1.​ Introduction
From strategy to implementation: seeking alignment
Strategy vs implementation
●​ Strategy creation focuses on analysis, planning, and goal-setting (thinking phase). It is entrepreneurial,
involves market positioning, and is usually done at the top level of management.
●​ Implementation is about execution and achieving goals (doing phase). It requires ongoing operational
work, process management, and coordination across the entire organization.
→ many businesses struggle with turning strategy into results because they overlook execution challenges.
Alignment
●​ Strategy alone is ineffective unless it aligns with people, processes, structure, incentives and leadership.
●​ Misalignment leads to failure - when a company’s daily operations and workforce do not support its
strategic goals, implementation breaks down.
●​ Alignment is necessary across:
1.​ People - ensuring everyone understands and contributes to the strategic goals.
2.​ Incentives - reward system should be in place, linking employees' performance to strategic success.
3.​ Supportive activities - activities must support the strategy, ensuring efficiency and eliminating errors or
wasted time to create a competitive advantage.
4.​ Organizational structure - should be agile and adaptable to support the strategy, enabling quick
decision-making and effective monitoring.
5.​ Culture - values, traditions, and operating style should align with the strategy. Changing culture requires
leadership and time.
6.​ Leadership of business - senior leadership must guide company, model desired
behaviors, and drive cultural and strategic alignment through top-down actions.
The Seven S framework (McKinsey) - a model for strategy implementation
→ helps organizations analyze and improve their alignment between strategy and
operational execution. The 7 elements reinforce one another and must be in sync for effective implementation.
1.​ Strategy - the company’s plan for achieving competitive advantage.
2.​ Structure - the way the organization is designed (hierarchy, departments, reporting lines).
3.​ Systems - internal processes, workflows, and IT systems that support operations.
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4.​ Style - leadership approach and management behavior (e.g. top-down vs collaborative).
5.​ Staff - talent, recruitment, and workforce capabilities.
6.​ Skills - core competencies that give the company an edge.
7.​ Superordinate goals - shared vision, values, and company culture that guide decision-making.
This framework
●​ Ensures all parts of an organization work together to support the strategy.
●​ Helps companies identify gaps between strategic intent and actual execution.
●​ Guides decision making on structural or cultural changes needed for better alignment.
Common challenges in implementation
1.​ The “say-do problem” - when a company claims to follow a strategy but fails to align incentives and actions
with it.
●​ Example: A company promises a pay-for-performance model but distributes bonuses evenly, failing to
reward high performers.​
●​ Solution: Ensure incentives and rewards are tied directly to strategic objectives.
2.​ Lack of employee alignment - employees are not trained, motivated, or structured to support the strategy.
●​ Example: A cookie company hired managers who wanted autonomy, but the business needed them to
follow strict operational procedures.
●​ Solution: Hire and train employees with the right skills and mindset for the strategy.
3.​ Poor operational support for strategy - business operations are not designed to deliver on strategic
promises.
●​ Example: Herman Miller introduced a strategy to serve small businesses but found its existing order
fulfillment system too slow.
●​ Solution: Redesign processes to eliminate inefficiencies and align operations with strategic goals.
4.​ Organizational structure blocks execution - the company’s structure does not support rapid decision
making or cross functional collaboration.
●​ Example: In military strategy, Blitzkrieg worked because German forces were structured to move fast,
while opponents had rigid, slow-moving setups.
●​ Solution: Adjust organizational design to fit strategy (e.g. smaller agile teams for speed-focused strategies).
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5.​ Company culture conflicts with strategy - strong company culture can resist change if it does not support
the new strategy.
●​ Example: Airlines with a history of rigid labor contracts struggle to adopt cost-cutting strategies like
low-cost carriers.
●​ Solution: Leadership must drive cultural change through clear communication, role modeling, and
rewarding desired behaviors.
Turning great strategy into performance (Mankins & Steele, 2005)
Strategy-to-performance gap
●​ Companies only achieve 63% of the financial performance promised in their strategies.
●​ Main problem: leadership struggles to determine if underperformance is due to poor strategy or bad
execution - often pulling the wrong levers to fix it.
●​ Common mistake: assuming that just working harder or smarter will fix the issue.
Biggest causes of strategy-to-performance gap
●​ Companies fail to track actual performance vs strategy projections.
-​
Less than 15% of companies compare actual results with previous strategic forecasts.
-​
This leads to repeated underperformance without learning from past mistakes.
●​ Multiyear financial projections are unreliable.
-​
Forecasts often overestimate long-term potential while underestimating short-term challenges
(hockey-stick effect).
-​
Creates a pattern of chronic underperformance.
●​ Poor resource allocation and execution planning.
-​
Failure to deploy resources correctly (timing & amount) strips away 7.5% of strategy value.
-​
Poor communication costs another 5.2% due to confusion on execution.
●​ Performance bottlenecks are invisible to top management.
-​
Companies don’t track early warning signs of execution failure, making it impossible to correct course in
time.
●​ A culture of underperformance develops.
-​
When failure to meet targets becomes the norm, accountability weakens.
-​
Employees stop seeing commitments as binding, leading to self-protection rather than problem-solving.
Closing the strategy-to-performance gap
1.​ Keep strategy simple and concrete - when strategy is too abstract, employees don’t know how to execute
it.
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2.​ Debate assumptions, not just forecasts - financial projections alone are misleading if underlying market
assumptions are flawed.
3.​ Use rigorous framework and speak common language - makes sure everyone understands strategy in the
same way.
4.​ Discuss resource deployment early - must happen alongside strategic planning, not afterwards.
5.​ Clearly identify execution priorities - prioritize the key moves that will drive success.
6.​ Continuously monitor performance - helps catch problems early.
7.​ Reward and develop execution capabilities - execution depends on hiring, developing and incentivizing the
right talent.
Cultural and financial benefits of closing the gap
●​ Performance can increase by 60-100%.
●​ Investors reward companies that deliver on their strategies.
●​ A culture of overperformance develops - leaders gain confidence, and employees are motivated.
●​ Talent attraction improves - top performers want to work at high-execution companies.
2.​ Performance management
Measuring performance
Why organizations measure performance
1.​ Improvement – identifies and corrects declining trends.
2.​ Planning & forecasting – tracks progress and adjusts strategies/budgets.
3.​ Competition – compares performance against rivals to improve weaknesses.
4.​ Rewards & incentives – ensures fair distribution of bonuses based on performance.
5.​ Regulatory compliance – meets government and industry standards (e.g., ISO 9000).
Who uses performance measurement data?
●​ Executives - assess strategy effectiveness and take corrective action.
●​ Unit managers - evaluate employee productivity and motivation.
●​ Shareholders and analysts - determine investment potential.
●​ Employees - understand their contribution to company goals.
Key performance indicators (KPIs)
Measure success in different aspects of performance and reflect Critical Success Factors (CSFs)—key activities
needed to achieve strategic goals.
Three types of KPIs:
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1.​ Process KPIs – Measure efficiency (e.g., product-repair cycle time).
2.​ Input KPIs – Track resources used (e.g., budget allocation).
3.​ Output KPIs – Assess results (e.g., ROI, market share, Economic Value Added).
Performance measurement systems
A formal PM system aligns business units with their strategic goals, ensuring all teams contribute to overall success.
Several types:
●​ Dashboards / cockpits - track metrics and targets on a scheduled basis.
●​ Quality improvement systems:
-​
Plan-Do-Check-Act (PDCA) – A cycle for continuous improvement.
-​
Six Sigma – Reduces errors to improve business processes.
-​
Baldrige National Quality Program – Evaluates performance across leadership, strategy, and
customer focus.
●​ Balanced scorecard (BSC) - (strategy map and scorecard) incorporates financial and non-financial metrics
across four perspectives:
1.​ Financial
2.​ Customers
3.​ Internal processes
4.​ Workforce learning and development
Steps to implement performance measurement
1.​ Define what to measure
-​
Identify objectives and CSFs.
-​
Choose relevant, balanced, and reliable performance metrics.
2.​ Gather data and set targets
-​
Use trends, employee input, and SWOT analysis to define targets.
-​
Communicate performance data effectively.
3.​ Analyze and respond to performance data
-​
Look for trends and causes of variations.
-​
Adjust targets or strategies as needed.
Common pitfalls
-​
Too many or too few metrics
-​
Unaligned or outdated objectives
-​
Overly aggressive targets
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-​
Manipulating or misinterpreting data
-​
Poor responses to shortfalls
Using the balanced scorecard as a strategic management system (Kaplan & Norton, 2007)
Strategy maps: converting intangible assets into tangible outcomes (Kaplan & Norton, 2004)
The BSC and strategy map help organizations: translate strategy into action by intangible assets (knowledge,
processes, and innovation) to tangible business outcomes (profitability, customer value, and efficiency), ensuring:
●​ Clear strategy definition and communication.
●​ Alignment between individuals, teams, and corporate goals.
●​ Tracking of strategy execution with measurable objectives.
Define objectives → define KSFs → choose KPIs → set targets
Leading vs lagging indicators
●​ Financial results are lagging indicators (reflect past performance).
●​ Non-financial measures are leading indicators (predict future success or
failure).
4 perspectives of the BSC
1.​ Financial perspective (lagging indicators - outcomes)
●​ Defines the tangible results of strategy (e.g., revenue,
profitability, cash flow).
●​ Strategy balances short-term efficiency (cost control, asset
utilization) with long-term growth (new markets, innovation).
●​ Companies at different stages focus on:
-​
Early-stage companies → Focus on sales growth rather than profitability.
-​
Sustaining companies → Prioritize return on capital, operating income, and profit margins.
-​
Mature businesses → Emphasize cash flow and harvesting returns.
2.​ Customer perspective (leading indicators - value proposition)
●​ Defines the company’s differentiation strategy in customer markets:
-​
Low cost leader (e.g., Walmart, McDonald’s).
-​
Product innovation & leadership (e.g., Mercedes, Apple).
-​
Customer solutions & strong relationships (e.g., IBM, consulting firms).
●​ Tracks customer satisfaction, retention, and market share.
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3.​ Internal process perspective (leading indicators - execution)
●​ Focuses on critical internal processes necessary to achieve financial and customer goals, includes:
●​ 4 process clusters:
1.​ Operations Management: Sourcing, production, delivery.
2.​ Customer Management: Acquiring, retaining, and growing customers.
3.​ Innovation: R&D, new product development, market expansion.
4.​ Regulatory & Social: Compliance, sustainability, ethical operations.
●​ Companies must balance:
-​
Short-wave value creation (efficiency and improvement of existing operations, cost reduction).
-​
Long-wave value creation (innovation and long-term strategic growth).
4.​ Learning and growth perspective (leading indicators - foundation)
●​ Provides infrastructure needed for strategy execution through:
-​
Human capital: Skills, leadership, and talent development.
-​
Information Capital: IT systems, knowledge sharing, data management.
-​
Organizational Capital: Culture, teamwork, adaptability.
●​ Double-loop learning ensures companies refine their assumptions about cause-and-effect relationships,
leading to continuous improvement.
Personal and corporate scorecards
●​ 3 levels of information:
1.​ Corporate objectives, measures and targets.
2.​ Business unit targets derived from corporate goals.
3.​ Individual / team targets aligned with corporate goals.
●​ Ensures strategy is communicated clearly and turned into actionable tasks.
How BSC and strategy map work together
●​ Strategy Maps visually link the four perspectives through cause-and-effect relationships (e.g., improving
internal processes → better customer service → stronger financial performance).
●​ The Balanced Scorecard turns these strategic objectives into measurable targets, KPIs, and performance
reviews.
How companies use the balanced scorecard
●​ Clarify and update strategy.
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●​ Communicate strategy across all levels of the organization.
●​ Align individual and unit goals with corporate strategy.
●​ Link strategic objectives to long-term targets and budgets.
●​ Conduct performance reviews to track success and improve strategy.
→ the full scorecard
3.​ Organization design
Lecture notes
Two determinants of structure
1.​ Environment - the faster the environment changes, the greater
need for a strategy that emphasizes adaptation → structure
needs to support that strategy.
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2.​ 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 formalization.
Consequences of badly designed structure
●​ Low motivation and morale
●​ Late and inappropriate decisions
●​ Conflict and lack of coordination
●​ Poor response to new opportunities and external change
●​ Rising costs
Do you have a well-designed organization? (Goold & Campbell, 2002)
Why most organizations are poorly designed
●​ Organization design is often unstructured, shaped by politics rather than strategy.
●​ Symptoms of poor design:
-​
Unclear responsibilities stall strategic initiatives.
-​
Turf wars prevent collaboration and knowledge sharing.
-​
Complex structures (e.g. matrix organizations) create confusion.
●​ Solution: a structured framework with 9 key tests to evaluate or improve organizational design.
The 4 “fit” tests - ensuring alignment with strategy and people
1.​ Market advantage test
-​
Does the structure support competitive advantage in target markets?
-​
Ensure key market segments receive sufficient management attention (e.g., dedicated business units).
2.​ Parenting test
-​
Does corporate headquarters add value to the organization?
-​
Define corporate-level roles clearly (e.g., coordination, knowledge sharing, R&D investment).
3.​ People test
-​
Does the design reflect the strengths and motivations of key personnel?
-​
Avoid misalignment between executives’ skills and their assigned roles.
-​
Ensure pivotal positions are filled with top talent.
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4.​ Feasibility test
-​
Have regulations, stakeholder interests, IT systems, and corporate culture been considered?
-​
Example: Some industries require separate legal entities in different regions.
The 5 “good design” tests - refining structure and processes
5.​ Specialist cultures test
-​
Protect teams that require unique cultures (e.g. innovation labs, e-commerce divisions).
6.​ Difficult links test
-​
Identify and solve cross-unit collaboration problems (e.g. pricing conflicts between product and customer
units).
7.​ Redundant hierarchy test
-​
Remove unnecessary management layers to improve agility.
-​
Rule of thumb: each management level should add at least 10% value to justify its existence.
8.​ Accountability test
-​
Ensure every unit has clear performance measures and responsibility for results.
-​
Avoid “shared responsibility” problems that create blame-shifting.
9.​ Flexibility test
-​
Can the organization adapt to new strategies and market changes?
-​
Identify potential roadblocks and create processes for innovation.
When you identify a problem with you design
●​ Try to fix it without substantially altering it,
●​ Only then make fundamental changes or even
reject the design.
Note on organization structure (Bernstein & Nohria, 2016)
Management centric structures
1.​ Functional structure
-​
Capabilities are grouped by function (HR, finance, sales, etc.)
-​
Employees are dedicated to specific functions, coordination occurs through the CEO or senior
committee.
2.​ Divisional structure
-​
Capabilities are grouped by product, geography, or market segments.
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-​
Divisions are responsible for all necessary functions within their scope, reducing the need for
cross-functional coordination.
3.​ Matrix structure
-​
Combines functional and divisional structures.
-​
Employees report to both functional and divisional managers, which can lead to
confusion and lack of jurisdictional clarity.
Employee centric structure
1.​ Self managed teams
-​
Emphasizes adaptability and learning, with the potential for more flexible and innovative
solutions.
-​
Can be highly effective but may come at the cost of efficiency.
2.​ Employee centric organization
-​
Built from bottom up, focusing on individual needs and self-alignment.
-​
Aims to adapt quickly to changes but may face challenges in maintaining structure and clarity.
Crowd centric, self organizing structures
●​ Relies on platforms where individuals self organize (e.g. open source communities, hackathons).
●​ Driven by purpose and intrinsic motivation, with organization emerging organically based on needs.
Key considerations
●​ Efficiency: The ability to perform tasks reliably with minimal resources.
●​ Responsiveness: Satisfying environmental demands and customer needs.
●​ Adaptability: Innovating and changing over time to stay competitive.
●​ Integrity: Consistency between the organization’s identity, individual motivations, and external demands.
Myths and realities
●​ The best structure depends on the context of the organization.
●​ Newer structures don’t eliminate management tasks or lead to equal empowerment.
●​ Organizations don’t belong strictly to one category; they can evolve.
Informal networks: the company behind the charts (Krackhardt & Hanson, 1993)
Why formal organizational charts don’t tell the whole story
●​ Formal structures define roles, reporting lines, and decision making authority.
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●​ However, informal networks - the real relationships between employees - often drive communication,
influence, and collaboration more than formal hierarchies.
●​ Leaders who fail to recognize informal networks risk inefficiency, poor decision making, and overlooked
talent.
3 types of informal networks
1.​ Advice networks (who seeks expertise?)
●​ Identify key problem solvers and knowledge sources in an organization.
●​ Often don’t align with formal hierarchies - real expertise may be lower down the chain.
●​ Application: helps managers find hidden influencers and improve decision making.
2.​ Trust networks (who confides in whom?)
●​ Show who trusts whom for sensitive advice and support.
●​ Critical for team cohesion, collaboration, and managing change.
●​ Application: helps leaders identify potential conflicts and ensure trust-based leadership.
3.​ Communication networks (who talk to whom?)
●​ Track how information actually flows within an organization.
●​ May reveal bottlenecks or disconnects that slow down execution.
●​ Application: helps streamline knowledge sharing and decision making across teams.
How can leaders use informal networks to improve performance
●​ Map the networks - use network analysis tools to uncover hidden relationships and power structures.
●​ Strengthen weak links - integrate isolated employees, address bottlenecks where a single person controls
too much information.
●​ Leverage trust networks for change management - employees resist change when trust is lacking.
●​ Improve decision making - formal decision makers should consult informal influencers before making
major changes.
→ formal structures should integrate with informal structures to optimize performance.
4.​ Incentive and motivation
Incentives within organizations (Hall, 2006)
Why incentives matter
●​ They are extrinsic motivation.
●​ Firms that seek to achieve strategic goals need alignment of behavior of various participants.
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●​ People respond to incentives - whether monetary, recognition based, or tied to decision making power.
●​ All companies have incentive systems, whether intentional or not. The key question is: “do incentives drive
value creation, or do they encourage inefficiency and misalignment?”
Designing an effective incentive system
●​ Business strategy vs organizational strategy
-​
Business strategy = where the organization wants to go (mission, market position).
-​
Organizational strategy = how the company gets there (structure, decision making, incentives).
●​ Incentives are built on 3 key elements
1.​ Allocation of decision rights - who has authority over pricing, hiring, budgeting, etc?
2.​ Performance measurement - objective (metrics, KPIs) vs subjective (peer review, leadership).
3.​ Rewards and punishments - salary, promotions, influence, recognition, or cultural norms.
●​ Centralization vs decentralization
-​
Centralized → needs strong monitoring and control to ensure compliance
-​
Decentralized → needs well designed incentives to align employees’ decisions with organizational goals.
The principal-agent problem - aligning incentives with value creation
●​ Arises when employees don’t bear the full consequences of their decisions, leading to misaligned
incentives.
●​ The agent may act in a way that benefits them personally, but not the principal, because they don’t fully
bear the costs of their actions. For example, an employee who doesn’t have to bear the full cost of poor
performance (such as inefficiency or error) might prioritize short-term benefits over long-term success or
overall efficiency.
●​ Solution: link incentives directly to value creation without overcomplicating measurement.
●​ Contractible actions are observable, verifiable, and enforceable.
●​ 3 common performance measurement challenges:
1.​ Controllability problem - was success due to effort or external luck?
2.​ Alignment problem - does the performance metric capture all aspects of value creation?
3.​ Interdependency problem - how do we fairly reward individuals in a team-based environment?
●​ Objective vs subjective performance evaluation
-​
Objective - measurable but often incomplete (sales, profit margins).
-​
Subjective - fill gaps but can be biased or politicized (leadership, teamwork).
→ best approach? → mix of both.
Managing incentives for long term success
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●​ Monetary incentives vs intrinsic motivation
-​
People value more than just money - autonomy, recognition, meaningful work.
-​
Great organizations balance financial rewards with a culture that fosters motivation.
●​ Challenges in implementing incentive systems
-​
Too rigid - formula based incentives fail to capture real contributions.
-​
Too vague - subjective evaluations create room for favoritism and dissatisfaction.
The psychological costs of pay-for-performance (Larkin et al., 2012)
Incentive intensity principle - 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.​ Employee’s responsiveness to incentives.
Psychological costs of pay-for-performance and compensation of employees
●​ Role of compensation
-​
Motivates employee effort and attracts and retains
high ability employees.
●​ Previous research
-​
Builds on agency theory and focuses on executive
compensation.
-​
Employee compensation is tied to firm decision
making and has widespread implications for
organizational performance.
5.​ Control and alignment
Lecture notes
Objective setting
●​ Objectives are a necessary prerequisite for any purposeful activity.
●​ Without objectives, it is impossible to
-​
Assess whether the employees’ actions are purposive;
-​
Make claims about an organization’s success.
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●​ Objectives can be
-​
Financial vs non-financial
-​
Quantified vs implicit
-​
Economic, social, environmental, societal
Basic control issues
1.​ Lack of direction
-​
Employees do not know what the organization wants from them
-​
The likelihood of the desired behaviors occurring is obviously small
→ communication + reinforcement
2.​ Lack of motivation
-​
Employees choose not to perform as their organization would have them perform
-​
Because: lack of goal congruence; self-interested behavior
3.​ Personal limitations
-​
Sometimes people are unable to do a good job because of certain personal limitations
-​
Lack of requisite knowledge, training, experience
-​
Employees are promoted above their level of competence
-​
Some jobs are not designed properly
Control problem avoidance
1.​ Activity elimination
-​
Subcontracts, licensing agreements, divestment
2.​ Automation
-​
Computers eliminate the human problems of inaccuracy, inconsistency, and lack of motivation
-​
Only applicable to relatively easy decision situations
-​
Can be very costly
3.​ Centralization
-​
Superiors reserve for themselves the most critical decisions
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Control in an age of empowerment (Simons, 1995)
●​ Modern businesses face the challenge of balancing control with employee empowerment.
●​ Too much control stifles innovation, too little can lead to inefficiencies and excessive risk taking.
Four levels of control - help organizations maintain control while fostering innovation and adaptability.
1.​ Belief systems - include core values, mission statements, and guiding principles that inspire employees and
provide a shared sense of purpose. By reinforcing a strong organizational culture, companies can align
employee actions with long-term strategic goals.
2.​ Boundary systems - establish formal rules, codes of conduct, and risk parameters that employees must
operate within. They define what not to do, ensuring that empowerment does not lead to reckless
decision making.
3.​ Diagnostic systems - are the traditional performance measurement tools, such as KPIs and financial
metrics, that track progress toward business objectives. They help organizations maintain efficiency and
accountability.
4.​ Interactive control systems - involve open communication and active engagement from leadership,
encouraging employees to participate in problem-solving and innovation. They are especially useful in
dynamic and uncertain environments where adaptation is necessary.
→ control systems should not be viewed as mechanisms for restriction, but as tools to channel innovation and
maintain strategic focus.
Aligning performance goals and incentives (Simons, 2016)
●​ Goals - broad aspirations.
●​ Objectives / targets - specific, measurable and time-bound criteria to assess progress.
●​ Performance goals - desired levels of accomplishments to measure actual results. Provide guidance to
employees on how their actions contribute to the strategy.
Purpose of performance goals
●​ Strategic communication - employees infer business strategy from performance goals.
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●​ Clear communication - helps convey management’s priorities to employees.
●​ Enhancing return on management (ROM) - effective performance goals allow top management to focus on
strategic decisions while optimizing operational effectiveness.
Critical performance variables
●​ Are essential for strategy implementation success.
●​ These directly impact the business’ strategic objectives.
●​ Two step process for determining critical performance variables:
1.​ Identify potential performance drivers that influence:
-​
Effectiveness (probability of success).
-​
Efficiency (potential for marginal gain).
2.​ Identify critical performance variables that could cause strategy failure if not achieved.
●​ Types of measures:
-​
Financial measures - quantitative values such as revenue or profit.
-​
Nonfinancial measures - data not typically found in accounting systems, like customer satisfaction
or product quality.
3 tests for effective performance measures
1.​ Alignment with strategy - measures should reflect and support the business strategy.
2.​ Measurability - measure objectives must be objective, complete and responsive:
-​
Objective - independently verifiable.
-​
Subjective - based on personal judgment
-​
Complete - covers all relevant aspects of performance.
-​
Responsive - reflects managerial influence.
3.​ Link to value - should relate to organizational value creation. Output measures are more reliable for
gauging economic value.
How many measures for each employee?
●​ Cognitive load - employees should be accountable for a manageable number of performance measures.
●​ The magic number 7 (+/- 2): cognitive theory suggests humans can manage that many pieces of
information.
Setting the performance bar
●​ Benchmark comparisons - involves comparing performance against the best in the industry.
-​
External benchmarking - compare with industry leaders.
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-​
Internal benchmarking - compare between branches or units within the same company.
●​ Motivating effort - optimally challenging - performance goals should be challenging but not impossible.
●​ Who should set performance goals?
-​
If information needed to set goals is spread across an organization → participative goal-setting.
-​
If information is centralized → less consultation is required.
-​
Alternative view: many individuals are self-motivated by achievement itself if they believe the
goal is legitimate and are involved in the goal-setting process.
●​ Multipurpose of performance goals
-​
Communication of strategy
-​
Motivation
-​
Planning and coordination
-​
Early warning signals
-​
Ex post evaluation
Aligning incentives
●​ Intrinsic motivation - driven by the belief that goals are legitimate and valuable. Can be enhanced by
emphasizing positive ideals and involving employees in decision making.
●​ Extrinsic motivation - driven by rewards such as bonuses or recognition, linking incentives to performance.
3 key decisions in designing incentives
1.​ Bonus pool - determine the amount of money set aside for bonuses and rewards.
2.​ Allocation formula - how bonuses are distributed based on:
-​
Individual performance
-​
Business performance
-​
Corporate performance
-​
Performance weight varies based on employee role (e.g., lower-level employees focus on
personal performance, senior managers on business/corporate performance).
3.​ Types of incentives - financial incentives include:
-​
Cash rewards
-​
Gifts or prizes
-​
Deferred cash payments
-​
Company stock options
Assessing achievement levels
●​ Objective methods
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-​
Use formulas to measure performance against goals (e.g., revenue growth).
-​
Less ambiguous and less frequent, making it easier for managers to focus on other tasks.
-​
Risk: Managers might manipulate ratios (e.g., cutting assets) to meet targets.
●​ Subjective methods
-​
Performance assessed through managerial knowledge and judgment.
-​
Time-consuming and dependent on trust.
-​
Risk: Managers may focus on short-term gains at the expense of long-term value.
Managing risks in incentive design
●​ Create performance matrices that reward both efficiency (e.g., ROCE) and growth (e.g., asset expansion)
to prevent short-term, damaging decisions.
●​ ROCE = return on capital employed - higher ROCE indicates that a company is efficiently using its resources
to generate profits.
6.​ Tools and systems of strategy execution
Lecture notes
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’)
→ Motivation is the sum of products of the valences of all outcomes, multiplied by the strength of expectancies
that action will result in the achievement of these outcomes.
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
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●​ Based around business functions rather than business processes
●​ Encourages incremental thinking
●​ Protects costs rather than lower costs
●​ Promotes sharp practices among managers
Developments in budgeting
●​ Zero-based budgeting (ZBB) - making a budget by assuming that previous activities did not exist, forcing
organizational members to justify the need of each one of their budgeted expenses and their compliance
with strategic objectives.
●​ Activity-based budgeting (ABB) - is the reverse of the ABC process: budgeted output of cost objects →
determine the necessary activities → determine the resources required for the budget period.
Note on flexible budgeting and variance analysis (Young)
Paper discusses the importance of aligning responsibility with control in management systems and introduces two
techniques for improving cost management: flexible budgeting and variance analysis.
Aligning responsibility with control
●​ Organizations must design management control systems that ensure managers are only held accountable
for costs they can control.
●​ Responsibility centers help distribute control, but accurate measurement of controllable costs is essential.
●​ Timely and useful cost reports improve managerial decision making.
1.​ Flexible budgeting - a flexible budget adjusts for volume changes before measuring a manager’s
performance, ensuring fairness in cost evaluation. Unlike fixed budgets, they account for variable expenses
that fluctuate with business activity. Implementation:
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Expenses are categorized as fixed or variable based on their nature.
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A cost formula is used to calculate expected costs at different levels of activity.
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Each period, the budget is adjusted (or “flexed”) based on actual performance.
2.​ Variance analysis - helps explain differences between budgeted and actual figures (financial deviations),
by pinpointing the root causes of budget deviations. Types:
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Spending variance - costs incurred beyond what was expected at a given volume.
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Volume variance - differences due to changes in business activity levels.
→ a well designed management control system aligns responsibility with decision making power, improving
efficiency and strategic decision making.
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The real budget crisis: stop rewarding forecasting and negotiating instead of real performance (Pfeffer, 2007)
Most organizations rely heavily on budgets to assess performance, allocate resources, and determine rewards.
However, this focus on meeting budget targets creates perverse incentives—rewarding executives for their ability
to forecast and negotiate budgets rather than for driving actual business success.
Key problems with traditional budgeting
●​ Budgets dictate performance evaluations - companies judge success by whether managers hit budget
targets rather than actual market performance.
●​ Budgeting consumes enormous resources - process takes up lots of time and money.
●​ Encourages gaming the system - managers negotiate easily achievable turrets to secure bonuses, leading
to underperformance rather than true accountability.
●​ Resources are allocated inefficiently - spending decisions are often based on available budget slack rather
than actual business needs.
Alternative approach
Beyond budgeting model → advocates for flexible, real-time performance evaluation based on external
benchmarks rather than rigid budget targets.
●​ Performance should be measured against market realities, not internal projections.
●​ Financial incentives should reward true business outcomes, not budget accuracy.
●​ Decentralized, agile decision making can improve resource allocation.
7.​ Change management
Lecture notes
2 basic types of change
1.​ Reactive change - closing a performance gap (what is and what should be) → urgency for results is high.
2.​ Proactive change - closing an opportunity gap (what is and what could be) → urgency for results is low.
6 types of change levers
●​ Enabling - these levers raise awareness for targets.
1.​ Credibility
2.​ Communication
3.​ Training
●​ Substantive - these levers facilitate adoption by targets.
4.​ Technical
5.​ Political
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6.​ Cultural
Leading change: why transformation efforts fail (Kotter, 2007)
Organizational transformation is essential for companies to stay competitive, yet over 70% of change initiatives fail.
Kotter argues that failures occur because companies underestimate the difficulty of change and lack a structured
approach. The most common cause is skipping key steps or making fundamental mistakes in execution.
Kotter’s 8 step change model
Mobilization phase (unfreeze)
1.​ Establishing a sense of urgency - creating awareness of market realities and the risks of inaction.
2.​ Forming a powerful guiding coalition - assembling key leaders who drive the change effort.
3.​ Developing a vision and strategy - defining clear goals and a roadmap for transformation.
Movement phase (change)
4.​ Communicating the vision effectively - ensuring employees understand and embrace the change.
5.​ Empowering broad-based action - removing obstacles that prevent change from taking root.
6.​ Generating short-term wins - creating momentum by achieving visible early successes.
Sustain phase (refreeze)
7.​ Consolidating gains and driving more change - building on early victories to embed change deeper.
8.​ Anchoring new approaches in the culture - reinforcing change through sustained leadership and
adaptation.
Leadership vs management
Kotter stresses that leaders drive change by inspiring and motivating people, whereas managers focus on
maintaining stability. Organizations with too many managers and too few leaders struggle with transformation.
Organizational behavior reading: leading organizational change (Raffaelli, 2017)
This reading outlines a four-step roadmap for organizational change. It is based on three key assumptions:
-​
Organizations function as interconnected systems—altering one part affects others.
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The process of change impacts its outcome.
-​
There is no single formula for successful change—leaders must navigate it based on their organization's
unique circumstances.
1.​ Diagnosis - why is change needed?
Organizations must identify what gap they are facing. Successful leaders assess both types to determine the
urgency and scope of change:
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●​ Performance gaps - arise when organizations fail to meet expectations in productivity, efficiency, or
adaptability. Leaders must analyze capabilities and formulate solutions to close these gaps.
●​ Opportunity gaps - emerge from external changes such as shifts in customer preferences, market
constraints, new regulations, or technological advancements. Leaders must frame change as an
opportunity rather than a response to failure.
2.​ Design - what kind of change is needed?
The SORT framework defines change across 4 dimensions:
●​ Scope - change can be radical or incremental.
●​ Origin - change can be top-down or bottom-up.
●​ Rollout - change can be system wide or localized.
●​ Timing - change can be big bang or phased.
Based on scope and origin, organizations experience 4 primary types of change:
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Tactical change (top-down, incremental) - small adjustments that address specific organizational issues
with minimal disruption.
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Evolutionary change (bottom-up, incremental) - gradual adaptations that emerge organically and allow
experimentation.
-​
Revolutionary change (bottom-up, radical) - fundamental shifts driven by employees, often leading to
deep cultural transformation.
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Transformational change (top-down, radical) - large-scale, leadership driven changes that require strategic
alignment and employee buy-in.
3.​ Delivery - how to implement it
Implementation requires careful consideration of:
●​ Rollout strategy - whether change should be introduced across the entire organization at once
(systemwide) or tested in specific areas first (localized).
●​ Timing - should change happen all at once (big bang) or gradually (phased approach).
●​ Leaders also need to address stakeholder engagement, resistance to change, and communication
strategies to ensure smooth implementation. Sponsorship from top leadership, clear incentives, and
alignment with organizational goals are critical.
4.​ Evaluation - assessing impact
Organizations must assess the effectiveness of change efforts using both quantitative and qualitative metrics.
●​ Performance indicators - productivity, efficiency, financial metrics, and customer satisfaction.
●​ Behavioral measures - employee engagement, cultural alignment, and adaptability.
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●​ Evaluation is an ongoing process, requiring feedback loops and adjustments to sustain change.
8.​ Organizational culture
Lecture notes
Structure - the skeleton
Culture - the psyche
Characteristics of organizational culture
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Innovation and risk taking
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Attention to detail
-​
Outcome orientation
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People orientation
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Team orientation
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Aggressiveness
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Stability
“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”. Contains 2 elements:
1.​ Judgemental element - what is right, good, desirable?
2.​ Intensity attribute - how important is it?
●​ Individual values (e.g. freedom, self respect).
●​ Values within the organization (e.g. being team oriented, being competitive).
Norms
●​ “Acceptable standards of behavior that are shared by the group’s members”.
Leading by leveraging culture (Chatman & Cha, 2003)
Culture is a powerful tool for leaders, shaping behavior, decision making, and performance. Strong, strategically
aligned cultures enhance organizational effectiveness.
Why culture matters
●​ It acts as an informal control system that alignes employee behavior with company goals.
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●​ A strong culture can outperform formal incentive structures in guiding decisions.
●​ It can have a boundary defining role, create sense of identity, facilitate commitment, enhance stability.
BUT it can also be
●​ Inducing institutionalization
●​ Barrier to change
●​ Barrier to diversity
●​ Barrier to M&As
The role of leadership
●​ Leaders shape and reinforce culture through vision, role modeling, and communication.
●​ Effective leaders understand when to leverage culture vs when to adjust it to meet strategic needs.
Strength vs alignment
●​ Strong cultures = deeply shared norms and values, but
they can be rigid. Require high levels of agreement about
what is valued, and intensity about these values.
-​
If there is high intensity but low levels of agreement → “warring factions”.
-​
If there is agreement but low levels of intensity → “vacuous” culture.
→ strong, adaptive cultures directly impact financial performance.
How to shape high performance culture
●​ Diagnose current culture - identify strengths and weaknesses.
●​ Define desired culture - align it with business strategy.
●​ Communicate cultural priorities - reinforce values through storytelling, recognition, policies.
●​ Align incentives with cultural goals.
●​ Monitor and evolve.
The leader’s guide to corporate culture (Groysberg et al., 2018)
●​ Strategy = formal logic for a company’s goals and guides decision making.
●​ Culture = expresses goals through values, beliefs, and shared assumptions.
●​ Leaders often underestimate culture, but it is a critical factor in organizational success.
What is organizational culture? Culture is
●​ Shared - a group phenomenon.
●​ Pervasive - exists at multiple levels.
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●​ Enduring - develops over time.
●​ Implicit - influences behavior unconsciously.
8 cultural styles
Culture is shaped by two key dimensions:
●​ People interactions - independent vs interdependent.
●​ Response to change - flexible vs stable.
This results in 8 cultural styles:
1.​ Caring - Collaborative, people-focused, emphasizes relationships.
2.​ Purpose – Vision-driven, idealistic, focused on sustainability or higher values.
3.​ Learning – Open to exploration, innovation, and curiosity.
4.​ Enjoyment – Playful, fun, and creative.
5.​ Results – Achievement-oriented, driven by goals and performance.
6.​ Authority – Competitive, structured, and leader-driven.
7.​ Safety – Risk-averse, process-driven, and compliance-focused.
8.​ Order – Rule-based, structured, and stable.
Aligning culture with strategy
●​ Effective leaders recognize cultural dynamics and align them with business objectives.
●​ They balance different cultural styles to optimize performance while avoiding misalignment.
●​ Changing culture requires awareness, assessment, and leadership intervention.
Note on organization culture (Sorensen, 2009)
Organizational culture is more than just “the way things are done” in a company. It consists of deeply held beliefs
and assumptions that shape how organizations respond to internal and external challenges. It operates at a
fundamental level, influencing decision making, behavior, and strategy. Key characteristics include:
●​ It develops over time as organizations adapt to their environment.
●​ It can be intentionally shaped by management but also evolves independently.
●​ It guides behavior through shared values and assumptions internalized by employees.
Why organizational culture matters
Firms face two key challenges that culture helps to address:
1.​ Consistency across managers
2.​ Continuity over time
Culture helps solve these issues by providing a shared cognitive and normative framework:
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●​ Normative order - defines what is considered the right / wrong way to behave.
●​ Cognitive order - shapes fundamental assumptions about how the world works.
Why strong cultures improve performance
Research suggests that firms with strong cultures tend to outperform those with weak cultures, especially in
competitive markets.
●​ Social control - shared values help enforce behavioral norms, making it easier to detect and correct
deviations.
●​ Goal alignment - employees have a clearer sense of strategic objectives and can act autonomously while
maintaining alignment with the firm’s mission.
●​ Employee motivation - workers feel a sense of ownership over their behavior, leading to higher
engagement and performance.
However, strong cultures can be a disadvantage in a volatile environment, as they can resist necessary change
when market conditions shift.
Creating and maintaining a strong organizational culture
1.​ Selection - hiring employees based on cultural fit ensures that new members share the organization’s core
values. This might however be difficult to sustain as external hiring constraints may limit the pool of
culturally aligned candidates.
2.​ Socialization - employees internalize cultural norms through interaction with leaders and coworkers:
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Leadership influence - senior executives play a key role in reinforcing values through
communication and behavior.
-​
Peer influence - if existing employees do not align with leadership values, their social influence
can undermine the intended culture.
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