Strategic control-and-reward systems are the third and final key building block when
designing organizations for competitive advantage. Strategic control-and-reward
systems are internal-governance mechanisms put in place to align the incentives of principals
(shareholders) and agents (employees). These systems allow managers to specify
goals, measure progress, and provide performance feedback. In Chapter 5, we discussed
how firms can use the balanced-scorecard framework as a strategic control system. Here,
we discuss additional control-and-reward systems: organizational culture, input controls,
and output controls.
As just demonstrated, organizational culture can be a powerful motivator. It also can
be an effective control system. Norms, informal and tacit in nature, act as a social control
mechanism. Zappos, for example, achieves organizational control partly through
an employee’s peer group: Each group member’s compensation, including the supervisor’s,
depends in part on the group’s overall productivity. Peer control, therefore, exerts a powerful force on employee conformity and performance. 64 Values and norms also provide
control by helping employees address unpredictable and irregular situations and problems
(common in service businesses). In contrast, rules and procedures (e.g., codified in an
employee handbook) can address only circumstances that can be predicted.