control used in strategic control system. These methods are adopted by the organizations based on types of control required. Budgets & budgetary controls along with ratio analysis, audits and time-related control techniques are well suited methods for strategic control.