Learning objectives
After this section, 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 structural types;
- 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) *[p. 329-330*]
Organizational alignment
Definition
Powell (1992) defines organizational alignment as the coherence among various components within an organization, including structure, processes, culture, and strategies.
This coherence is not theoretical, it has real performance implications. Powell (1992) shows empirically that organizational alignments produce supernormal profits, independent of traditional industry and strategy variables, aligning with the resource-based view of the firm (Teece 1982).
Achieving high organizational alignment serves as a unique source of competitive advantage. Firms that effectively align internal components are better equipped to enhance performance, respond to market changes, and create distinctive positions in their industries.
Effects of alignment
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.
Research identifies four dimensions of organizational alignment that significantly relate to profitability (Powell 1992):
- Internal structural fit refers to coherence among various internal organizational components, including alignment of strategies, processes, and culture
- Size-structure fit relates to how well organizational structure matches the size and complexity of the organization
- Size-planning components fit focuses on alignment between organization’s size and its planning components like budgeting and forecasting
- Locus of control refers to beliefs regarding degree of control over events, relevant for understanding leadership styles and decision-making
Among these, structural fit appears to be the most significant source of competitive advantage.
McKinsey 7S framework
Based on organizational alignment thinking, McKinsey proposed the 7S Framework (Channon and Caldart 2015) as a tool to help identify critical alignment issues by ensuring seven elements are aligned and mutually reinforcing (Hayes et al. 2002).
Hard elements
- Strategy: Set of actions planned in response to environmental changes to improve competitive positioning
- Structure: Division of activities; integration and coordination mechanisms
- Systems: Formal and informal procedures for measurement, reward and resource allocation
Soft elements
- Shared values: Key beliefs and aspirations forming core of corporate culture
- Skills: Organization’s core competencies and distinctive capabilities
- Staff: People as resources needing nurturing, development, and allocation
- Style: Typical behavior patterns of key groups like CEOs, managers, professionals
The 7s framework emphasizes that all elements must work together - weakness in any area can undermine overall organizational effectiveness (Peters and Waterman 1982). It can be applied to identify critical alignment issues, determine what needs realignment to improve performance and to maintain alignment during change (restructuring, new processes, mergers, leadership changes).
Having established why alignment matters for organizational performance, how does this relate to the fundamental relationship between strategy and structure?
Structure x strategy
Structure follows strategy
Changes in strategy often require changes in organizational structure because structure dictates how objectives and policies are established and determines how resources are allocated (David and David 2016).
The relationship between strategy and structure is, thus, fundamental to organizational design. As David and David (2016) explains, there are two major reasons why strategic changes often require structural changes:
- Objective and policy setting: Structure largely dictates how objectives and policies will be established throughout the organization. Different structures create different decision-making processes, communication patterns, and authority relationships.
- Resource allocation: Structure determines how resources will be allocated throughout the organization. Different structures create different priorities, funding mechanisms, and resource flows.
This means that when organizations change their strategies, they often need to change their structures to support effective implementation of the new strategic direction.
Need for structural changes
Organizations need to consider structural changes in several situations:
Strategic ojective changes
- Shift from growth to efficiency focus
- Move from cost leadership to differentiation strategy
- Change from local to global orientation
Market or product evolution
- Entry into new geographic markets
- Launch of new product lines
- Diversification into unrelated businesses
environmental shifts
- Technological disruptions requiring new capabilities
- Regulatory changes demanding new compliance structures
- Competitive pressures requiring faster decision-making
Internal factors
- Organizational growth beyond current structure’s capacity
- Performance problems indicating structural misalignment
- Cultural transformation initiatives
The key is recognizing when current structure becomes a constraint rather than an enabler of strategic success.
Understanding this relationship, what structural options are available to organizations, and how do they evolve over time?
Integration strategies
Overview
Integration strategies significantly influence organizational structure requirements (Harrigan 1985):
Vertical integration
Gaining control over distribution channels or retailers — forward integration
- Structural implications: Need for coordination between manufacturing and distribution units
- Example: Apple’s retail stores requiring integration between product development and retail operations
- Structure needs: Strong coordination mechanisms, shared information systems, integrated planning
Gaining control over suppliers or raw material sources — backward integration
- Structural implications: Integration of supply chain and manufacturing operations
- Example: Steel companies owning iron ore mines requiring integrated supply chain management
- Structure needs: Coordinated procurement and production planning, integrated cost management
Horizontal integration
Gaining control over competitors in same industry
- Structural implications: Consolidating similar operations, eliminating redundancies
- Example: Bank mergers requiring integration of branch networks and systems
- Structure needs: Standardized processes, centralized functions, unified culture
Structural design principles
Lawrence and Lorsch (1967) outline following guidlines for integration strategies:
- Differentiation: Maintain specialized capabilities in each integrated unit
- Integration mechanisms: Create coordination systems across integrated operations
- Conflict resolution: Establish processes for resolving inter-unit conflicts
- Information systems: Develop shared information and control systems
Structural options
Overview
Organizations can choose from simple structures for small firms, functional structures for specialization, divisional structures for diversification, or matrix structures for complex coordination.
Simple structure
- Characteristics: Minimal hierarchy, centralized decision-making, informal processes (Dess et al. 2014)
- When appropriate: Small, entrepreneurial organizations; early development stages; dynamic environments
- Advantages: Quick decisions, flexibility, low costs, close relationships
- Disadvantages: Limited scalability, over-reliance on few people, information overload at top
Functional structure
- Characteristics: Employees grouped by specialized functions, clear hierarchy, centralized decisions (Dess et al. 2014; David and David 2016)
- When appropriate: Single product/service lines, stable environments, deep expertise needs
- Advantages: High specialization, efficient resource use, clear roles, economies of scale
- Disadvantages: Poor cross-functional coordination, slow market response, potential silos
Divisional structure
- Characteristics: Semi-autonomous units by product/market/geography, profit accountability (Dess et al. 2014; David and David 2016)
- When appropriate: Large diversified organizations, multiple markets/products, dynamic environments
- Advantages: Market focus, quick response, clear accountability, management development
- Disadvantages: Resource duplication, coordination challenges, increased costs
Matrix structure
- Characteristics: Dual reporting relationships, shared authority, project-based teams (Dess et al. 2014; David and David 2016)
- When appropriate: Complex projects, dynamic environments, need for specialization and integration
- Advantages: Enhanced coordination, resource efficiency, flexibility, skill development
- Disadvantages: Role ambiguity, complex decisions, high costs, potential conflicts
Strategic business units
Strategic Business Unit (SBU) structure is a variant of divisional structure where divisions are organized as semi-autonomous strategic business units, each responsible for a distinct business area (Hrebiniak 2005).
Key characteristics
- Strategic autonomy: Each SBU operates as a separate business with its own strategy
- Portfolio management: Corporate level manages portfolio of SBUs like investment portfolio
- Resource allocation: Corporate allocates resources based on SBU strategic potential
- Performance accountability: SBUs measured on strategic and financial performance
Use cases
- Large diversified corporations with multiple distinct businesses (Goold, Campbell, and Alexander 1994)
- Businesses serving different markets with different competitive dynamics
- Need for both business-level strategy focus and corporate-level synergies
- Sufficient scale in each business to justify separate strategic management
Advantages
- Clear strategic focus for each business unit
- Enables portfolio optimization at corporate level
- Facilitates resource allocation based on strategic priorities
- Develops general management capabilities
- Balances autonomy with coordination
Disadvantages
- High administrative overhead and complexity
- Potential for inter-SBU competition for resources
- Risk of losing synergies between related businesses
- Difficulty coordinating across SBUs when needed
Examples: General Electric’s traditional SBU structure, Samsung’s business group structure, 3M’s business unit organization.
For comprehensive treatment of SBU management, see Goold, Campbell, and Alexander (1994) and Campbell, Goold, and Alexander (1999).
Performance implications
Research by Chandler (1990) and Burton, Obel, and Håkonsson (2015) shows that different structures create distinct performance implications:
Efficiency vs. innovation trade-offs
- Functional structures excel at operational efficiency but may limit innovation
- Divisional structures promote innovation but can sacrifice economies of scale
- Matrix structures balance both but at higher administrative costs
Speed vs. coordination
- Simple structures enable rapid decisions but limit coordination capacity
- Complex structures improve coordination but slow decision-making
- Hybrid structures attempt balance but create role ambiguity
Cost vs. flexibility
- Centralized structures reduce costs but limit local responsiveness
- Decentralized structures increase flexibility but raise coordination costs
- Network structures maximize flexibility but create dependency risks
Measurement challenges
- Different structures require different performance metrics (Galbraith 2014)
- Financial measures may not capture innovation or learning benefits
- Structural efficiency must be balanced with strategic effectiveness
- Short-term costs of restructuring vs. long-term performance benefits
No structure is inherently superior. As organizational alignment suggests, performance depends on fit between multiple elements, particularly structure, strategy, and environment. Organizations must regularly assess whether their structure enables or constrains strategic objectives.
Structural evolution patterns
Organizations typically [evolve through predictable stages (simple → functional → divisional → matrix/hybrid) driven by size, strategy, environment, and complexity.
Stage 1: simple structure
- Start-up phase with entrepreneurial leadership
- Informal processes and direct supervision
- Focus on survival and early growth
Stage 2: functional structure
- Growing size requires specialization
- Development of functional departments
- Formalization of processes and procedures
Stage 3: divisional structure
- Diversification creates need for divisional organization
- Geographic expansion or product line growth
- Decentralization of decision-making
Stage 4: matrix/hybrid structures
- Complex environments require flexible structures
- Multiple organizational dimensions (function, product, geography)
- Advanced coordination mechanisms
Driving forces for structural evolution
- Size: Increasing size creates need for formalization and coordination
- Strategy: Strategic changes require structural adaptation
- Environment: Environmental complexity demands structural responses
- Technology: Technological changes influence optimal structure
- Age: Organizational maturity affects structural needs
Understanding these patterns helps leaders anticipate when structural changes may be needed and plan transitions more effectively.
Structure x DT
Leadership in DT
Digital transformation (DT) requires new leadership roles: CIOs evolving from operational to strategic and CDOs emerging to lead 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 (Lorenz and Buchwald 2023).
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 (Lorenz and Buchwald 2023).
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)
Excursus: structural ambidexterity
The ambidexterity challenge: Organizations must simultaneously manage existing operations efficiently (i.e., exploitation) while exploring new opportunities for future growth (i.e., exploration). This creates tension between stability and change.
CIO-CDO ambidexterity
Exploitation focus (CIO-led)
- Operational efficiency and cost optimization
- Stable, reliable IT operations and infrastructure
- Process improvement and automation initiatives
- Risk management, security, and regulatory compliance
Exploration focus (CDO-led)
- Digital innovation and new opportunity identification
- Experimental initiatives and pilot projects
- Customer experience innovation and new touchpoints
- New business model development and market entry
Implementation strategies
The key is recognizing these roles as complementary rather than competing, with CIOs providing technical foundation and CDOs driving business transformation (Lorenz and Buchwald 2023).
- Separate but coordinated structures: Different organizational units for exploitation vs. exploration
- Shared resources and governance: Common technology platforms with different usage patterns
- Cultural integration: Values supporting both operational excellence and innovation
- Dynamic resource allocation: Flexible budgeting between stability and innovation needs
- Performance measurement: Balanced metrics for efficiency and innovation outcomes
This structural approach enables organizations to maintain current performance while building future capabilities.
Structural transitions
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
Convergence starts with effective integration of strategy, structure, people and processes, characterized by incremental change.
Convergent periods create stability but can also create inertia that makes future change more difficult, as it may lead to overconfidence and reduced flexibility (less vigilance, greater resistance to change).
Focus in periods of convergence
- Refining policies, methods, and procedures
- Creating specialized units and linking mechanisms
- Developing personnel suited to present strategy
- Fostering commitments to company mission and departmental excellence
- Promoting confidence in accepted norms, beliefs, and myths
- Clarifying roles, power, status, dependencies, and allocation mechanisms
Periods of upheaval
The need for discontinuous change usually springs from (Mintzberg 2014):
- Industry discontinuities (emergence of substitutes, new technologies)
- Product life-cycle shifts (moving between emergence, growth, maturity, decline)
- Internal company dynamics (leadership changes, ownership shifts, strategic reorientation)
Frame-breaking change represents revolutionary changes of the system, as opposed to incremental changes in the system (Mintzberg 2014).
Scope of frame-breaking changes
- Reformed mission and core values
- Altered power and status relationships
- Comprehensive reorganization
- Revised interaction patterns and communication flows
- Introduction of new executives and leadership
Triggers
- Industry discontinuities: New technologies disrupting existing business models, emergence of substitute products, regulatory changes
- Product life-cycle shifts: Moving from growth to maturity phases, market saturation, changing customer needs
- Internal dynamics: Changes in ownership, leadership transitions, strategic reorientation, performance crises
Characteristics
- Rapid, comprehensive transformation rather than gradual evolution
- Affects multiple organizational elements simultaneously
- Often requires external leadership or fresh perspectives
- Creates discontinuity with past practices and structures
- Involves higher risk but potentially higher rewards
The key is recognizing when incremental change is insufficient and radical transformation is necessary (Mintzberg 2014).
Leadership requirements
Convergence periods require maintaining alignment and incremental adjustment while frame-breaking change demands comprehensive executive involvement and fresh perspective.
Leadership during convergence
- Focus on maintaining congruence and fit within the organization
- Re-emphasize strategy, mission, and core values
- Monitor external environment for opportunities and threats
- Make incremental adjustments to maintain alignment
- Build organizational capabilities and cultural strength
Leadership during upheal
- Direct executive involvement in all aspects of transformation
- Specification of new strategy, structure, people, and processes
- Development of comprehensive implementation plans
- Communication of vision and rationale for change
- Management of resistance and cultural transformation
Different types of change require fundamentally different leadership approaches. Leaders must diagnose whether situation calls for convergence or frame-breaking approach and adapt their style accordingly.
Key takeaways
- Organizational alignment among structure, processes, culture, and strategies creates sustainable competitive advantage
- Performance implications vary by structure
- Five main structure types serve different strategic contexts
- Integration strategies require specific structural approaches
- Structural evolution follows predictable patterns driven by organizational size, strategy, environment, and complexity
- Digital transformation creates new leadership requirements with CIO and CDO roles requiring clear boundaries and collaboration
- Structural ambidexterity enables organizations to balance exploitation (efficiency) and exploration (innovation) simultaneously
- Organizational evolution alternates between convergence periods (incremental change) and frame-breaking transformation (revolutionary change)
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?