Organizational Design

Strategy and Performance Management

Andy Weeger

Neu-Ulm University of Applied Sciences

July 22, 2025

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

When an organization shifts its strategy, its structural design typically must adapt as well.

Organizational alignment

Definition

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

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
• Size-structure fit
• Size-planning components fit
• Environment-structure fit

• Internal structural fit refers to coherence among various internal organizational components, including alignment of strategies, processes, and culture. When internal structural fit is high, all elements work together synergistically rather than working at cross-purposes. According to Powell, this appears to be the most significant source of competitive advantage among the four dimensions.
• Size-structure fit relates to how well organizational structure matches the size and complexity of the organization. As organizations grow or shrink, their structural designs must adapt accordingly - what works for a 500-person company often fails at 50,000 employees, and vice versa. Misalignment occurs when structure becomes either too simple to manage organizational complexity or too bureaucratic for the actual scale of operations.
• Size-planning components fit focuses on alignment between organization’s size and its planning components like budgeting and forecasting. Larger organizations typically require more formalized planning processes and sophisticated management systems, while smaller organizations may function better with informal, flexible approaches. Misfit occurs when planning sophistication doesn’t match organizational scale—either over-bureaucratizing small operations or under-managing large, complex ones.
• Environment-structure fit refers to the alignment between organizational structure and the external environment in which the firm operates. Different environmental characteristics (stability vs. dynamism, complexity, munificence, competitive intensity) require different structural responses - for example, dynamic environments favor flexible, decentralized structures while stable environments may benefit from formalized, centralized designs. Organizations achieve superior performance when their structural choices match environmental demands and competitive conditions.

Among these, structural fit appears to be the most significant source of competitive advantage.

Discussion

When Roy Jakobs became CEO in 2022, Philips faced a crisis with its CPAP recall and struggled with organizational misalignment. The company had grown into a diversified conglomerate spanning lighting, consumer electronics, and healthcare.

How would you assess Philips’ organizational alignment at that point using Powell’s four dimensions?
Which dimension(s) were most problematic?

Philips in 2022 exhibited severe misalignment:

• Internal structural fit was critically compromised with incoherent strategy spanning unrelated industries, cultural-process disconnects revealed by the CPAP crisis (stated patient safety values vs. actual quality failures), and siloed business units preventing organizational learning.
• Size-structure fit was problematic as the 77,000-employee diversified conglomerate structure created excessive complexity without corresponding synergies (prompting the 13% workforce reduction).
• Environment-structure fit was misaligned as the rigid, diversified structure couldn’t respond with the agility required by dynamic healthcare environments demanding rapid innovation, stringent regulatory compliance, and AI integration.

McKinsey 7S framework

Figure 1: McKinsey 7S Framework (Channon & Caldart, 2015, p. 137)

Based on organizational alignment thinking, McKinsey proposed the 7S Framework (Channon & 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 & 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?

Discussion

Philips’ transformation under Jakobs leadership can be analyzed using the 7S framework.

For which element(s) can you identify specific changes Jakobs has implemented?

Which element was the most critical to address first, and why?

Specific changes

• Strategy: Complete refocusing on healthcare technology, divesting non-healthcare businesses, AI integration across all products
• Structure: 10,000 job cuts (13% workforce reduction), creation of Chief Patient Safety and Quality Officer reporting directly to CEO, simplified organizational hierarchy
• Systems: New quality assurance processes, regular performance review forums between staff and leadership, improved escalation mechanisms for product issues
• Shared Values: Explicit elevation of patient safety and quality as foundational principles, “patient safety is #1 priority”
• Skills: Building AI capabilities enterprise-wide, focus on healthcare innovation and digital health expertise
• Staff: Cultural transformation initiatives, employee engagement increased 12 points despite workforce reduction through respectful communication
• Style: “Dutch directness” with transparent communication, emphasis on “explaining the why,” open forums for discussing problems without fear

Shared values was the most critical starting point because the CPAP crisis fundamentally revealed a values failure - patient safety was not truly prioritized despite being stated as important. Jakobs explicitly made this his first move: “It had to be crystal clear from the moment I took charge that for me, safety was the number one priority.” Without resetting the foundational values, all other changes (structure, systems, processes) would lack legitimacy and coherence - you cannot build effective structures and systems around values that aren’t genuinely held. Strategy was simultaneously critical as the second foundational element, since refocusing on healthcare provided the strategic clarity needed to align all other elements; without knowing what business Philips would be in, structural and system changes would be directionless.

The 7S framework reveals that Jakobs followed a deliberate sequence: establish foundational elements first (shared values + strategy), then adapt hard elements to support them (structure + systems), while continuously working on people elements (staff + skills + style) to embed the transformation culturally.

Structural adaptation

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 & David, 2016).

The relationship between strategy and structure is, thus, fundamental to organizational design. As David & David (2016) explains, there are two major reasons why strategic changes often require structural changes:

1. 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.
2. 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.

Discussion

Which triggers prompted Philips’ structural changes?

• Were these changes primarily driven by strategic objective changes, market evolution, environmental shifts, or internal factors?
• Could Philips have avoided the crisis if they had restructured earlier?

Philips’ structural changes were triggered by convergence of all four categories, with internal factors as the immediate catalyst:

Internal factors (dominant)

• CPAP recall (500+ deaths) revealed fundamental organizational failures
• Performance problems and cultural dysfunction preventing safety issue escalation
• Leadership transition (van Houten → Jakobs, 2022)

Environmental shifts

• AI/digital health disruption requiring new capabilities
• Regulatory pressure (FDA consent decree)

Strategic objective changes

• Shift from diversified growth to focused healthcare differentiation
• Move from conglomerate to specialized health technology leader

Market evolution

Healthcare transformation toward value-based care and integrated digital solutions

Internal factors were dominant—the crisis forced immediate action and revealed structure was constraining strategy, compounded by environmental shifts making diversified structure increasingly untenable.

Proactive restructuring could have prevented or mitigated the crisis. Years of consumer complaints, business unit silos preventing quality oversight, complexity (77,000 employees across unrelated industries) straining coordination.

The CPAP crisis illustrates that structural misalignment creates latent vulnerabilities that become catastrophic when factors converge. Proactive realignment requires leaders to recognize when incremental change is insufficient and initiate frame-breaking change before crisis forces it—especially difficult in safety-critical industries where the cost of waiting is measured in lives.

Need for structural changes

Structural adaptation becomes necessary when strategic objectives change, new markets or products are pursued, or environmental conditions shift significantly.

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

Organizations can pursue vertical integration (forward or backward), horizontal integration, or related diversification.

Each integration strategy requires different structural approaches.

Integration strategies significantly influence organizational structure requirements (Harrigan, 1985):

Structural design principles

Lawrence & Lorsch (1967) outline following guidelines for integration strategies:

1. Differentiation: Maintain specialized capabilities in each integrated unit
2. Integration mechanisms: Create coordination systems across integrated operations
3. Conflict resolution: Establish processes for resolving inter-unit conflicts
4. Information systems: Develop shared information and control systems

For detailed treatment of integration strategies and structure, see Harrigan (1985) and Porter (1985).

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.

For detailed analysis of structural choices, see Galbraith (2014) and Burton et al. (2015).

Simple structure

Simple structure based on Dess et al. (2014)

 

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

• 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

Functional structure based on Dess et al. (2014)

 

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

• Characteristics: Employees grouped by specialized functions, clear hierarchy, centralized decisions (David & David, 2016; Dess et al., 2014)
• 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

Divisional structure based on Dess et al. (2014)

 

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

• Characteristics: Semi-autonomous units by product/market/geography, profit accountability (David & David, 2016; Dess et al., 2014)
• 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

Discussion

Philips historically operated with a divisional structure across multiple industries (lighting, healthcare, consumer electronics, semiconductors).

What do you think were the advantages of this structure for Philips in the 1990s-2000s?

From your point of view, why did these turn into disadvantages?

Advantages in the 1990s-2000s:

• Risk diversification: multiple revenue streams protected against industry-specific downturns
• Technology spillovers: core competencies in electronics and optics transferred across divisions (lighting expertise → X-ray tubes → medical imaging)
• Resource allocation flexibility: profitable mature businesses (lighting, consumer electronics) funded emerging healthcare innovations
• Appropriate structural fit: divisional structure matched organizational size and enabled decentralized accountability

Why advantages became disadvantages (2010s-2020s):

• Technology synergies disappeared: healthcare required specialized AI/software capabilities unrelated to consumer products; LED lighting diverged from medical imaging technology.
• Regulatory divergence intensified: healthcare became heavily regulated (FDA, patient safety) while consumer products remained minimally regulated, creating incompatible governance requirements and risk profiles.
• Strategic focus dilution: specialized competitors (Siemens Healthineers, GE Healthcare) outmaneuvered Philips. The CPAP crisis revealed the fatal cost: patient safety issues buried in silos because corporate leadership was distracted across multiple industries.
• Capital market penalty: investors valued focused “pure plays” over conglomerates. Successful spin-offs (ASML, NXP, Signify) proved diversified Philips was worth less than sum of parts.
• Coordination costs exceeded benefits: Administrative overhead of managing 77,000 employees across unrelated businesses with duplicated functions outweighed any remaining synergies.

The divisional structure lost strategic fit between structure and environment. When technology platforms diverged, regulations intensified, and competition demanded specialization, diversification advantages evaporated while costs (complexity, diluted focus, governance challenges) amplified. Healthcare became a distinct industry requiring safety culture incompatible with consumer product management - what once enabled flexibility now created dangerous rigidity.

Matrix structure

Matrix structure based on Dess et al. (2014)

 

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

• Characteristics: Dual reporting relationships, shared authority, project-based teams (David & David, 2016; Dess et al., 2014)
• 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 represents a hybrid approach that combines divisional autonomy with corporate portfolio management and strategic coordination.

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 et al., 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 et al. (1994) and Campbell et al. (1999).

Discussion

Philips spun off or sold multiple SBUs including Signify (lighting), ASML (semiconductors), and NXP (chips). These companies are now very successful independently.

What did Philips gain and lose through this “de-diversification”?

Compare this to companies like GE or Samsung that maintain SBU structures.

Jakobs’ philosophy captures the strategic shift: “It’s not about where you do innovation—it’s about the impact.” Philips chose focus over breadth, betting that excellence in healthcare beats mediocrity across multiple industries. The restructuring trades diversification’s safety for specialization’s performance, accepting healthcare-only risk to gain execution excellence and unified purpose—essential in safety-critical industries where divided attention can be measured in lives lost.

Gains

Strategic clarity & execution:

• Clear identity as healthcare technology company enabling “simpler, leaner organization” (Jakobs’ stated goal)
• Concentrated management attention: patient safety as unambiguous #1 priority (impossible when distracted by consumer electronics)
• €1.5 billion in cost savings since 2023 through elimination of cross-SBU administrative overhead

Organizational alignment:

• Structure now matches strategy: healthcare-only focus enables unified safety culture
• AI integration enterprise-wide: “There is no single product in Philips that does not have AI” - coherent technology strategy impossible in diversified structure
• Cultural transformation: 12-point engagement increase despite layoffs because “we were respectful and clear about why” - singular purpose enables clarity

Market performance:

• Unlocked shareholder value: spin-offs (ASML, NXP, Signify) worth more independently than within Philips
• Healthcare pure-play positioning in growth market vs. conglomerate discount

Losses

Risk & scale:

• Total dependence on healthcare market (e.g., no cushion from other industries during healthcare-specific downturns)
• Reduced overall scale and bargaining power

Strategic options:

• Committed to healthcare with limited pivot capability
• Lost diversification’s traditional risk management benefits

Performance implications

Different organizational structures create distinct performance patterns: efficiency vs. innovation trade-offs, speed vs. coordination challenges, and cost vs. flexibility implications.

Research by Chandler (1990) and Burton et al. (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

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

 

 

 

 

 

 

 

 

 

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

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

1. Size: Increasing size creates need for formalization and coordination
2. Strategy: Strategic changes require structural adaptation
3. Environment: Environmental complexity demands structural responses
4. Technology: Technological changes influence optimal structure
5. 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.

Reflection

Form small groups of 3 to 4 students. Discuss your findings from reading Lorenz & Buchwald (2023). Prepare to present the key findings.

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.

15:00

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 & 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 & 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

Organizations need to balance exploitation (efficiency and optimization) and exploration (innovation and new opportunities) through structural mechanisms.

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.

Discussion

Jakobs states “There is no single product in Philips that does not have AI” while simultaneously emphasizing patient safety as the #1 priority.

• How is Philips balancing exploration (AI innovation) with exploitation (safety, reliability, regulatory compliance)?
• What structural mechanisms enable this ambidexterity?
• What are the risks of getting this balance wrong in healthcare?

Simultaneous dual focus: AI integration across all products while establishing “patient safety is #1 priority” as non-negotiable foundation. Jakobs avoids overcorrection, explicitly stating he’s “not aiming for 100% no-failure rate, which would prevent many new product launches” - recognizing excessive safety focus kills innovation.

Structural mechanisms enabling ambidexterity:

Separate but coordinated leadership

• Chief Patient Safety and Quality Officer (exploitation) reports directly to CEO, ensuring compliance
• Innovation leadership (exploration) drives AI integration
• CEO personally bridges both functions

Integration processes

• Regular forums reviewing “process and product performance”
• Time for employees to reflect on “how their day-to-day activities trickle down to patient safety”
• Open problem discussion forums preventing safety concerns from being suppressed

Use-case validation

• “You need to understand the use case very well…get closer to the practice to really see what the innovations do” - grounds AI development in clinical realities

Risks of getting this balance wrong:

• Over-exploitation (safety paralysis): Beneficial AI tools never reach patients; competitors deploy superior diagnostics
• Over-exploration (innovation recklessness): The CPAP crisis demonstrated the catastrophic cost - 500+ deaths when safety was insufficient. In healthcare, errors are irreversible, trust-destroying, and heavily regulated (FDA can shut down entire product lines).

Philips’ lesson: Make safety the enabler of innovation, not the enemy. As Jakobs notes, four streams must align: “Technology, clinical practice, financial regime, and regulatory environment” - innovation without regulatory approval is worthless; safety without innovation is stagnation.

Structural transitions

Prologue

Most successful firms experience periods of convergence with incremental changes followed by periods of upheaval with major system-wide transformations (Mintzberg, 2014).

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 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

Periods of upheaval with frame-breaking change occurs in response to major environmental shifts and involves revolutionary transformation of organizational systems.

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

1. Industry discontinuities: New technologies disrupting existing business models, emergence of substitute products, regulatory changes
2. Product life-cycle shifts: Moving from growth to maturity phases, market saturation, changing customer needs
3. 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 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 Barnett & Salomon (2012) and make notes on following questions:

• What are the primary objectives of Barnett and Salomon’s study regarding CSR and financial performance?
• How do the authors measure CSR and financial performance in their study?
• What are the main findings of the study regarding the relationship between CSR and financial performance?
• Were there any unexpected or counterintuitive results in the research findings? How do these findings contribute to the understanding of CSR in strategic management?
• How can the findings of this study inform strategic management practices?

Q&A

Literature

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