Structure

How to match a firm’s structure with its strategy?

Andy Weeger

Neu-Ulm University of Applied Sciences

September 3, 2024

Learning outcomes

After this session, you should have a solid understanding of

• the need to match a firm’s structure with its strategy;
• different types of organizational structure;
• advantages and disadvantages of these types of structures;
• key strategic issues related to CDO/CIO roles;
• the concept of (structural) ambidexterity and how it relates to CDO/CIO roles;
• as well as the need for and characteristics of periods of convergence and upheaval.

Prologue

Changes in strategy often require changes in the way an organization is structured, for two major reasons. First, structure largely dictates how objectives and policies will be established [..] The second major reason [..] is that structure dictates how resources will be allocated. David and David (2016, 329–30)

Organizational alignment

Definition

Powell (1992) defines organizational alignment as the congruence or coherence among various components within an organization, including structure, processes, culture, and strategies.

Efects

Firms with a high degree of alignment are better equipped to adapt to changes in their external environment, are more resilient to threats and better able to capitalize on emerging opportunities (Powell 1992).

Powell (1992) shows empirically that same organizational alignments produce supernormal profits, independent of the profits produced by traditional industry and strategy variables, which is well aligned with the resource based view of the firm (Teece 1982).

Achieving a high level of organizational alignment can, thus, serve as a unique source of competitive advantage. Firms that effectively align their internal components are better equipped to enhance performance, respond to market changes, and create a distinctive position in their industries.

Components

Powell (1992) identifies four dimensions of organizational alignment that significantly relate to profitability:

Internal structural fit, size-structure fit, size-planning components fit, and locus of control.

Whereas structural fit seems to be the most significant source of competetive advantage.

• Internal structural fit refers to the coherence and alignment of various components within an organization’s internal structure. This can include the alignment of strategies, processes, and organizational culture.
• Size-structure fit relates to how well the organizational structure matches the size and complexity of the organization. It involves ensuring that the structure is appropriately scaled to the organization’s operations.
• Size-planning components fit focuses on the alignment between the organization’s size and its planning components. This may include how well planning processes, such as budgeting and forecasting, align with the organization’s size.
• Locus of control refers to an individual’s belief regarding the degree to which they can control events affecting them. In an organizational context, it can be relevant in understanding leadership styles and decision-making processes.

7s Framework

Figure 1: McKinsey 7S Framework (Hayes et al. 2002, 137)

Based on an organizational alignment thinking, McKinsey proposed the 7s Framework. The framework is a tool designed to help business owners and managers to identify critical alignment issues by proposing seven elements need to be aligned and mutually reinforcing. The model can be used to help identify what needs to be realigned to improve performance, or to maintain alignment during phases of change (e.g., restructuring, new processes, organizational merger, new systems, change of leadership).

The elements are (Channon and Caldart 2015):

• Strategy: Strategy is defined as the set of actions that a firm plans in response or anticipation of changes to its external environment. These actions allow a firm to improve its competitive positioning. Purpose of the business and the way the organization seeks to enhance its competitive advantage.
• Structure: Structure allow the firm to focus on areas that are deemed important for its evolution. This includes division of activities; integration and coordination mechanisms.
• Systems: These include formal and informal procedures for measurement, reward and resource allocation.
• Shared values: These values define the firm’s key beliefs and aspirations that form the core of its corporate culture.
• Skills: The organization’s core competencies and distinctive capabilities. It is argued that old skills can often act as hindrance in developing new skills.
• Staff: Staff considers people as a pool of resources, which need to be nurtured, developed, guarded, and allocated. It includes organization’s human resources, demographic, educational and attitudinal characteristics.
• Style: Typical behavior patterns of key groups, such as CEOs, managers, and other professionals.

Reflection

Form small groups of 3 to 4 students. Discuss your findings from listening to the Decoder Episode with Philips CEO Roy Jakobs and discuss and summarize what you have learned about organizational alignment at Philips.

Your summary must include the following points:

• An overview of how Philips has strategically pivoted.
• A description of the company’s operational model.
• The advantages and disadvantages of this model, particularly considering speficics of the healthcare context.

Organizational structures

Simple structure

Simple structure based on Dess et al. (2014)

 

A simple structure in organizational terms refers to a basic and straightforward organizational design characterized by minimal hierarchy, few rules and procedures, and centralization of decision-making. It is often found in small, entrepreneurial organizations, particularly in their early stages of development (see e.g., Dess et al. 2014).

Figure 2: Simple structure based on Dess et al. (2014)

Key features of a simple structure include:

• Low formalization: Procedures, rules, and processes are minimal. The organization relies on informal communication and flexibility. Simple structures often prevail in entrepreneurial environments where agility and quick decision-making are critical.
• Centralized decision-making: Decision-making authority is concentrated at the top of the organization, usually with the founder or a small leadership team. Leaders can directly supervise and interact with employees, fostering close relationships.
• Low specialization: Job roles and tasks are not highly specialized. Employees often wear multiple hats and perform a variety of functions.
• Quick response to changes: The simplicity of the structure allows for quick adaptation to changes in the environment or market conditions.

While a simple structure has its advantages, such as flexibility and quick decision-making, it may face challenges as the organization grows. As the organization expands, there is often a need for more formalization, departmentalization, and delegation of authority. This evolution may lead to the adoption of more complex organizational structures, such as functional structures or divisional structures, to accommodate the increased size and complexity of the organization.

Functional structure

Functional structure based on Dess et al. (2014)

 

In a functional structure is an organizational design that groups employees based on their specialized functions or roles within the organization. In a functional structure, employees with similar skills and expertise are organized into functional departments or units, each focused on a specific aspect of the organization’s operations. This structure is common in many types of organizations and is often characterized by clear lines of authority and reporting (Dess et al. 2014; David and David 2016).

Figure 3: Functional structure based on Dess et al. (2014)

Key features of a functional structure include:

• Clear hierarchy: The structure typically follows a clear hierarchical framework with a top-down chain of command. Each functional department is headed by a manager or director reporting to top leadership.
• Specialization and expertise: Allows for a high level of specialization and expertise within each functional area. Employees focus on tasks related to their specific functions, leading to efficiency and depth of knowledge.
• Centralized decision-making: Decision-making authority is often centralized at the top of the hierarchy, with top-level executives making key strategic decisions that affect the entire organization.
• Efficient use of resources: Resources, such as personnel and equipment, are efficiently allocated within each functional department. This specialization can lead to economies of scale and resource optimization.
• Clarity of roles: Roles and responsibilities are clearly defined within each functional department, contributing to role clarity and well-defined job descriptions.
• Communication within functions: Communication predominantly occurs vertically within each functional department. Employees within the same function share a common language and understanding of their specific area of expertise.

Functional structures are well-suited for organizations with a relatively simple product or service line, where efficiency, expertise, and clear specialization are essential. However, they may face challenges when it comes to interdepartmental coordination and communication, especially in dynamic environments where cross-functional collaboration is crucial. Organizations may also adopt additional structures, such as matrix structures or divisional structures, to address the limitations of a purely functional approach in more complex or diversified settings.

Divisional structure

Divisional structure based on Dess et al. (2014)

 

A divisional structure in organizational terms refers to a design that organizes an enterprise into semi-autonomous units or divisions, each responsible for a distinct product, service, or customer group. Each division within the structure operates as a separate business entity with its own functional areas, such as marketing, finance, and operations, though some functional are performed in each separate division and centrally (e.g., finance). The divisions are organized by product or service, customer-types, or process (i.e., strategic business units). This structure is often adopted by large organizations with diverse product lines or those operating in multiple markets (Dess et al. 2014; David and David 2016).

Figure 4: Divisional structure based on Dess et al. (2014)

Key features of a divisional structure include:

• Divisional autonomy: Divisions operate with a significant degree of autonomy. They have their own leadership, decision-making processes, and strategic initiatives.
• Product, market, or geographic focus: This allows for specialization and focused attention on the unique needs of each market or product line.
• Functional independence: Each division has its own set of functional areas (e.g., marketing, finance, operations) to support its specific activities. This enables divisions to adapt and respond more efficiently to the requirements of their particular markets.
• Profit and loss accountability: Divisions are often held accountable for their own financial performance. This accountability is reflected in their profit and loss statements, making divisions responsible for their own costs, revenues, and profitability.
• Coordination at the corporate level: While divisions operate independently, there is usually coordination at the corporate level. Corporate headquarters may provide support functions that serve all divisions, such as human resources, legal, and overall strategic planning.
• Strategic flexibility: The divisional structure offers strategic flexibility, allowing each division to tailor its strategies to the specific demands of its market or product category. This adaptability can enhance responsiveness to changes in the business environment.
• Clear accountability: The structure provides clear lines of accountability, making it easier to assess the performance of each division individually. This clarity helps in making informed decisions about resource allocation and strategic adjustments.

The divisional structure is particularly suitable for large and complex organizations with diverse business interests. It allows for specialization and focused management attention in each division, fostering agility and responsiveness to market variations. However, it also requires effective coordination and communication between the corporate center and the individual divisions to ensure alignment with overall organizational objectives.

Matrix structure

Matrix structure based on Dess et al. (2014)

 

A matrix structure in organizational terms is a hybrid organizational design that combines elements of both functional and divisional structures. In a matrix structure, employees have dual reporting relationships - they report both to a functional manager and to a product, project, or geographic manager. This structure is particularly useful for organizations dealing with complex projects, multiple products, or a combination of functional and divisional demands (Dess et al. 2014; David and David 2016).

Figure 5: Matrix structure based on Dess et al. (2014)

Key features of a matrix structure include:

• Combines the functional dimension (grouping by skills or expertise) with the divisional dimension (grouping by product, project, or geographic area). This allows for flexibility in addressing both functional and divisional needs.
• Dual reporting relationships: Employees report to both a functional manager (based on their area of expertise, such as marketing or finance) and a project or divisional manager (based on the specific project, product, or geographic area they are working on). Functional and Divisional Dimensions:
• Enhanced communication and coordination: Facilitates improved communication and coordination between different parts of the organization, as individuals from various functional areas collaborate on specific projects or products.
• Project-based teams: Often involves the creation of project-based or cross-functional teams where individuals from different functional areas work together on specific tasks or projects.
• Flexibility and responsiveness: Offers greater flexibility and responsiveness to changes in the external environment, as the organization can quickly adapt to new projects, market demands, or technological advancements.
• Resource efficiency: Allows for efficient use of resources, as individuals with specific expertise can be allocated to projects or products as needed without being limited by the boundaries of a traditional functional structure.
• Complex decision-making: Involves more complex decision-making processes, as employees may need to navigate and balance the expectations and priorities of both their functional and divisional managers.

While the matrix structure offers advantages in terms of flexibility and responsiveness, it can also pose challenges related to potential conflicts, power struggles, and the complexity of reporting relationships. Effective communication, collaboration, and a clear understanding of roles and responsibilities are crucial for the success of a matrix structure. The matrix structure is often adopted in industries such as information technology, aerospace, or complex project-based organizations where interdisciplinary collaboration is essential.

Growth patterns of large companies

Growth patterns of large corporations according to Dess et al. (2014)

 

 

 

 

 

 

 

 

 

Figure 6: Growth patterns of large corporations according to Dess et al. (2014)

Excursus: CIO/CDO

Reflection

Form small groups of 3 to 4 students. Discuss your findings from reading Lorenz and Buchwald (2023). Create a presentation that summarises the key findings. Each presentation should last 5 minutes.

Your summary must include the following considerations:

• the roles of CDO and CIO,
• strategic reasons for introducing a CDO role,
• the dynamics and challenges related to the relationship between CDOs and CIOs,
• (structural) ambidexterity in relation to the roles of CIO and CDO,
• and recommendations for the design and implementation of organisational structures that efficiently support digital transformation.

Roles

The Chief Information Officer (CIO) traditionally leads the IT department, ensuring technology infrastructure supports organizational goals. They manage data, information systems, and IT operations as well as they address cybersecurity, data privacy, and compliance with IT regulations.

The Chief Digital Officer (CDO) is responsible for driving digital innovation and transformation across the organization. They often focus on enhancing customer experiences through digital channels and technologies. They collaborate across departments to integrate digital solutions into various aspects of the business.

They may face challenges in aligning strategic objectives and collaborating effectively.

• CIOs often focus on stable IT operations, while CDOs prioritize innovation, sometimes causing tensions in their priorities.
• Communication gaps can arise due to differing perspectives on technology’s role in the organization.

Strategic imperative for a CDO

The CDO role is typically introduced with the objective of leading digital transformation initiatives and ensuring that the organization maintains a competetive edge in the digital age.

• CDOs foster a culture of innovation, identifying opportunities for digital technologies to create new business models and revenue streams.
• Organizations appoint CDOs to respond quickly to market changes and technological advancements (i.e., need for agility)

Structural ambidexterity

Organizations need to balance exploitation (efficiency and optimization, led by the CIO)
and exploration (innovation and new opportunities, led by the CDO).

Recommendations for organizational structures:

• Cultivate a culture that supports both roles
• Establish effective coordination mechanisms allows CDOs and CIOs to work synergistically, e.g., foster open and continuous communication between the CDO and CIO to ensure alignment and shared goals.
• Clearly define reporting lines and responsibilities for both the CDO and CIO to avoid ambiguity.
• Encourage cross-functional collaboration and the formation of teams that integrate digital and IT expertise.

Organizational evolution

Prologue

As the fit between strategy, structure, people and processes is never perfect, most successful firms go through periods of convergence — in which they make only incremental changes, followed by upheaval – in which they carry out major, system-wide changes or reorientations, to adapt to environmental shifts. Mintzberg (2014)

Periods of convergence

In convergent periods stable and interconnected social systems emerge, in which the most successful and resilient actors maintain their position.

Convergence starts with an effective integration of strategy, structure, people and processes. It is an on-going process characterized by incremental change (Mintzberg 2014):

• Refining policies, methods, and procedures.
• Creating specialized units and linking mechanisms.
• Developing personnel especially suited to the present strategy.
• Fostering individual and group commitments to the company mission and to the excellence of one’s own department.
• Promoting confidence in the accepted norms, beliefs, and myths.
• Clarifying established roles, power, status, dependencies, and allocation mechanism.

Convergent periods are a double-edged sword, they

• help the organisation develop internal forces for effectiveness and stability; and
• lead to self-confidence and less flexibility (less vigilance and greater resistance to change)

Frame-braking change

Frame-braking change occurs in response to or, better yet, in anticipation of major environmental changes.

The need for such discontinuous change usually springs from one or a combination of …

• industry discontinuities (e.g., emergence of substitutes),
• product life-cycle shifts (e.g., shifting from the emergence phase to the maturity stage),
• or internal company dynamics (e.g., changes in shareholder structure)

Frame-breaking change is driven by shifts in the business strategy. Frame-breaking changes are revolutionary changes of the system, as opposed to incremental changes in the system.

Frame-breaking changes usually involves the following features:

• Reformed mission and core values
• Altered power and status
• Reorganisation
• Revised interaction patterns
• New executives

Leadership

During periods of convergence …

• executive leadership focuses on maintaining congruence and fit within the organisation;
• leadership re-emphasizes strategy, mission and core values, while keeping an eye on external opportunities/threats.

Frame-breaking change requires …

• direct executive involvement in all aspects of the change;
• this involves specification of the strategy, structure, people, processes and in the development of implementation plans;

Effective executives foresee the need for major change, and act before they are forced by circumstances/crisis to do so.

Most frame-breaking upheavals are managed by executives brought in from outside the company. The process benefits from their fresh perspective, new skills and the impetus for a new start.

Exercise

Please turn to your neighbour and identify an example of an organisation that has recently undergone or is currently undergoing a transformative change (i.e., frame-breaking change).

Outline how the strategy has changed and how it has affected the adaptation of other components, for example, those reflected by the 7s framework.

Please prepare to present your findings.

Review and consolidation

The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.

• Explain the concept of organizational alignment.
• Relate the 7s framework to the concept of organizational alignment.
• List reasons why firms with a high degree of organizational alignment are better able to adapt to changes in their external environment, are more resilient to threats and better able to capitalize on emerging opportunities.
• Do a research on Strategic Business Unit (SBU) structure and explain the difference between a SBU structure and a divisional organizational structure.
• Discuss advantages and disadvantages of a functional versus a divisional organizational structure.
• Compare and contrast the roles of Chief Information Officer (CIO) and Chief Digital Officer (CDO) in an organization. How do their responsibilities contribute to strategy formation and strategy implementation?
• Define and elaborate on the concept of structural ambidexterity in the context of CIO and CDO roles. How can organizations achieve a balance between exploitation and exploration in their structures?
• How can organizational structures be designed to facilitate effective collaboration between different functional areas?

Homework

Read Chakravarthy (1986) and make notes on following questions:

• Why is it difficult to accurately measure strategic performance?
• Why are traditional financial metrics limited in capturing the strategic impact of various strategic initiatives and decisions?
• How can the the quality of a firm’s adaptation be evaluated?
• How should, according to the findings of the study, strategic performance be evaluated?
• How do the findings relate to the balanced score card method?

Q&A

Literature

Chakravarthy, Balaji S. 1986. “Measuring Strategic Performance.” Strategic Management Journal 7 (5): 437–58.

Channon, Derek F, and Adrián A Caldart. 2015. “McKinsey 7S Model.” Wiley Encyclopedia of Management, 1–1.

David, F. R., and F. R. David. 2016. Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Global Edition. Psychology Express. Pearson Education.

Dess, Gregory G, G Tom Lumpkin, Alan B Eisner, and Gerry McNamara. 2014. Strategic Management: Text and Cases. McGraw-Hill.

Hayes, John et al. 2002. The Theory and Practice of Change Management. Springer.

Lorenz, Felix, and Arne Buchwald. 2023. “A Perfect Match or an Arranged Marriage? How Chief Digital Officers and Chief Information Officers Perceive Their Relationship: A Dyadic Research Design.” European Journal of Information Systems 32 (3): 372–89.

Mintzberg, Henry. 2014. The Strategy Process: Concepts, Contexts, Cases. Pearson education.

Powell, Thomas C. 1992. “Organizational Alignment as Competitive Advantage.” Strategic Management Journal 13 (2): 119–34.

Teece, David J. 1982. “Towards an Economic Theory of the Multiproduct Firm.” Journal of Economic Behavior & Organization 3 (1): 39–63.