Summary
Strategy Implementation
Matthijs Bekkers
2104090
Week 1 – Change Management
In low-urgency scenarios, an incremental change strategy is most successful. The
disruptiveness of the change levers should be gradually increased over the course of the
change program in non-urgent situations.
Challenges of strategy implementation:
1. Different scope than analysis.
2. Need for coherence.
a. The strategy of a company has to be aligned with the different components.
i. The strategic goals have to be coherent with the people, the
leadership, the structure, the incentives, the supporting activities and
the culture.
3. Complexity; Interactions and the number of elements.
Leading Organizational Change
The reason for firm failures is often not because of insufficient funding, but other reasons
like lack of commitment by senior management & lack of clearly defined and/or achievable
milestones and objectives to measure progress.
‘’Strategic drift can be defined as a
gradual deterioration of competitive
action that results in the failure of an
organization to acknowledge and
respond to changes in the business
environment.’’
Change fatigue = tiredness about
things that are not stable, but
constantly changing.
3 assumptions:
1. Organizations are systems if you alter one component you will affect others.
2. Change is both a process and an outcome.
3. There is no single correct formula for managing successful change.
DIAGNOSING THE NEED FOR CHANGE – Why is change needed?
Leaders should understand whether their firm is facing a performance gap or an opportunity
gap.
- Performance gap  requires change that improves current organizational routines
and practices.
o When there is a difference between expected and actual performance 
evaluate the organization’s ability to perform and produce output; capacity to
foster individual learning; and potential to adapt.
- Opportunity gaps  require change that creates new routines and practices for the
future.
o Look outside the firm and anticipate what they need to do to remain
competitive in the future.
DESIGNING THE CHANGE PROCESS – what sort of change is called for?
S.O.R.T.: 4 critical elements of change design and implementation:
1. Scope: radical vs incremental  scope = “the intended impact of the change on the
organizations’ core practices, norms, identity, and member behaviors”.
o Radical change  will affect nearly all of these aspects of the organization.
o Incremental change  making small adjustments to the existing
organizational systems, processes, and routines. Targets specific components.
2. Origin of change: top-down vs bottom-up  where the change will emerge
3. Rollout  after – at implementation.
4. Timing
Types of change based on scope and origin design decisions:
o Tactical change  top-down and incremental change – to
address a specific issue within the org and to achieve a particular
goal. It implies a shift in behaviors that can be quickly
implemented (they rarely result in an organization-wide change)
o Evolutionary change  bottom-up and incremental change – the
ideas must emerge from individuals and subunits within the org,
so the leaders must provide resources, remove barriers, and
offer guidance. Good to learn and test new ideas without
upending the entire system.
o Revolutionary change  bottom-up and radical change – it impacts the core beliefs
and behaviors, and the norms and structures that guide the org. it emerges from
within the org and it will gain traction and reach across the entire firm. It can
occasionally lead to chaos.
o Transformational change  top-down and radical change – it starts with the leaders’
goals in mind. A great deal of resources is needed to manage this change.
DELIVERING CHANGE – Choosing the best approach to implementation
Rollout and timing (from before) are the 2 decisions related to implementation.
- Rollout of change: systemwide vs localized  where to implement change across the
organization.
Systemwide  across multiple units or subunits simultaneously – it can be very
effective if the change needs to start immediately.
Localized  in a successive process: one by one, the change will be implemented in
each area – good to devote more resources and attention to each segment.
- Timing of change: fast vs slow  slow  provide more opportunities for evaluation
and learning, but can lose momentum.
2 implementation approaches:
a. Focus on piloting and experimentation  localized and slow  this approach is more
common; leaders can test ideas in a targeted manner.
b. Focus on assimilation and integration  systemwide and fast.
There is a trade-off between the two, and it depends on how much stretching and stress the
leaders believe the organization can endure.
Implementation tactics
 Bold strokes  they command attention, they send
a signal from the top to the rest of the org (ex.
buying another company, firing a subset of
employees…).
 Long marches  sustained programs, a sequence
of interventions.
Kotter - Change Management
1) Establish a sense of urgency.
2) Form a powerful guiding coalition.
3) Create a vision.
4) Communicate a vision.
5) Empower others to act on the vision.
6) Plan for and create short-term wins.
7) Consolidate improvements and
produce still more change.
8) Institutionalize the new approaches.
Resistance usually stems from perceptions of
excess stretching and stress on the organization
or on specific people or units.
- Against opposition, creating buy-in
o Don’t tell people what to do, but
let them figure out if a change
might be needed.
Lewin
Assessment of readiness - 4 measures:
1. Discrepancy  do individuals believe that there is a significant gap and that the
change is needed?
2. Appropriateness  is the change believed to be appropriate to address the
discrepancy?
3. Efficacy  do individuals believe they can successfully implement a change?
4. Principal support  do individuals believe their leaders are committed enough to the
change’s success?
Reasons for individual resistance to change:
- Direct Costs,
- Saving Face,
- Fear of the unknown,
- Breaking routines,
- Incongruent systems,
- Incongruent team dynamics.
Raise dissatisfaction.
- Communicate the need for change and the costs of not changing.
- Performance / opportunity gap analysis (both internal and external)
- Compare using data
- Contextual landscape analysis
- Benchmarking
- Employee attitudes
- Sharpen the awareness of the gap analysis. → There is a gap with the others /the
environment meaning we DO need to change. Make others aware of this.
- Involve key players in the company.
Characteristics of Effective Models / Visions
- Desirable: satisfy stakeholders, motivate employees.
- Feasible: opportunity for short term wins, realistic stretch.
- Relevant: contextually sensitive.
Process choices for successful change ->
6 types of Change Levers
Enabling: these levers raise awareness for
targets (getting ready for the change).
- Credibility: e.g. invite an external consultant to extoll change.
- Communication: e.g. initiate town hall meeting.
- Training: e.g. provide external training experience.
Substantive: these levers facilitate adoption by targets.
- Technical: e.g. align the reward system to with change initiative.
- Political: e.g. privately confront a resister.
- Cultural: e.g. tell a success story.
Lever effectiveness depends on:
- Urgency of situation. The higher the urgency the more disruption they accept.
- Change agent formal authority and credibility.
- Timing of deployment.
- Change target receptivity.
Individual Change Curve
Communication is important, if the communication is lacking, people will fill the gap with
rumors. ‘’If you don’t have a communication plan, there is one, but without you’’.
Week 2 – Structure and Organization Design
Strategy Implementation Steps
Step 1: Understand the underlying strategy by asking 5 questions:
1. Customer Selection:
a. What customers to serve and not serve.
2. Value proposition:
a. What is the offering?
b. What are the dimensions of differentiation?
3. Value capture
a. How is value captured?
i. E.g. Walmart has a 22% margin advantage. ⅔ from ecosystem and ⅓
operational efficiencies.
4. Activities
a. What are the required activities?
b. What can be done internally?
c. What requires reliance on external parties?
5. Sustaining advantage
a. How to respond to competitive actions?
b. How to protect future profit streams?
Step 2: Identify the critical tasks
- Define the core tasks and the supporting business processes. This directly follows
from the business strategy.
- Strengthen an existing process
a. Overheal customer relationship management to track more data
b. Building retail networks in new geographic markets.
- Develop new product concepts.
- Outsource manufacturing.
Purpose
- Firm seeking to implement strategy.
- Need to organize people, resources and activities for coordination and control.
Note on Organizational Structure (HB)
Organizations exist to enable people to effectively integrate their efforts and get things
done.
The structure of an organization --> pattern of organizational roles, relationships, and
procedures that enables such integrated, collective action by its members.
Organizational structure is human-created and fulfills a set of coordination functions better
than non-organizational structures (ex. markets, crowdsourced communities…).
- It serves 4 coordination functions to meet a specific set of organizational and
individual needs:
The tools of organizational structure:
1) The division of labor to coordinate capabilities:
o How should responsibility for various capabilities be divided among the
members of an organization?  think about the extent of horizontal and
vertical specialization.
 Specialization: a trade-off  development of skills vs more
coordination costs and monotonous jobs.
2) Integration mechanisms to coordinate activities:
o Need to integrate the independent activities and output of the members.
o Various modes of vertical and horizontal integration within and among groups
(ex. direct supervision, formal rules…). Technology is also playing a key role in
integration mechanisms to coordinate activities.
o Difference in routine integration and exceptional integration:
 Routine integration = ex. across stations in an assembly line require
either direct supervision or standard operating procedures
 Infrequent and unusual matters  may require committees or task
forces.
o Integration can also lead to dynamic work teams or open collaboration.
3) The distribution of decision-making authority to coordinate goals:
o Decision of “who should make what decisions”.
o Problems of: centralization or decentralization of decision-making authority;
and on the horizontal dimension  depending on the different roles
o Decision rights should be given to those who have the best information, but
we should keep in mind the extent of goal congruence and the incentives of
the members of the org.
4) The setting and sustaining of organizational boundaries:
o Deciding what to do inside and outside of the org. Ex. make vs buy decisions,
horizontal and vertical integration, supply chain relationships… and the extent
to which different parts of the organization interact directly with the outside
environment.
These 4 dimensions can have formal (explicit) and informal (emergent) components.
o Formal components  are deliberately determined and codified by the
established structures.
o Informal components  emerge from the pattern of social interactions
within the organization.
Challenges for managers: gaining awareness of both formal and informal structures; and
keeping them aligned (so that one doesn’t undermine the other, like in “flat” organizations
where there is no hierarchy).
Criteria to evaluate a structure’s strengths and weaknesses:
a) Efficiency  ability to perform tasks reliably.
b) Responsiveness  ability to satisfy the various demands in the environment.
c) Adaptability  ability to innovate and to change dynamically over time.
d) Integrity  ability to provide the glue for consistency in the organization.
Trade-offs between these are often necessary.
Basic forms of Organizational Structure over time:
 Management-centric – Traditional Organizational Structures  when organization
grows, this allows them to scale:
o Functional form  capabilities are grouped together by common function
(HR, Finance, Sales, Engineering…) from the bottom to the top of the org.
 Careers are defined based on experience within that function.
 Coordination across function occurs through the office of the CEO or a
senior executive committee.
 Narrow Span of Control
 Organized according to the inputs to produce a product.
o Divisional structure  groups capabilities delimited by product,
geography, market-segment, client-type… and all the functions needed for
the division are carried out and coordinated vertically within each division.
 Careers – by experience in that division (ex. specialist in B2B or B2C)
 Coordination through CEO
 Wider Span of Control
 Organized according to the outputs.
How to choose among them? Usually, companies start with one product  functional
form; but soon they will need separate divisions for geographic markets, or new
products, and this leads to coordination problems  how to avoid duplicative efforts
and waste of resources  hybrid structures: matrix org.
o Matrix structure  both divisional and functional structures are
implemented simultaneously.
 Employees report to both functional and divisional managers  the
matrix concept is appealing but the problem is the ambiguity in
determining responsibility and authority relationships  people spend
lots of time in meetings to solve these conflicts.
 There must be collaboration in matrix structures, otherwise it will fail.
 Employee-centric – Emerging Organizational Structures  let patterns of
coordination emerge based on the organic networks formed by members of the org
as they do their work.
o Self-managed teams might raise productivity substantially.
o Promise of employee-centric structures  constant adaptability to capture
opportunities for learning. But drawback of lower efficiency.
o It should not be confused with lack of structure; these orgs invest heavily in
defining “structuring” processes.
 Crowd-centric – Self-Organizing  these orgs build platforms upon which the
collective can iteratively self-organize. Ex. open source communities like Wikipedia.
o Chaos can become spontaneous order when need arises.
o Division of labor is fluid as roles are picked up, discarded, and exchanged.
o Integration mechanisms are community-based and technology-enabled.
o Meetings are held when needed. Task forces created spontaneously.
o Authority is distributed.
o Why are they working together so tightly though? Collective Purpose is key.
Intrinsic motivations to achieve goals, like motivation to learn.
Strategy:
- Differentiation Strategy: favors coordination and adaptability over control and
efficiency. → Implies flatter organization and greater decentralization.
- Cost leadership Strategy: favors control and efficiency over coordination and
adaptability. → Implies greater centralization and formation.
Consequences of badly designed structure
- Low motivation and morale
- Late and inappropriate decesions
- Conflict and lack of coordination
- Poor response to new opportunities and external change
- Rising costs
Designing Organizations for Performance (HB)
Steps that managers have to follow to design an organization effectively:
1) Analyze the four Cs:
- Who is the primary customer?
- What are the relevant critical performance variables that define success?
- How much creative tension is needed to stimulate innovation and adaptation to
changing circumstances?
- How important is commitment to others in building customer loyalty and
navigating organizational complexity?
2) Apply the tools at hand:
Resources, measures and rewards, out-of-the-box pressure, and leadership.
3) Design the four levers:
Unit structure, diagnostic control systems, interactive networks, and shared
responsibilities.
4) Align the four spans:
Span of control, span of accountability, span of influence, and span of support
This step-by-step plan is not flawless though  it fails to recognize the dynamic nature of
the levers model.
These design variables are highly interdependent,
they cannot be designed or adjusted in isolation.
The ultimate goal  to influence the span of
attention of people on the ground (the workers
that can make the strategy implementation
successful). What to care off and will pay attention
to.
To know whether the span of attention for
individuals throughout an org is properly aligned
and focused  put yourself in their shoes.
Employees’ span of attention is determined by the things they need to accomplish:
- What resources do I control to accomplish my tasks?
- What measures will be used to evaluate my performance?
- Who do I need to interact with and influence to achieve my goals?
- How much support can I expect when I reach out to others for help?
From this perspective, the diagram can be split into demand and supply of resources:
Span of control and Span of support  supply of organizational resources.
- Span of control  Formal resources, controlled directly by an individual (ex.
decision rights for people, physical facilities, info…)
- Span of support  Soft resources – to what extent can I count on people?
Span of accountability and Span of influence  demand of organizational resources.
- Span of accountability  creates demand for individuals to find the resources
they need to achieve their goals (ex. access to people, facilities, information…).
- Span of influence  also creates demand through out-of-the-box pressures of
interactive networks (ex. dual influence structures, stretch goals…).
Successful organization design  there is
balance, demand = supply 
The X test  to test whether demand and supply of org resources
are in balance.
1. Check the levels of different spans and draw them.
2. Draw lines from control to support (supply) and from
accountability to influence (demand).
3. If the lines intersect  supply=demand  the design is in
alignment.
4. If the lines do not cross  the spans are misaligned  the
resources may be insufficient to meet demand, so there
was a failure in strategy implementation; or resources
exceed the needs of the org, so there was a lack of control
and poor economic returns.
Entrepreneurial gap = the difference between span of control as determined by organization
structure, and span of accountability as set by diagnostic control systems contributed to the
subsequent entrepreneurial orientation of the organization.
As organizations become more complex  it becomes more important that all 4 levers of
organization design are aligned.
The more complex and demanding the task, the more resources are required to execute it.
Example: J&J and GE 
1. Both designs are well aligned, J&J is highly decentralized (with hundreds of
independent companies), and GE is more centralized (just a dozen companies).
2. Both companies have high expectations for performance  span of accountability
is wide.
3. Span of control is narrower (less) for GE because it’s more centralized.  GE has a
wider entrepreneurial gap (span of accountability > span of control)  to achieve
their goals GE managers need to become entrepreneurs in their big corporation.
4. GE CEO made sure to have a wider span of influence compared to span of control
(by implementing dual influence structures and cross-unit initiatives)
Within organization design there is never a fixed, final
solution  managers need to ensure that their org
remains flexible and capable of change over time
(when circumstances and strategy change).
Design interventions: from evolutionary (changing the
soft levers of interactive networks and shared
responsibilities) to revolutionary (changing the hard
levers of unit structure and diagnostic control
systems).
- Soft intervention  if the org is well
positioned in the market, managers may
not wish to change their basic design
structure. But they can change the patterns
of action within the org (ex. they may want
more customer focus, innovation, more
collaboration…)  act on the soft levers (interactive networks and shared
responsibilities)
o 1st step – increase creative tension through dual influence structures (ex.
task forces, cross-unit groups…) or through formal systems (stretch goals,
interactive control systems…)
o These soft interventions can be very effective, but they will fail if there is a
lack of clarity about the other 2 Cs (customer definition and critical
performance variables).
- Hard intervention  major redesign of the org to reposition themselves in the
market, or change customers, or change differentiation basis.
Matrix organizations is an appealing design solution for complex organizations in
competitive markets, because it allows simultaneous focus on multiple dimensions of value
creation.
- A successful matrix org must have all four spans set very wide.
- The more demanding the org and the strategy,
the more resources are needed for successful
implementation.
The potential for problems is very high. The equilibrium is
precarious. A small change in any of the levers will disrupt
the balance of supply and demand.
If an organization wants to succeed, it needs to respond to the basic human needs of people
who populate it.
Lawrence and Nohria  the biological needs of humans can be represented by 4 drives:
1. The drive to acquire  the essence of competitive markets (in the model it is
reflected as the span of control and unit structures).
2. The drive to defend  need for safety and protection of personal property (in the
model it is met by diagnostic control systems and span of accountability).
3. The drive to learn  need to make sense of the world (interactive networks and
span of influence).
4. The drive to bond  the social nature of human beings (shared responsibilities and
span of support).
Tension between drive to acquire and drive to bond  shapes the degree to which people
act selfishly or selflessly.
Tension between drive to learn and drive to defend  shapes the way we respond to
information that challenges our self-image.
The responsibility of leaders:
- An organization’s structure (Organization design)…
o …. should be a function of its specific strategy.
o … is management’s primary tool for focusing and aligning resources to
ensure implementation of business objectives and strategies.
o … affects people, how they relate to each other and how they question
assumptions, experiment, learn. And it is leader’s responsibility.
Informal Networks: the company behind the chart (HBR)
Often what needs more attention is the informal organization  the network of
relationships that employees form across functions and divisions to accomplish tasks faster.
- Formal organization  to handle easily anticipated problems.
- Informal organization  when unexpected problems arise.
Network analysis  to help managers understand the networks and leverage them to solve
organizational problems – translate relationships into maps:
-
-
-
The advice network  to see players in an org on whom others depend, to solve
problems and provide technical info. These are the source of political conflicts and
failure to achieve strategic objectives.
The trust network  to see which employees share delicate political info and back
one another during crises. Examine this when implementing a major change or there
is a crisis.
The communication network  to see the employees who talk about work-related
matters regularly. To identify gaps in information flow – examine these when
productivity is low.
The influence of central figures in informal networks  understanding them (who wields
power in networks) could increase the influence of managers.
- Managers can analyze informal networks in 3 steps:
1) Network survey  to know who talks to whom about work, who trusts whom, and
who advises whom on technical matters.
2) Cross-checking the answers between the employees.
3) Processing the information using a computer program to draw the map.
Week 2 - INCENTIVE and MOTIVATION
Incentives within Organizations (HB)
People take actions that provide immediate rewards and avoid actions that will get them
punished. But not all behavior is purposeful.
- Purposeful people care about the things that companies must allocate (
promotions, influence, working conditions, and money) and they are motivated by
things that companies choose to allocate ( recognition, pats on the back,
perquisites).
Organization’s incentive system = the system of formal and informal rules that determines
how the wealth created/destroyed by the org is divided among the org’s members, which, in
turn, affects the amount of wealth that is created/destroyed by the org.
 the incentive system motivates people to create/destroy value.
Two sub strategies for the firm’s strategy to succeed:
1. Business strategy  how to compete – where the org wants to go
2. Organizational strategy  successful execution of the business strategy – how it
plans to get there.
Business strategy
Managers make the value-creating mission of an org concrete  so they create passion for
the work and pride of the employees.
Organizational strategy
First, create an organizational structure = how to organize
managers and workers into work units.
Second, allocation of decision rights  the authority to make
decisions (also fundamental element of a firm’s incentive
strategy).
Then, determine performance goals and objectives or various
units, teams, or individuals – critical drivers of high-level
profit goals.
Allocation of decision rights
See whether authority for various decisions is high up (top managers) or down low (lowerlevel managers).
In most orgs, some decisions are centralized (top) and other are decentralized (low).
- Centralized  see if they are being carried out – systems to monitor and control
- Decentralized  need for well-developed incentive systems to ensure that those
making decisions are accountable for the decisions they make
More decentralized  more need of accountability of decisions.
3 factors affect the location of decision rights:
1) The location of specific knowledge = knowledge that can’t be easily transferred up
and down hierarchies
o If specific knowledge is deep within the org  decentralization
o If specific knowledge is at the top  centralization
o Lower-level managers often have more specific knowledge on how to best
create value because they are closer to consumers and to problems.
o Decentralization also empowers low managers, inspires them and it raises
intrinsic motivation. It also increases the speed of response to changes.
o It also mitigates the scope of influence activities (or value-destroying politics).
2) The intrinsic motivation of workers
3) The existence of influence activities  centralized  more power  more
influence.
Incentive strategy = it concerns the way that orgs tie rewards and punishments to individual
and team performance in order to motivate value-creating behavior.
Two ways of motivating
1. Intrinsic motivating (inside of you)
2. Extrinsic motivation - Formal incentive systems.
a. Reward or payment
b. Financial performance awards → linked to goals and targets being reached.
→ You need both, you have to have intrinsic motivation to work towards goals. You
need extrinsic motivation to make sure everything is aligned.
Elements of incentive design
- Principal:
o Whose goals/objectives are to be achieved.
o Shareholders, owners, supervisors.
- Agent:
o Acts on behalf of the principal to advance the goals.
o Board of directors, managers, subordinates.
→ A contract connects the principal and the agent. It is an agreement that binds their
relationship. It includes the expectations of the agent & the rewards the agent may receive.
Principal seeks to influence the behavior of the agent by:
- Designing incentives.
- Allocating decision making authority.
→ Agent chooses actions to maximize his/her profit.
→ In the event that incentives are difficult to align:
o Move information and authority to those whose incentives are better aligned
with those of the principal.
Commitment problems in contract:
- Bounded rationality → you can’t know everything.
- Opportunism → even though we have a contract, if we know we can be better off we
will try to negotiate leading to commitment problems.
Information problems
Moral Hazard problems
- A moral hazard is a question of whether the agent is taking due care and acting
diligently to achieve objectives?
- What information does the agent convey to the principal about the actions?
- Which actions are contractible, and which are not?
→ Contractible actions are:
- Observable
- Verifiable
- Enforceable
Example of managerial misbehavior
- Accountant using office time to prepare for the CPA exam.
- Hospital doctors ordering redundant tests.
- R&D scientists pursuing personal projects using company resources.
The incentive problem
- It is hard to link rewards to performance on a personal level.
- Therefore, largely a performance measurement problem.
- Although never be done perfectly, measuring performance well is one of the keys to
a successful incentive strategy.
Incentives and Performance Measurement
Basing pay on objective measures of performance is challenging.
→ ‘’You get what you pay for’’
- Employees choose actions that are rewarded and not actions that increase value.
→ Problem with multiple tasks:
- Value with different tasks e.g. value = task 1 + 2 * task 2.
- Reward = task 1 + task 2.
-
The payment is the same while the tasks might be easier / more difficult. Then the
employee will choose the easier option for the same reward.
Pay to performance relationship
Incentive Intensity Principle states that the optimal intensity of incentives depends on:
1. Additional profits created by additional effort.
2. The accuracy with which activities are evaluated.
3. The employee’s risk appetite.
4. The employee’s responsiveness to incentives.
Compensation and Organization Contexts
- Top managers → stock options
o Greater incentive to act in favor of shareholders.
o Direct link between compensation and stock price.
o Attract motivated and entrepreneurial employees.
o Typically structured in a way that encourages retention (e.g. you may need to
work for 5+ years to receive the full amount of stock options).
o The downside is excessive risk-taking and short-run orientation.
- Sales → sales commissions (reduces monitoring needs)
- R&D → revenue sharing from new products.
- Manufacturing → piece rates.
- Manufacturing → skill improvement? → increase in salary (e.g. getting certified to be
a welder may result in the company giving you a pay raise).
Intrinsic Motivating and Crowding-out Effect.
- Monetary incentives may undermine intrinsic motivation.
- The provision of extrinsic incentives may:
o Provide information about the difficulty, attractiveness of the task, or the lack
of trust.
Crowding Out Effect --> an economic theory arguing that rising public sector spending drives
down or even eliminates private sector spending.
The principal-agent problem:
Unlike owners, managers and workers do not pay the full consequences of their actions 
incentive problem / principal-agent problem / or agency problem = the incentives of
owners, managers, and workers are never aligned  conflicts
- Linking rewards to performance measurement can mitigate the agency problem.
Human nature and monetary incentives:
People care about money and a bunch of other stuff, intangible too  thus incentives are
necessarily broader than money. They allocate anything that people value.
- Money is a very easy and widely used form of incentive – aligning monetary rewards
with performance.
Objective performance measurement:
Having objective performance measures will lessen the incentive problem. But there are
three fundamental reasons why performance is hard to measure accurately:
1) The Controllability problem  difficult to know whether performance was the result
of effort & skill or luck (controllable vs uncontrollable)
2) The Alignment problem  most jobs require multiple tasks, some are easy to
measure, some aren’t.
o Individual performance measures then are incomplete and therefore not
aligned with value creation (they are imperfect proxies for value creation).
3) The Interdependency problem  value is typically created by interdependent groups
of individuals.
o The outcome is the result of joint performance, so it’s difficult to determine
the individual contributions.
Subjective Performance Evaluations
Using subjective performance evaluations can overcome some of the challenges of objective
measures (that are either too narrow, misaligned, or too broad and uncontrollable). Because
objective measures cannot take the “soft” things individuals do in an org into
account (ex. cooperation, mentoring, making a workplace attractive).
The problem is that people do not like to be evaluated, they do not take well negative
evaluations, so managers tend to give positive ones to most people.
- Differentiation is key for subjective evaluations  claiming that some people are
better performers than others, and that people are differentially better in some
areas than others.
But subjective evaluations have other challenges:
- They can become politicized (managers can give better eval to people who they
worked with closely).
- They can lead to the gaming of the system (badly reviewing employees that are
leaving).
Centralized control or decentralized diversity: A guide for matching compensation with
company strategy and structure, Duncan Brown (HBR)
Balance of power between the firm’s central headquarters and its constituent parts can
become a complex issue. With matters of compensation, it’s even more complex.
A company’s formal reward policy is rarely of any help because there will be exceptions and
conflicts.
Recently, trend towards centralization. For greater efficiency.
Three variable types to influence the company’s levels of integration and consistency:
1) Strategy and goals
2) Internal structure
3) Approach to Human Resources Management
The more centralized structure, the more the pay arrangements and benefits are common
for all divisions. And more emphasis on group performance.
- Any mismatch between compensation arrangements and these other variables is
liable to create major problems.
Organizations should be in-between centralization and decentralization
Lecture 6 – Control Systems & Alignment
From Strategy to Implementation: Seeking Alignment (HB)
Implementation  the concrete measures that translate
strategic intent into actions that produce results.
- It requires continuous managerial attention.
- Unlike strategy creation (which is entrepreneurial and
market-oriented), implementation is operationsoriented.
Alignment  a successful strategy needs to be built around a coherent and reinforcing set
of supporting practices and structures.
= a situation in which organizational structures, support
systems, processes, human skills, resources, and incentives
support strategic goals.
4 elements of alignment:
1. Strategy.
2. Processes.
3. People (employees).
4. Customers.
People & Incentives:
Every manager and every employee must be involved with implementation.
- Senior management needs to communicate the strategic intent
- Mid-lower- management needs to translate it into the ways their subordinates work
The company needs to have:
- People with the right skills
- People with the right attitudes
- Resources for people to do their jobs
Ex. cookie company  good strategy, good operating procedures, but they were hiring like
“be your own boss” so the personnel selection process was out of alignment.
Incentives  big part of the people side of implementation.
- Unless employees have real incentives to implement the strategy, they will not
commit to it.
- The best assurance of implementation is a reward system that aligns employees’
interests with the success of the strategy  every employee should have
measurable performance goals with clearly stated rewards for goal achievement.
“The Say-Do problem”  when a company says one thing and does another.
Supportive activities:
Corporate-level strategy is a system of interdependent parts. Its success depends not only
on the quality of the individual elements, but also on how the elements reinforce each
other.
-
Success is more likely when many seemingly unrelated activities reinforce each other
and the overall strategy.
Ex. Southwest Airlines  low-cost fares (primary activity) supported by many
secondary activities  rivals tried to imitate the low prices without the supportive
activities and they failed.
 This way, strategic fit creates competitive advantage and superior profitability.
Organizational Structure:
Organizational structure also needs to be aligned with the company’s strategy.
Some strategies require new organizational structure.
Culture & Leadership:
Culture and leadership must be supportive of both the strategy and the day-to-day work
that implements it.
Culture  a company’s values, traditions, and operating styles.
- A vague quality that is difficult to measure, but it exists and sets the tone for
managerial and employee behavior.
- How people view their workplace, and how things are done.
- To understand a company’s culture, ask “who are your company’s heroes, and what
stories do people talk about them?”.
Culture may be strong or weak.
- Strong cultures  difficult to change without great effort, time, and substantial
disruption.
- If your company has a strong culture  adopting a strategy consistent with it makes
more sense.
Leadership:
- Changing a company’s culture to better align with a new strategy is the responsibility
of the CEO and senior management – it’s a top-down job
- Ideas to approach the task:
o Identify the aspects of culture that must change to support strategy
implementation and concentrate on these.
o Model the behaviors and values you’d like employees to adopt.
o Encourage employees in “town meeting” forums to build consensus and
commitment to change.
o Sponsor celebratory events when milestones are met.
o Set high performance standards.
o Reward people.
Objective = a necessary prerequisite for any purposeful activities. Without objectives, it is
impossible to assess whether the employees’ actions are purposive & to make claims about
an organization's success.
Effectiveness = how to measure your objective.
Efficiency = how much you achieve your objective.
Objectives can be:
- Financial versus non-financial
o Gross Margin or Operational
- Quantified and explicit versus implicit
- Economic, social, environmental, societal.
Basic control issues
- Three issues
o Do they understand what we expect of them?
 Lack of direction
 Employees do not know what the organization wants from
them  f.e. AH = scanning, filling shelves and ordering.
 When this lack of direction occurs, the likelihood of the desired
behaviors occurring is obviously small
 Communication + Reinforcement!
o Will they work consistently hard and try to do what is expected of them?
 Lack of motivation
 When employees ‘choose’ not to perform as their organization
would have them perform
 Because
o Lack of goal congruence
 Individual goals do not coincide with the
organizational goals.
o Self-interested behavior
 Generally, individuals are prone to being ‘lazy’
 E.g. take long lunches, overspend on
things that make life more pleasant, use
sick leaves when not sick, etc.
 More extreme examples of motivational
problems:
 Employee crimes (fraud or thefts).
o Are they capable of doing what is expected of them?  not about ‘are they
smart enough’, but ‘do they have the right knowledge/training’
 Personal limitations
 Sometimes, people are ‘unable’ to do a good job because of
certain personal limitations they have.
 Some examples/causes:
o Lack of requisite knowledge, training, experience.
o Employees are promoted above their level of
competence;
o Some jobs are not designed properly.
 Training; Job Assignment; Job Design
Control-problem avoidance
- Three possibilities:
o Activity elimination
 E.g. subcontracts, licensing agreements, divestment.

Try to avoid the problem through e.g. subcontracts, licensing,
divestment, etc.
 Task seems difficult? → Subcontract it. By eliminating the activity they
avoid the problem.
o Automation
 Computers/robotics eliminate the human problems of inaccuracy,
inconsistency, and lack of motivation.
 Only applicable to relatively easy decision situations
 Automation can be very costly.
o Centralization
 Superiors reserve for themselves the most critical decisions.
 By not delegating, superiors make the decisions themselves.
Control alternatives
- Controls can focus on:
o Action Controls  The actions taken, f.e. if someone is watching, you will
behave different.
o Results Controls  The results produced (requires less attention from a
manager), f.e. give a goal on the beginning of a quarter and let people work,
check on the end if they achieved (do not look at their fingers constantly)).
o People Controls  The types of people employed and their shared values and
norms (control by culture), f.e. onboarding to make sure what the values are.
Afterwards, socialized within the firm and behave well (without the manager
checking), because all others behave according to the culture.
Need for Multiple/Mixed Performance Measures
- The ways in which organizations measure performance send signals to all employees
and stakeholders about what the organization considers as its priorities.
- Using multiple measures of performance helps employees focus on several
dimensions of their jobs rather than just keying in on one dimension
- MCS Designers need to expand their views of the kinds of performance measure to
use
-
Need for measures of quality, speed to market, cycle time, flexibility, complexity,
innovation, and productivity.
If you want to improve performance, you most likely only focus on the tip-of-the-iceberg. But
when you want to make it long-term, go back in time and recruit better people, have better
systems. Gap/delay between the hoped-for defect and the performance.
Control Levers
Develop four systems within the organization. Not only conceptually, but also what you ‘do’
to achieve it.
Beliefs System = how are you setting the culture in
your organization
- Culture = a way to influence people. Not
always positive  people are bounded in
their behavior.
- Do this by Onboarding = socialize people.
Look at their behavior.
Interactive Control Systems (Dynamic) = update
and position yourself. Keep on track with things
that are changing. How to update and modify your strategy when this is needed (by keeping
on track and be current with the operations).
Boundary Systems = ‘Things you should not do because it is bad’. To make sure that your
people understand the borders.
- Not always negative = by setting limits, you create freedom.
o A company is not investing in a particular field. By setting the lines, they can
delegate to their co-workers. If the line what not set; they would need to be
managed more to ask for approval with every decision they want to make.
Diagnostic Control Systems = want to check things ‘in the middle’  if you have f.e. bad
recruitment now, it will eventually lead to bad performance. You want to prevent this.
- Many things you can do in a subtle way, with much ambiguity (generates value for
you input).
- When you see issues/potential problems, this is already a sign of eventual delay.
React as soon as possible. This is called a ‘leading indicator’ (a KPI about the future).
Lagging indicator = a KPI that has been ended
Diagnostic Control System  the formal information system that managers use to monitor
organizational outcomes and correct deviation from preset standards of performance.
- The process:
1. Set a goal in advance
2. Measure output
3. Compute or calculate performance variance
-
-
Why use control system diagnostically:
o To monitor critical performance variables for successful implemtatio of
strategy
o Conserving attention
 Management by exception (automatic pilot)
Risk in using diagnostic control systems
o Measuring the wrong variables
 What gets measured, gets managed
o Building slack into targets  the difference between maximum you could do
and what you actually do.
o Gaming the system  when trying to test the ‘defect’, and people know it,
they could check by removing the ‘defects’ from the system.
Strategy Archetypes and Control Levers
- Strategy as a plan:
o A direction, a guide or course of action into the future, a path to get here to
there.
 Observatory effect = when people get monitored, they will
automatically work harder (to not lose their job).
o Diagnostic control system
In Practice
- Output measurement
- Balanced scorecard
- Dashboard
- Valuation
-
Strategy as a pattern:
o It is about consistency in behavior over time.
o Interactive control system
Interactive control systems  the (in)formal information systems that managers use to
personally involve themselves in the decision activities of subordinates.
- The process:
Boundary systems  are those that define and communicate of business conduct for all
employees
- In practice:
o (Enable creativity) Code of conducts; procedures; budgets; strategic boundary
- Strategy as a position
Beliefs systems  the explicit sets of organizational definities that senior
- Strategy as a perspective
- In Practice: Organizational Culture
o Vision; Core values; Mission statements
Lecture 8 – Organizational Culture
Artifacts = The first part of ‘organizational culture’ that will be observed, are the visible
organizational structures and processes (f.e. fond-types, colors, clothing, etc.).
- Way of working: open (collaborative) OR closed (individual) offices?
- Behavior: how do people work together.
Perspectives of researchers
- Levels
- Types
- Characteristics
- Dimensions (Hofstede)
Edgar Schein – Levels
Types
Characteristics of organizational culture
- Innovation and risk taking
- Attention to detail
- Outcome orientation
- People orientation
-
Team orientation
Aggressiveness
Stability
Dimensions (Hofstede)
- Process-oriented vs Results-oriented
- Employee-oriented vs Job-oriented
- Parochial vs Professional (limited set vs. a whole professional culture)
- Open system vs Closed system
- Loose control vs tight control
- Normative vs Pragmatic
Definition organizational culture -->
“a system of shared meaning held by members that distinguishes the organization from
other organizations” (Robbins & Judge)
Values -->
Basic convictions that: “a specific mode of conduct or end-state of existence that is
personally or socially preferable to an opposite or converse mode of conduct or end-state”
(Robbins)
- Two elements
o A judgmental element: what is right, good or desirable?
o An intensity attribute: How important is it?
- Individual values:
o Freedom OR Self-respect
- Values within the organization
o Being team oriented OR Being Competitive
Norms -->
“Acceptable standards of behavior that are shared by the group’s members”
- F.e. dress-code.
Strong and Weak Cultures
Companies want current graduates because they are still ‘influenceable’. After attracting
them, from a budget, they can be ‘onboarded’.
What do organizational cultures do?
- Boundary-defining role
- Creates sense of identity
- Facilitates commitment
- Enhances stability
- Sense-making and control
But also:
- Might induce institutionalization
- Might be a barrier to change
- Might be a barrier to diversity
- Might be a barrier to M&A’s (dual culture clash)
Organizational Climate --> “The shared perceptions organizational members have about
their organization and work environment” (Robbins & Judge)
- Difficult to distinguish from organizational culture but the general consensus
seems to be that organizational climate is a concept that deals with more
direct observable issues is relatively temporary and subject to direct control.
(Denison, 1996)
Organizational culture: How do you create it and can it be sustained?
Founders create (when founder leaves, big influence on the company)
- Hire
- Indoctrinate and socialize
- Encourage to identify
Sustaining
- Selection
- Top management
- Socialization
o Onboarding
Socialization process
Socialization explained
Organizational socialization process – Collective versus individual
How can you learn the organizational culture as an employee?
- Stories
- Rituals
- Material symbols
- Observing
o How can you get promoted?
o What behavior/attitude is frowned upon?
o Who has a lot of influence on the procedures?
o Who has a lot of influence on the policy?
Culture for performance
Factors shaping managerial behavior
Common pattern of emergence – Corporate culture
How does culture determine performance?
lack of flexibility
+
better goals alignment
+
motivation (identification)
+
reinforcing characteristices needed in an industry
+
reinforces learning &/or -limits it
+
creates common ground – known routines
resistance to change
may reinforce bad behavior (9-5 mentality)
may reduce autonomy
+
brings coherence
may limit innovation
Lecture 9
Final valuation, based on the long-term value for the firm (not short-term).
Motivation and Goals – Vroom’s Expectancy Theory
The strength of a tendency to act depends on:
1. Does effort lead to performance?
Expectancy: If I exert a lot of effort, will I perform well?
2. Does performance lead to an outcome/s?
Instrumentality: If I perform well, will I receive outcomes?
3. Does outcome/s lead to a reward?
Valence: Will the outcomes be satisfying?
Motivational Force – to perform an activity or set of activities is:
- a function of the attractiveness or valence of a goal
multiplied by the expectancy that the activity will result
in the attainment of that goal
- Instrumentality affects valence
Measurement Implications
1. Unrealistic goals are
counterproductive.
2. You get what you measured (if you do
not measure what you want to
achieve, you may end with a result
you do not want to happen).
Goal-setting Theory
Stress-goals: achievable, but hard to get to.
It is good to have correctly designed goals; ranging from easy, towards hard to achieve goals.
What is the expected outcome that is still motivational for the employee?
- Set a budget so that;
→ Budgeted result > Expected result
→ Budget result < best possible outcome
-
-
Performance measurement: Systems
Dashboards / Cockpits (shows the situation, gives an idea of where the organization
is going)
Quality-improvement Systems
o Plan-Do-Check-Act (Total Quality Management)
o Six Sigma
Balanced Scorecard
o Strategy map
o Scorecard
Balanced Scorecard: Review
Why would you need/want this model?
BM
Never ending loop: translate vision  communicate  plan  feedback  translate  ...
Balanced scorecard helps you understand if you are moving in the right direction.
Strategy Map A
Four Perspectives
- Financial  What do shareholders expect from the company?
- Customer  How does the company appear to its clients?
o There is a causal link with this category’s indicators and the financial category
→ E.g. Customer satisfaction is a determining factor of financial performance
- Internal Business Process  How can the company improve the quality of its main
processes?
o The determining factor for customer satisfaction (e.g. how long do customers
have to wait?)
- Learning and Growth  How will the company sustain its ability to change?
→ The competence and motivation of personnel and the performance of
information systems.
o These are the bases that drive all the other categories
Causal Chain:
The financial performance is the outcome you are looking for, when designing you might
start at the end and work backward.
BSG: Lagging Indicators and Leading Indicators
- The Balanced Scorecard Methodology
o Performance modeling based on establishing the causal links between the
indicator categories
- Analyses of the cause and effect relationships within each of the four categories
-
o Combines indicators that show results (lagging indicators) and indicators
linked to performance drivers (leading indicators
Methodology:
o Performance modeling based on establishing the causal links between the
indicator categories.
o Analyses of the cause and effect relationships within each of the four
categories → Combines indicators that show results (lagging indicators) and
indicators linked to performance drivers (leading indicators).
The linkage -->
^
| Customer Objectives & Value Propositions
- Best Total Cost
o “Offer Products and Services That Are Consistent, Timely, and Low-Cost”
- Product Leader
o “Products and Services That Expand Existing Performance Boundaries into the
Highly Desirable”
- Complete Customer Solutions
o “Provide the Best Total Solution to Our Customers”
-
System Lock-in
o “High Switching Costs to End-Use Customers”
o “Add Value to Complementors”
Tableau de Bord (Dashboard), is a management tool that…
- groups the most relevant indicators (financial and non-financial) so that
- managers can properly steer and control performance.
TDB Objectives
- Create a piloting tool that is:
o Adaptable
o Rapidly delivers a targeted information
- Communicate information to all of the managers within a company, not just the
highest level
- Give each manager necessary information on his/her business unit, while
guaranteeing overall consistency of information
How to draw up a Scorecard
1. Define Objectives
- Define the mission and resulting objectives
o Reason to exist
 For example:
 Activity (manufacture, design, sell etc)
 Product (computers, software, consulting etc)
 Even the market (the general public, the public sector, B to B
etc)
- Start from the mission
o What is the activity that the unit is responsible for?
o For whom does it work and why?
- Clarify the objectives
o What are the criteria used to assess the manager?
→ Sales growth, customer satisfaction improvement, etc.
- The objectives
o Are in small number
o Have a defined deadline
o Can be quantitative or qualitative
o Can be measured
Responsibilities must be clearly assigned  organizational chart needed.
The process must be interactive.
o Managers meet their subordinates and identify their responsibilities
o All stakeholders review the organizational chart afterwards.
2. Identify key success factors
- Variables that are performance drivers
o Intermediate performance drivers
o More operational drivers
- Achieving these drivers shapes the overall performance objectives
- KSFs correspond to the action plans
o List of concrete and detailed actions to perform based on strategy
o Identifies the human, material, and financial resources needed
- Output
o A grid of Objectives/Action Variables
o Identifies the impact of each Action Variables on the Objectives
3. Characters of KPIs
- They enable to follow:
o Achievement of results
o Performance of action plans
- They must be:
o Reliable: the measure must reflect a realistic view of the evolution
o Clear and directly linked to the action: the measure must be straight forward
o In limited number: no more than twenty
o Not “manipulable”: the measure must not be “optimized” based on unfair
technical factors
o Predictive: to anticipate possible issue before it occurs
Choose KPI
- Result Indicators:
o Measure the achievement of the objectives: activity level, margin, quality,
cost, etc.
- Means Indicators:
o How the result was achieved
o Compare the results achieved and the means used
o Ratios: units produced/resources used
 Number of contracts signed/ number of salespeople
 Number of units produced/ number of direct labor hours used
- Action Plan Progress Indicators:
o % of employees trained, number of suggestions expressed
- Environmental Indicators:
o Internal (activity of other departments linked).
o External (market, competition)
Lecture 10
Performance  Triangle of Goals, Resources and Results.
- When in manufacturing car-industry, high investments in assets, so higher amount of
resources.
- Startup, with little resources but with a goal.
o The ‘resources’ are not yet relevant. Have precise goals and check, based on
the resources if you have achieved the goal. Also with efficiency: what are the
results, are they on the same line with the goals you have set, and what
resources did you use to achieve it.
Tools to manage performance
Responsibility centers: in a firm, different places that are in charge of particular assets and
operations (cost center, profit centre, etc.). A way to allocate resources.
Cost accounting: costs to produce a product or service.
What do we need tools for?
• Direction
• Limits
• Follow advancement
• Diagnose deviations early
• Motivation
• Purpose
• Priorities
• Planning
• Management of time
• Management of resources (allocation)
Budgeting
1. Why do we need a budget?
2. What issues arise with the budget?
3. What solutions will overcome the issues?
4. Limitations
→ What are the issues surrounding the construction and use of budgets?
→ What can we do to fix these issues?
→ Important to give yourself slack. Slack is the difference between optimal
performance and what you actually achieve.
→ The typical budget timeline has a time horizon issue as you are nearing the end
of the timeline. What does the budget look like after this initial timeline?
Why do we need a budget?
A budget is a way to allocate ‘control’. There is no need for bureaucratic permission because
you are deciding what to do with it (within particular fields and restrictions of course).
- It enables allocation; give away bureaucracy.
• Decentralization – Power delegation
• Planning
• Communication
• Resources Allocation
• Coordination  different departments need to speak together to get to a budget.
• Performance measurement
• Feedback
• Motivation
Budgeted Statement of Cash Flow = make an prospect of what will be sold, and when. In
summer you will sell more sunglasses than in the winter. So the company needs to be
prepared for this in terms of raw materials, production and distribution f.e..
Motivation and Goals – Expectancy Theory (VROOM)
The strength of a tendency to act depends on:
1. Perceived probability that effort will lead to performance-related outcomes
(“expectancy”)
2. Extent to which performance-related outcomes lead to need-related outcomes
(“instrumentality”)
3. Worth that is placed on any given outcome (“valence”)
‘We will only work (and get paid), if we think a battle is ‘not lost’/if we can win.’
1. Unrealistic goals are counterproductive  if the goal is too big; you will stop put in
effort. If you generate a goal and people feel like they cannot achieve it, they will not
invest/’waste’ their resources, capabilities and motivation on it.
2. You get what you measured  even a bad designed performance management
system will have more effect than no PMS.
Behavioral Issues of budgetary control
• Budgets can improve job satisfaction and performance
• Demanding, yet achievable, budget targets tend to motivate better than less demanding
targets
• Unrealistically demanding targets tend to have the adverse effect on managers’
performance
• The participation of managers in setting their targets tends to improve motivation and
performance
Budgeting Limitations
• Cannot deal with the fast-changing environment
• Focuses on short-term financial targets
• Concentrates power in hands of senior managers
• Takes up too much management time
• Based around business functions rather than business processes
• Encourages incremental thinking
• Protects costs rather than lower costs
• Promotes sharp practices among managers
Rolling Budget --> Look at the current budget and update it with new information. Always
look 6 months ahead. During the current budget also start planning ahead with a new
budget.
Feedback Control -->
Slack = difference maximum efficiency and what you actually do, is called ‘slack’. Can also be
financial slack; human resource resources slack; etc.
- When there is always a little bit more to do/to achieve, this gives opportunities for
growth (if you are always doing top-efficiency, you will less likely grow).
- Employees create their own ‘slack’, by not setting the bar that high  when you
have to sell products, you tell your boss you will sell at most 8.000 products, while
you can easily sell 10.000 to create your own ‘margin’.
o Type of ‘gamesmanship’ = try to achieve a more achievable business.
Types of budgets:
Flexible budgets and variances  help managers gain insights in why the actual results differ
from the planned performance.
Static Budget  A static budget is a budget prepared for only one level of activity.
- It is based on the level of output planned at the start of the budget period.
- The master budget is an example of a static budget.
Static-budget variance 
- A favourable variance for revenue items means that actual revenues exceeded
budgeted revenues.
- A favourable variance for cost items means that actual costs were less than budgeted
costs.
- Favorable - Noted F or Fav
- Unfavorable - Noted U or Adv
Flexible-budget variance  The flexible-budget variance is the difference between the
actual results and the flexible-budget amount for the actual levels of the revenue and cost
drivers. (Also called Total variance).
- The flexible-budget variance arises because the actual selling price, variable costs per
unit, quantities and fixed costs differ from the budgeted amount.
Sales variances
- Sales volume variance: the difference between the profit as shown in the original
budget and the profit as shown in the fixed budget for the period.
- Sales price variance: the difference between the actual sales figure for the period and
the sales figure as shown in the flexed budget.
- Sales quantity variance: the difference between the budgeted amount based on
actual quantities sold of all products and the budgeted mix and the amunt in the
static. (based on the budgeted quantities to be sold of all products and the budgeted
mix).
- Sales mix variance: the difference between the budgeted amount for the actual sales
mix and the budgeted amount if the budgeted sales mix had been unchanged.
Zero-based budgeting (ZBB)
- Many companies use last year figures and an estimated change percentage to
prepare their budgets. Thus, inefficiencies in activities and
processes are held for the next period, then the next one and so on.
- Though, controlling means improving company’s efficiency.
-
The ZBB approach means making a budget by assuming that previous activities did
not exist. This forces organizational members to justify the need of each one of their
budgeted expenses and their compliance with the strategic objectives.
Variance Analysis
Material variances
- Total direct material variance: the difference between the actual direct material cost
and the direct material cost according to the flexed budget (budgeted usage for the
actual output)
- Direct material usage variance (or efficiency): the difference between the actual
quantity of direct materials used and the quantity of direct material according to the
flexed budget (budgeted usage for actual output). The quantity is multiplied by the
budgeted direct material cost per unit.
- Direct material price variance: The difference between the actual cost of the direct
material used and the direct cost allowed (actual quantity of material used at the
budgeted direct material cost).
Activity-based budgeting (ABB)
Kaizen Budgetting = you budget less time than you advance.