control in an age of empowerment -...

Control in an Age ofEmpowerment

Harvard Business Review

by Robert Simons

Reprint 95211

Harvard Business ReviewSubscription ServiceP.O. Box 52623Boulder, CO 80322-2623

Telephone: U.S. and Canada (800) 274-3214Outside U.S. 44-85-846-8888Fax: (617) 496-8145American Express, MasterCard, VISA accepted. Billing available.

Harvard Business ReviewOperations DepartmentSoldiers FieldBoston, MA 02163

Telephone: (800) 545-7685Fax: (617) 496-8145

Inquire about HBR’s custom service for quantity orders.Imprint your company’s logo on reprint covers, select articles for custom collections or books. Color available.

Telephone: (617) 495-6198Fax: (617) 496-2470

For permission to quote or reprint on a one-time basis:Telephone: (800) 545-7685Fax: (617) 495-6985

For permission to re-publish please write or call:

Permissions EditorHarvard Business School Publishing CorporationSoldiers FieldBoston, MA 02163

(617) 495-6849

HBR Subscriptions

HBR Article ReprintsHBR Index

HBR Custom Reprints

Permissions

Harvard Business Review

MARCH-APRIL 1995

Reprint Number

JOHN P. KOTTER LEADING CHANGE: WHY TRANSFORMATION EFFORTS FAIL 95204

NOEL M. TICHY THE CEO AS COACH: AN INTERVIEWAND RAM CHARAN WITH ALLIED SIGNAL’S LAWRENCE A. BOSSIDY 95201

ROBERT SIMONS CONTROL IN AN AGE OF EMPOWERMENT 95211

JOHN POUND THE PROMISE OF THE GOVERNED CORPORATION 95210

B. JOSEPH PINE II, DON PEPPERS, DO YOU WANT TO KEEP YOUR CUSTOMERS FOREVER? 95209AND MARTHA ROGERS

A. CAMPBELL, M. GOOLD, CORPORATE STRATEGY: 95202AND M. ALEXANDER THE QUEST FOR PARENTING ADVANTAGE

GEOFFREY OWEN WHY ICI CHOSE TO DEMERGE 95207AND TREVOR HARRISON

REGINA FAZIO MARUCA HBR CASE STUDYHOW DO YOU GROW A PREMIUM BRAND? 95205

SIMON JOHNSON WORLD VIEWAND GARY LOVEMAN STARTING OVER: POLAND AFTER COMMUNISM 95203

RICHARD O’BRIEN BOOKS IN REVIEWWHO RULES THE WORLD’S FINANCIAL MARKETS? 95206

PERSPECTIVESREDRAW THE LINE BETWEEN THE BOARD AND THE CEO 95208JOHN G. SMALE • ALAN J. PATRICOF • DENYS HENDERSON • BERNARD MARCUS • DAVID W. JOHNSON

HarvardBusinessReview

How can managers promote innovation while avoiding unwelcome surprises?

by Robert Simons

Control in an Age of

A fundamental problem facing managers in the1990s is how to exercise adequate control in organi-zations that demand flexibility, innovation, andcreativity. Competitive businesses with demand-ing and informed customers must rely on employeeinitiative to seek out opportunities and respond tocustomers’ needs. But pursuing some opportunitiescan expose businesses to excessive risk or invite be-haviors that can damage a company’s integrity.

Consider the spate of management control fail-ures that have made headlines in the past severalyears: Kidder, Peabody & Company lost $350 mil-lion when a trader allegedly booked fictitious prof-its; Sears, Roebuck and Company took a $60 mil-lion charge against earnings after admitting that it recommended unnecessary repairs to customersin its automobile service business; Standard Char-tered Bank was banned from trading on the HongKong stock market after being implicated in an im-proper share support scheme. The list goes on. Ineach case, employees broke through existing con-trol mechanisms and jeopardized the franchise ofthe business. The cost to the companies – in dam-aged reputations, fines, business losses, missed op-portunities, and diversion of management atten-tion to deal with the crises–was enormous.

How do senior managers protect their companiesfrom control failures when empowered employees

Copyright © 1995 by the President and Fellows of Harvard College. All righ

are encouraged to redefine how they go about doingtheir jobs? How do managers ensure that subordi-nates with an entrepreneurial flair do not put thewell-being of the business at risk? One solution isto go back to the fundamentals of control developedin the 1950s and 1960s for machinelike bureaucra-cies. In that era, managers exercised control bytelling people how to do their jobs and monitoringthem with constant surveillance to guard againstsurprises. Although this approach sounds anachro-nistic for modern businesses, it is still effectivewhen standardization is critical for efficiency andyield, such as on an assembly line; when the risk oftheft of valuable assets is high, such as in a casino;or when quality and safety are essential to productperformance, such as at a nuclear power plant.

However, in most organizations operating in dy-namic and highly competitive markets, managerscannot spend all their time and effort making surethat everyone is doing what is expected. Nor is it realistic to think that managers can achieve controlby simply hiring good people, aligning incentives,and hoping for the best. Instead, today’s managersmust encourage employees to initiate process im-provements and new ways of responding to cus-tomers’ needs–but in a controlled way.

Fortunately, the tools to reconcile the conflict between creativity and control are at hand. Most

ts reserved. DRAWINGS BY EDWARD GOREY

Empowerment

managers tend to define control narrowly – as mea-suring progress against plans to guarantee the pre-dictable achievement of goals. Such diagnostic con-trol systems are, however, only one ingredient ofcontrol. Three other levers are equally important intoday’s business environment: beliefs systems,boundary systems, and interactive control systems.

Each of the four control levers has a distinct pur-pose for managers attempting to harness the cre-ativity of employees. Diagnostic control systemsallow managers to ensure that important goals arebeing achieved efficiently and effectively. Beliefssystems empower individuals and encourage themto search for new opportunities. They communi-cate core values and inspire all participants to com-mit to the organization’s purpose. Boundary sys-tems establish the rules of the game and identifyactions and pitfalls that employees must avoid. Interactive control systems enable top-level man-agers to focus on strategic uncertainties, to learnabout threats and opportunities as competitive con-ditions change, and to respond proactively.

Diagnostic Control SystemsDiagnostic control systems work like the dials

on the control panel of an airplane cockpit, en-abling the pilot to scan for signs of abnormal func-

HARVARD BUSINESS REVIEW March-April 1995

tioning and to keep critical performance variableswithin preset limits. Most businesses have come torely on diagnostic control systems to help man-agers track the progress of individuals, depart-ments, or production facilities toward strategicallyimportant goals. Managers use these systems tomonitor goals and profitability, and to measureprogress toward targets such as revenue growth andmarket share. Periodically, managers measure theoutputs and compare them with preset standards ofperformance. Feedback allows management to ad-just and fine-tune inputs and processes so that fu-ture outputs will more closely match goals.

But diagnostic control systems are not adequateto ensure effective control. In fact, they create pres-sures that can lead to control failures – even crises.Whether managers realize it or not, there are built-in dangers when empowered employees are held ac-countable for performance goals – especially for dif-ficult ones – and then left to their own devices toachieve them. For example, Nordstrom, the upscalefashion retailer known for extraordinary customer

Robert Simons is the Charles M. Williams Professor ofBusiness Administration at Harvard Business School inBoston, Massachusetts. His book Levers of Control: HowManagers Use Innovative Control Systems to DriveStrategic Renewal was published in December 1994 by theHarvard Business School Press.

81

Each of the four control levers has a

r n

service, recently found itself em-broiled in a series of lawsuits andinvestigative reports related to itssales-per-hour performance-mea-surement system. Used to trackthe performance of its entrepre-neurial salespeople, the systemwas designed to support the ser-vice orientation for which Nord-strom is famous. But withoutcounterbalancing controls, thesystem created the potential forboth exemplary customer serviceand abuse. Some employeesclaimed that first-line supervisorswere pressuring them to under-report hours on the job in an at-tempt to boost sales per hour. Set-tling those claims cost Nordstrommore than $15 million.

I recently conducted a study often newly appointed chief execu-tive officers to understand betterhow they used measurement andcontrol systems to implementtheir agendas. Within the firstmonths of taking charge, many ofthe new CEOs established demand-ing performance goals for divi-sion managers and increased therewards and punishments associ-ated with success and failure inachieving those goals. In responseto the pressures, several divisionmanagers manipulated financialdata by creating false accountingentries to enhance their reportedperformance. The managers werefired, but not before they had inflicted damage ontheir organizations. In one memorable case, a retailcompany had been making inventory and mark-down decisions based on the falsified data, a prac-tice that resulted in significant losses. These arenot isolated incidents. The Big Six accounting firmshave observed a substantial increase in errors andfraud over the past five years as organizationsdownsize and reduce the resources devoted to inter-nal controls. With the elimination of many middlemanagement jobs, basic internal controls, such assegregation of duties and independent oversight,have often been sacrificed.

One of the main purposes of diagnostic measure-ment systems is to eliminate the manager’s burdenof constant monitoring. Once goals are establishedand people have performance targets on which their

purpose foattemptingcreativity a

82

rewards will be based, many man-agers believe they can move on toother issues, knowing that em-ployees will be working diligentlyto meet the agreed-upon goals. Yetthe potential for control failuresas the performance bar is raisedand employees’ rewards are put atrisk underscores the need for man-agers to think about the three oth-er essential levers of control.

Beliefs SystemsCompanies have used beliefs

systems for years in an effort to articulate the values and directionthat senior managers want theiremployees to embrace. Typically,beliefs systems are concise, value-laden, and inspirational. Theydraw employees’ attention to keytenets of the business: how the organization creates value (“BestCustomer Service in the World”);the level of performance the orga-nization strives for (“Pursuit ofExcellence”); and how individualsare expected to manage both in-ternal and external relationships(“Respect for the Individual”).

Senior managers intentionallydesign beliefs systems to be broadenough to appeal to many differentgroups within an organization:salespeople, managers, productionworkers, and clerical personnel. Be-cause they are broad, beliefs state-

ments are often ridiculed for lacking substance. But this criticism overlooks the principal purposeof the statements: to inspire and promote com-mitment to an organization’s core values. Still, thestatements achieve their ends only if employees believe, by watching the actions of senior manag-ers, that the company’s stated beliefs representdeeply rooted values. If employees suspect that man-agers are going through the motions of the latestfad, cynicism will set in.

Indeed, some managers adopt missions and cre-dos not out of any real commitment but becausethey seem fashionable. However, managers whouse their missions as living documents – as part of a system to guide patterns of acceptable behavior –have discovered a powerful lever of control. AtJohnson & Johnson, for example, senior managers

managersto balanced control.


CONTROL

meet regularly with subordinates throughout thecompany to review and reaffirm the beliefs record-ed in J&J’s long-standing credo, which articulatesclearly and passionately the company’s responsibil-ities to customers, employees, local communities,and stockholders. Managers throughout the organi-zation recognize the value that senior managersplace on the exercise and respond accordingly.When problems arise, such as when J&J faced theTylenol crisis, the strong beliefs system embeddedin its credo provided guidance regarding the types ofsolutions to search for.

In the past, a company’s mission was usually understood without reference to core values or for-mal beliefs; employees knew that they worked for a bank or a telephone company or a company thatmade shock absorbers. However, businesses havebecome much more complex in recent years, mak-ing it more difficult for individuals to comprehendorganizational purpose and direction. Moreover, inmany businesses, downsizing and realignmenthave shattered strongly held assumptions about thevalues and foundations of businesses and their top-level managers. Employees no longer know whomto trust. At the same time, their expectations formeaningful careers have risen as education levels


Harness Employees’ Creativity w

Potential

To contribute

To do right

To achieve

To create

Organizational Blocks

Uncertainty about purpose

Pressure or temptation

Lack of focus or of resources

Lack of opportunity or fear of risk

ManSolu

Comvalu

Specrules

Buildclea

Opedialolearn

have increased. Without a formal beliefs system,employees in large, decentralized organizations of-ten do not have a clear and consistent understand-ing of the core values of the business and their placewithin the business. In the absence of clearly artic-ulated core values, they are often forced to make assumptions about what constitutes acceptable be-havior in the many different, unpredictable circum-stances they encounter.

Beliefs systems can also inspire employees to cre-ate new opportunities: they can motivate individu-als to search for new ways of creating value. We allhave a deep-seated need to contribute – to devotetime and energy to worthwhile endeavors. Butcompanies often make it difficult for employees tounderstand the larger purpose of their efforts or tosee how they can add value in a way that can makea difference. Individuals want to understand the or-ganization’s purpose and how they can contribute,but senior managers must unleash this potential.Effective managers seek to inspire people through-out their organizations by actively communicatingcore values and missions. As top-level managers re-ly increasingly on empowered employees to gener-ate new ideas and competitive advantage, partici-pants from all parts of an organization need to

83

ith the Four Levers of Control

agerial tion

municate core es and mission

ify and enforce of the game

and support r targets

n organizational gue to encourage ing

Control Lever

Beliefs systems

Boundary systems

Diagnostic control systems

Interactive control systems

CONTROL

sthy

understand as clearly as possible their company’spurposes and mission.

Beliefs systems can augment diagnostic controlsystems to give today’s managers greater amountsof control. But they are only part of the answer.Think of them as the yang of Chinese philosophy –the sun, the warmth, and the light. Opposing themare dark, cold boundaries–the yin–which representthe next lever of control.

Boundary SystemsBoundary systems are based on a simple, yet pro-

found, management principle that can be called the“power of negative thinking.”1 Ask yourself thequestion, If I want my employees to be creative andentrepreneurial, am I better off telling them what todo or telling them what not to do?The answer is the latter. Tellingpeople what to do by establishingstandard operating procedures andrule books discourages the initia-tive and creativity unleashed byempowered, entrepreneurial em-ployees. Telling them what not todo allows innovation, but withinclearly defined limits.

Unlike diagnostic control sys-tems (which monitor critical per-formance outcomes) or beliefssystems (which communicatecore values), boundary systemsare stated in negative terms or asminimum standards. The bound-aries in modern organizations,embedded in standards of ethicalbehavior and codes of conduct, areinvariably written in terms of ac-tivities that are off-limits. Theyare an organization’s brakes. Every business needs them, and,like racing cars, the fastest andmost performance-oriented com-panies need the best brakes.

Human beings are inventive,and, when presented with new op-portunities or challenging situa-tions, they often search for waysto create value or overcome obsta-cles. But empowerment – fueledby inspiration and performancerewards – should never be inter-

1. My colleague, Professor Charles Christenson,coined this term in a 1972 Harvard BusinessSchool working paper.

Beliefs sybe though

yang to tboundar

84

preted as giving subordinates a blank check to dowhatever they please. People generally want to dothe right thing – to act ethically in accordance withestablished moral codes. But pressures to achievesuperior results sometimes collide with strictercodes of behavior. Because of temptation or pres-sure in the workplace, individuals sometimeschoose to bend the rules. As the recent problems atKidder, Peabody and Salomon Brothers show, entre-preneurial individuals sometimes blur or misinter-pret the line between acceptable and unacceptablebehavior. At Salomon Brothers, a creative trader at-tempting to increase investment returns violatedU.S. Treasury bidding rules and short-circuited ex-isting controls; the aftermath of the scandal de-stroyed careers and impaired Salomon’s franchise.Similar problems at Kidder, Peabody involving fic-

titious securities trades resultedin massive losses and ultimatelyled to the sale of the business.Clearly, the consequences of a mis-step can be severe.

Boundary systems are especial-ly critical in those businesses inwhich a reputation built on trustis a key competitive asset. A well-respected bank with a global fran-chise states as a part of its busi-ness principles that its three mainassets are people, capital, and rep-utation. Of all these, it notes, thelast is the most difficult to regainif impaired. To guard against dam-age to its reputation, the bank’scode of conduct forbids individu-als both from developing client relationships in “undesirable” in-dustries, such as gambling casinos,and from acting as intermediariesin unfriendly takeovers, which senior managers believe could undermine the perceived trust-worthiness of the company.

Large consulting firms likeMcKinsey & Company and theBoston Consulting Group rou-tinely work with clients to ana-lyze highly proprietary strategicdata. To ensure that their reputa-tions for integrity are never com-promised, the firms enforce strictboundaries that forbid consultantsto reveal information – even thenames of clients – to anyone notemployed by the firm, including

tems can of as thee yin ofsystems.

ductoperalo-ain, theems

ableheirame en- be-nag-0 is

sur-

ni e

stn s.

spouses. They also clearly state in their codes ofprofessional conduct that individuals must not mis-represent themselves when attempting to gathercompetitive information on behalf of clients.

Unfortunately, the benefits of establishing busi-ness conduct boundaries are not always apparent to senior managers. Too often, theylearn the hard way. Many codes ofconduct are instituted only after a public scandal or an internal inves-tigation of questionable behavior.Over the years, General Electric hasinstituted codes of business conductthat prohibit activities relating toimproper payments, price fixing, andimproper cost allocation on govern-ment contracts. Each of those codeswas instituted after a major crisis impaired the in-tegrity of the business. For instance, when GE wasforced to suspend its $4.5 billion business as suppli-er to the U.S. government in 1985, CEO Jack Welchresponded by strengthening internal controls andissuing a clear policy statement that forbade the be-haviors that had landed GE in trouble: impropercost allocations on government contracts. Similar-ly, senior managers at Wall Street investment firms

organ

compa


Renew Strategy with the

Beliefs Systems

Interactive Control Systems

BusinesStrateg

Core Values

Strategic Uncertainties

did not pay much attention to business conboundary systems until the disclosure of imprbehavior by a small number of employees at Smon Brothers nearly destroyed the business. Agsenior managers at investment firms acrosscountry scrambled to install compliance syst

to avoid a similar crisis in their own firms.Effective managers anticipate the inevit

temptations and pressures that exist within torganizations. They spell out the rules of the gbased on the risks inherent in their strategy andforce them clearly and unambiguously. Somehaviors are never tolerated: the firing of the maer who inflated his or her expense report by $5a familiar story in many organizations. On the

Boundary systems are azation’s brakes. And, lik

racing cars, the fasteies need the best brake

85

Four Levers of Control

Boundary Systems

Diagnostic Control Systems

s y

Risks to Be Avoided

Critical Performance

Variables

Interactive controlsystems track the

ntr at

face, the punishment may seemtoo harsh for the crime, but thepurpose of such punishment is tosignal clearly to all managers andemployees that the consequencesof stepping over ethical bound-aries are severe and nonnego-tiable. As performance-orientedorganizations grow and becomemore decentralized, the risks offailure increase. Managers mustrely more and more on formal sys-tems in order to ensure that theboundaries are communicatedand understood.

Not all boundaries concernstandards of ethical conduct.Strategic boundaries focus on en-suring that people steer clear ofopportunities that could diminishthe business’s competitive posi-tion. A large computer company,for example, uses its strategicplanning process to segregate itsproduct and market opportunitiesinto what managers call greenspace and red space. Green spaceis the acceptable domain for newinitiatives. Red space representsproducts and markets in which se-nior managers have decided theydo not want to pursue new op-portunities, although the orga-nization could compete in thoseproducts and markets given itscompetencies. A British relief or-ganization uses a similar systemto monitor strategic boundaries; itmaintains a gray list of companies whose contribu-tions it will neither solicit nor accept. Managers atAutomatic Data Processing (ADP) use a strategicboundary list that delineates the types of businessopportunities that managers must avoid. Theguidelines provide ADP managers with clarity andfocus. This technique has contributed to 133 con-secutive quarters of double-digit growth in earningsper share–a record unmatched by any other compa-ny traded on the New York Stock Exchange.

Working together, boundary systems and beliefssystems are the yin and yang that together create adynamic tension. The warm, positive, inspirationalbeliefs are a foil to the dark, cold constraints. Theresult is a dynamic tension between commitmentand punishment. Together, these systems trans-form limitless opportunity into a focused domain

uncertaikeep senio

awake

86

that employees and managers areencouraged to exploit actively. Incombination, they establish direc-tion, motivate and inspire, andprotect against potentially damag-ing opportunistic behavior.

Interactive Control Systems

When organizations are small,key managers and employees cansit around the same table and in-formally explore the impact ofemerging threats and opportuni-ties. But as organizations growlarger and senior managers haveless and less personal contact withpeople throughout the organiza-tion, new formal systems must becreated to share emerging infor-mation and to harness the creativ-ity that often leads to new prod-ucts, line extensions, processes,and even markets. Unfortunately,diagnostic control systems, whichhighlight shortfalls against plans,won’t suffice. Instead, senior man-agers need sensing systems morelike the ones used by the NationalWeather Service. Ground stationsall over the country monitor tem-perature, barometric pressure, rel-ative humidity, cloud cover, winddirection and velocity, and precip-itation. Balloons and satellitesprovide additional data. These data are monitored continuously

from a central location in an effort to identify pat-terns of change.

Managers need similar scanning mechanisms.Like weather-tracking systems, interactive controlsystems are the formal information systems thatmanagers use to involve themselves regularly andpersonally in the decisions of subordinates. Thesesystems are generally simple to understand.Through them, senior managers participate in thedecisions of subordinates and focus organizationalattention and learning on key strategic issues.

Making a control system interactive invariablydemands attention from participants throughoutthe business. At Pepsico, for example, the weeklyrelease of new Nielsen market-share numbers cre-ates a flurry of activity as 60 or 70 people through-out the organization begin working on the data in

ies thatmanagers night.


CONTROL

as

anticipation of the inevitable scrutiny and queriesof senior management. Senior managers scheduleweekly meetings to discuss the new Nielsen infor-mation, to challenge subordinates to explain themeaning of changed circumstances, and to reviewaction plans that subordinates have developed toreact to problems and opportunities.

Interactive control systems have four character-istics that set them apart from diagnostic controlsystems. First, they focus on constantly changinginformation that top-level managers have identi-fied as potentially strategic. Second, the informa-tion is significant enough to demand frequent andregular attention from operating managers at alllevels of the organization. Third, the data generatedby the interactive system are best interpreted anddiscussed in face-to-face meetings of superiors, sub-ordinates, and peers. Fourth, the interactive controlsystem is a catalyst for an ongoingdebate about underlying data, as-sumptions, and action plans.

Interactive control systems trackthe strategic uncertainties that keepsenior managers awake at night – theshocks to the business that could undermine their assumptions aboutthe future and the way they havechosen to compete. Depending on thebusiness, these uncertainties mightrelate to changes in technology, customers’ tastes,government regulation, and industry competition.Because interactive control systems are designed togather information that might challenge visions ofthe future, they are, by definition, hot buttons forsenior managers.

A senior manager’s decision to use a specific con-trol system interactively – in other words, to investtime and attention in face-to-face meetings to re-view new information – sends a clear signal to theorganization about what’s important. Through thedialogue and debate that surround the interactiveprocess, new strategies often emerge. Consider thecase of a well-known hospital supply company. Thecompany is a low-cost producer, supplying dispos-able hospital products for intravenous drug deliverysuch as plasma containers, tubing, and syringes.Even though efficiency, quality, and cost controlare important competencies, these concerns do notkeep managers awake at night. (They are well un-derstood and can be managed effectively with diag-nostic control systems.) Instead, senior managersworry that technological breakthroughs will under-mine their ability to deliver products valued by themarket. Accordingly, they use a project manage-ment system interactively to focus organizational

Interac

informcon


attention on a dozen or so emerging technologicalissues. Senior managers meet monthly for severaldays to debate the impact of technologies – intro-duced by competitors or in related industries, or de-veloped in-house – on their business. These meet-ings become intense as the managers challenge oneanother to assess the impact of new informationand develop responses. From this dialogue, newstrategies emerge.

Senior managers at USA Today, Gannett Compa-ny’s daily newspaper, use a similar process to re-view information contained in a simple package ofreports delivered each Friday. Three weekly reportsgive senior managers a picture of how they havedone in the previous week and what conditions lieahead for the upcoming few weeks. The data in theFriday packet range from year-to-date figures to daily and account-specific information. These data

provide insight into changing industry conditionsand the advertising strategies of key customers.They allow managers to look at the big picture andprovide enough detail to identify specific vulnera-bilities, opportunities, and the source of any prob-lems that require proactive responses.

Each week, senior managers at USA Todayschedule intensive face-to-face meetings with keysubordinates to analyze and interpret the report data. Among the regular topics of discussion anddebate are advertising volume against plan, com-mitted future volume by issue, and new business bytype of client. In addition to looking for unexpectedshortfalls, managers also look for unexpected suc-cesses. From these meetings, significant innova-tions have been proposed to deal with unanticipat-ed downturns and to capitalize on unanticipatedopportunities. Innovations have included launch-ing a new market-survey service for automotiveclients, introducing fractional-page color advertis-ing, selling exclusive inserts dedicated to specificcustomers and products, and using circulationsalespeople to sell ad space in regional locations.

Of course, managers in other businesses choosedifferent kinds of control systems to use interac-tively depending on the strategic uncertainties as-

tive control systems focuson constantly changing

tion that senior managersider potentially strategic.

87

CONTROL

sociated with their business strategies. For exam-ple, Johnson & Johnson uses its profit-planning sys-tem interactively to focus attention on the develop-ment and protection of innovative products in itsvarious markets. Managers periodically reestimatethe predicted effects of competitive tactics and newproduct rollouts on their profit plans for the currentand the following year. The recurring questionsposed by managers are: What has changed since ourlast forecast? Why? What are we going to do aboutit? The results are new ideas and action plans.

Balancing Empowerment and Control Effective managers empower their organizations

because they believe in the innate potential of peo-ple to innovate and add value. For instance, the rea-son Nordstrom salespeople provide exceptionalcustomer service is that they are selected andtrained to act entrepreneurially. In turn, they havethe freedom and motivation to tailor their serviceto each customer’s needs. To unleash this type ofpotential, senior managers must give up controlover many kinds of decisions and allow employeesat lower levels of the organization to act indepen-dently. Good managers work constantly to helpemployees rise to their potential. In small organiza-tions, managers do this informally. While eating ortraveling together, they communicate core valuesand missions, the rules of the game, and current tar-gets – and they learn about significant changes. Ascompanies become larger, more decentralized, andgeographically dispersed, senior managers are nolonger in constant contact with all the employeeswho will identify and respond to emerging prob-lems and opportunities. Nonetheless, the guidingprinciples of communication and control are everybit as important.

A large international construction company re-spected for its quality and customer service pro-vides a clear illustration of how the control leverssupport one another. The company has more than25 offices in the United States and abroad; as a re-sult, project managers and employees make multi-million-dollar decisions far from the company’stop-level managers. The senior managers who setthe company’s overall direction and strategy ensurethat they have adequate control of their far-flungoperations by using all four levers of control.

88

To communicate core values, they rely on a be-liefs system. The company’s widely circulated credorefers to the importance of responsibility, of col-lective pride in engineering quality, of financial suc-cess, and of integrity. It concludes with an over-all objective handed down by the founder: “To bethe best.”

These inspirational beliefs are offset by clearboundaries. Managers are forbidden, for example, to work in certain countries where facilitating payments and bribes are required to do business, because these sorts of actions jeopardize the com-pany’s belief in integrity. The company also main-tains a turkey list to communicate to managers thetypes of projects that the company has learned arenot profitable and should be avoided. (For example,senior managers have learned from bitter experi-ence to steer clear of sewage-disposal-plant con-struction.) The list is adjusted from time to time asmanagers learn where their competencies lie andwhere they don’t.

Managers gain still more control by using a vari-ety of diagnostic controls – among them profitplans, budgets, and goals and objectives. These con-trol systems do not require very much attentionfrom senior management other than the time spentsetting annual goals and monitoring exceptions tosee that events unfold according to plan. One con-trol system, however, is used interactively. Theproject management system focuses attention onthe strategic uncertainties that managers want everyone to monitor: the company’s reputation inthe trade, the shifting perceptions of customers,and the ideal skill mix required in various projectteams. The new data are used as a catalyst to forceregular face-to-face discussions in which managersshare information and attempt to develop betterways to customize their services and adjust theirstrategies in a changing market.

Collectively, these four levers of control set inmotion powerful forces that reinforce one another.As organizations become more complex, managerswill inevitably deal with increasing opportunityand competitive forces and decreasing time and at-tention. By using the control levers effectively,managers can be confident that the benefits of inno-vation and creativity are not achieved at the ex-pense of control. Reprint 95211


control in an age of empowerment -...

Documents