Introduction

According to Adler (2011), Performance Management (PM) entails activities that organizations implement with the aim of ensuring its goals are achieved consistently and efficiently. The scope of performance management varies and can be implemented at various organizational levels including individual employees, departments, the entire organization and processes. From this definition, Adler (2011) infers that the primary objective of PM is to ensure that organizational strategies are implemented effectively in order to facilitate the achievement of organizational goals. Adler (2011) further argues that PM interlinks organizational strategies and organizational goals. Kotha (1995) perceived Performance Management System (PMS) as a tool that organizations can use to implement their strategies by communicating its goals and objectives, monitoring individual and firm performance outcomes, and reinforcing individual accountability required for the achievement of organizational goals. Theoretically, it is apparent that PMS meets the needs of organizational strategies. Is this theoretical framework feasible in a real organizational environment? Are all PMS designed to meet the needs of organizational strategy? In an attempt to explore the relationship between PMS and organizational strategy, this paper undertakes a critical review of whether all PMS are designed to cater for the needs of organizational strategy. This essay outlines the extent to which the statement is true, its limitations, and strengths.

According to Prajogo & Sohal (2006), an effective PMS should be able to align performance measures to the goals and objectives of the firm; however, this is the most significant challenge with regard to implementing effective PMS. Several organizations face challenges when it comes to relating and aligning their organizational strategy with organizational operations; as a result, it is highly likely that firms are likely to make use of PMS that are not capable of aligning their performance measures to their respective goals and objectives (Smart & Vertinsky 2006). A good PMS intents to maximize the results and align the various subsystems with the goal of attaining overall organizational objectives; thus, placing emphasis on PM within an organization has an effect on the overall firm-level success. In this regard, Prajogo & Sohal (2006) assert that aligning the goals and objectives of the firm to performance is crucial in the firm’s success and constitutes the most important characteristic of an effective PMS. Prajogo & Sohal (2006) found out that firms that often adopt PMS that do not reflect their goals and objectives do not report organizational success; as a result, Prajogo & Sohal (2006) concluded that performance alignment is a critical aspect of effective PMS that meets the needs of organizational strategies. Failure to integrate performance alignment within PMS results in its failure to satisfy the needs of the firm’s strategy. Prajogo & Sohal (2006) recommends the use of Competency-Based PMS, which is a PMS that focuses on communicating the values and mission of the organization, and aligning team and individual performance with the strategic objectives of the firm, which in turn reflects the distinctive needs of the firm. Smart & Vertinsky (2006) and Prajogo & Sohal (2006) recommend four critical success factors for effective PMS, they include: (a) aligning the business units to the objectives of the organization; (b) aligning individual employee performance to the objectives of the organization; (c) aligning performance measures to the goals of the organization; (d) aligning IT performance to the objectives of the organization; (e) aligning financial performance to the goals of the organization. An inference from this observation by Smart & Vertinsky (2006) and Prajogo & Sohal (2006) is that the criteria for effective PMS rules out the possibility that all PMS are designed meet the needs of organizational strategy except for cases whereby performance alignment is integrated with the design of the PMS.

According to Tapinos, Dyson & Meadows (2005), organizational strategy often depends on various variables including the organization’s external environment and its internal structure; as a result, the fit of a strategy relies significantly on how the organization adapts to changes taking place in the external environment by adjusting its internal structures. In this regard, Tapinos, Dyson & Meadows (2005) introduces another criteria and a critical success factor for effective PMS to meet the needs of organizational strategy: flexibility, sufficient vertical alignment and sufficient horizontal alignment. Since the main aim of adopting a PMS is to align the firm performance to strategy, which varies according to changes in external environment and internal structures, flexibility is vital in ensuring the success of PMS. Tapinos, Dyson & Meadows (2005) found that several firms falter by implementing PMS that define the performance goals although they fail to revisit the established goals on a regular basis; this implies that such firms lack an adjustment process during instances of performance improvement or decline. As a result, the firm lacks a mechanism for timely adjustment resulting in the firm using outdated strategies that are irrelevant in the dynamic business environment. Similarly, a PMS that meets the needs of strategy should be characterized by a successful and sufficient vertical alignment, which guarantees that the organizational goals commence at the top level management and are propagated towards lower organizational levels (Adler 2011). A PMS that has insufficient vertical alignment results in managers and employees having performance objectives that are not relevant to the strategic goals resulting in performance gaps.

From this critical analysis, this paper established the criteria needed to evaluate the effectiveness of PMS with regard to view as to whether all PMS are designed to meet the needs of organizational study. From this discussion, the critical success factors for a PMS include performance alignment, flexibility, and sufficient vertical and horizontal alignment. To this end, a PMS can only meet the needs of organizational strategy if it integrates performance alignment and is flexible to meet the changing nature of organizational strategies as regards to how firms adapt their internal structures to changes taking place in their external environments.

References List

Adler, R 2011, ‘Performance management and organisational strategy: How to design systems that meet the needs of confrontation strategy firms’, The British Accounting Review, vol 43, no. 4, p. 251.

Kotha, S 1995, ‘Strategy and Environment as Determinants of Performance: Evidence from the Japanese Machine Tools Industry’, Strategic Management Journal, pp. 497-518.

Prajogo, D & Sohal, A 2006, ‘The Relationship between Organisational Strategy, Total Quality Management, and Organizational Performance- the Mediating role of TQM’, European Journal of Operations Research, vol 168, pp. 35-50.

Smart, C & Vertinsky, I 2006, ‘Strategy and the environment: A study of corporate responses to crises’, Strategic Management Journal, pp. 199-213.

Tapinos, E, Dyson, R & Meadows, M 2005, ‘The impact of performance measurement in strategic planning’, International Journal of Productivity and Performance Management, vol 54, no. 4, pp. 370 – 384.