Control in an Age oj
by Robert Simons
A fundamental problem facing managers in the 1990s is how to exercise adequate control in organizations that demand flexibility, innovation, and creativity. Competitive businesses with demanding and informed customers must rely on employee initiative to seek out opportunities and respond to customers' needs. But pursuing some opportunities can expose businesses to excessive risk or invite behaviors that can damage a company's integrity. Consider the spate of management control failures that have made headlines in the past several years: Kidder, Peabody&. Company lost $350 million when a trader allegedly booked fictitious profits; Sears, Roebuck and Company took a $60 million charge against earnings after admitting that it recommended unnecessary repairs to customers in its automobile service business; Standard Chartered Bank was banned from trading on the Hong Kong stock market after being implicated in an improper share support scheme. The list goes on. In each case, employees broke through existing control mechanisms and jeopardized the franchise of the business. The cost to the companies- in damaged reputations, fines, business losses, missed opportunities, and diversion of management attention to deal with the crises-was enormous. How do senior managers protect their companies from control failures when empowered employees 80
are encouraged to redefine how they go about doing their jobs? How do managers ensure that subordinates with an entrepreneurial flair do not put the well-being of the business at risk? One solution is to go back to the fundamentals of control developed in the 1950s and 1960s for machinelike bureaucracies. In that era, managers exercised control by telling people how to do their jobs and monitoring them with constant surveillance to guard against surprises. Although this approach sounds anachronistic for modern businesses, it is still effective when standardization is critical for efficiency and yield, such as on an assembly line; when the risk of theft of valuable assets is high, such as in a casinoi or when quality and safety are essential to product performance, such as at a nuclear power plant. However, in most organizations operating indynamic and highly competitive markets, managers cannot spend all their time and effort making sure that everyone is doing what is expected. Nor is it realistic to think that managers can achieve control by simply hiring good people, aligning incentives, and hoping for the best. Instead, today's managers must encourage employees to initiate process improvements and new ways of responding to customers' needs-but in a controlled way. Fortunately, the tools to reconcile the conflict between creativity and control are at hand. Most DRAWINGS BY EDWARD GOREY
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managers tend to define control narrowly-as measuring progress against plans to guarantee the predictable achievement of goals. Such diagnostic control systems are, however, only one ingredient of control. Three other levers are equally important in today's business environment: beliefs systems, boundary systems, and interactive control systems. Each of the four control levers has a distinct purpose for managers attempting to harness the creativity of employees. Diagnostic control systems allow managers to ensure that important goals are being achieved efficiently and effectively. Beliefs systems empower individuals and encourage them to search for new opportunities. They communicate core values and inspire all participants to commit to the organization's purpose. Boundary systems establish the rules of the game and identify ' actions and pitfalls that employees must avoid. Interactive control systems enable top-level managers to focus on strategic uncertainties, to learn about threats and opportunities as competitive conditions change, and to...