7. Strategic change

What is strategic change?

Strategic change means making fundamental changes to the business model (value creation) or the organisation. It can occur in three places: organisational, financial and portfolio.

The business model describes how an organisation makes money: the combination of resources, value-creating activities and the products or services offered. The organisational system describes how people work together and how work is organised; it supports the business model and has three components:

• Organisational structure: how tasks and people are divided into groups and hierarchical layers (by function, market or region).
• Organisational processes: agreements, procedures and routines used to coordinate work and control activities.
• Organisational culture: shared values, norms and beliefs that shape behaviour and cooperation.

There is also an informal organisational structure: social relationships and power relations that are not formally recorded. Someone can formally hold a leadership role but have little influence in practice.

The problem of strategic alignment: magnitude and pace

Revolution versus evolution

Managing the paradox (navigating): managers decide per situation whether change should be gradual or radical. In stable periods small adjustments often suffice; in turbulent periods drastic measures may be needed.

Contextual factors: available time, the scope of the change (one department or the whole organisation), organisational culture, employees' readiness for change, the power of management, the organisation's capabilities and resources, and the degree of diversity among staff.

International perspective: change differs by country, organisational structure and the role of top management. In bureaucratic organisations with many rules and hierarchy, change is harder and radical change is sometimes necessary; in organic, self-managing organisations change is more spontaneous and gradual. Time horizon also matters: short-term oriented organisations or cultures more often choose fast, radical change, while long-term oriented ones prefer gradual, continuous change.

Reading 8.1: Reengineering work (Michael Hammer)

"Don't automate, obliterate": new information technology should not merely automate existing processes but be used to redesign them completely for radical improvement. Quality, innovation and service matter more than cost, growth and control. Principles:

1. Organise around outcomes, not tasks: one process combining several steps instead of separate departments.
2. Have those who use the output of the process perform the process, so adjustments are faster.
3. Subsume information-processing work into the real work: no separate departments for collecting information.
4. Treat geographically dispersed resources as though they were centralised, using technology to combine scale with flexibility.
5. Link parallel activities during the process instead of integrating results afterwards, avoiding errors and extra coordination.
6. Put the decision point where the work is performed, giving employees more autonomy.

Reading 8.2: Building learning organisations (Peter Senge)

Learning organisations see learning as a key competitive advantage and encourage employees to keep developing new ideas and adapting. Leaders design vision and structures, help people learn and support the organisation. Key leadership skills: building a shared vision (developing and communicating a personal vision, building on intrinsic motivation), surfacing and challenging mental models (critically examining existing thinking patterns and assumptions) and systems thinking (seeing problems as part of a larger whole rather than isolated events).

Reading 8.3: Ambidextrous organisations (Tushman and O'Reilly)

Ambidextrous organisations can carry out both gradual (evolutionary) and radical (revolutionary) change. They combine exploiting existing activities with developing new innovations, improving continuously while periodically making radical changes. A risk is that successful organisations hold on too strongly to their existing way of working, leading to inertia and failed change.

Textbook deepening: De Wit, Ch. 8 (Strategic change)

The sections below add the theory from the textbook chapter on strategic change to the lecture notes above.

Operational versus strategic change; strategic alignment

Not all change is strategic. Operational changes are ongoing "fine-tuning" (upgrading procedures, improving activities, reassigning people) that raise performance within the existing system. Strategic changes create a new type of alignment: a new fit between the basic set-up of the firm (its business model and organizational system) and the environment. Example: adding lemon-flavoured Coke is not strategic change, branching out into bottled water is; hiring a new CEO is not in itself strategic change, but the new CEO's reorientation towards a new vision is. The process of constantly enacting strategic changes to stay in harmony with external conditions is called strategic alignment. If the firm does not keep up, it suffers strategic drift (Johnson): it drifts away from the environment into misfit, which requires strategic renewal (Figure 8.1).

The organizational system as a "corporate body"

Following Bartlett and Ghoshal, De Wit dissects the organizational system with a body metaphor (Figure 8.3): the business model is the firm's work, the structure its anatomy, the processes its physiology, the culture its psychology and the organizational members its cells. Formal definitions: the business model is "the specific configuration of resources, value-adding activities and product/service offerings directed at creating value for customers"; the organizational system is "how the individuals populating a firm have been configured, and relate to one another, with the intention of facilitating the business model".

• Structure: the clustering of tasks and people into smaller groups (horizontal differentiation), balanced by integration mechanisms, most fundamentally formal authority. The span of control (number of people or units reporting to a manager) determines the number of management layers; key questions are the number of layers and how much authority is delegated. The board of directors is at the apex.
• Processes: arrangements, procedures and routines to control and coordinate people and units, from organization-wide planning, budgeting and reporting to limited ones (product development meetings, quality circles) and temporary ones (task forces, committees, project teams). Informal processes include gossip, networking, informal negotiation and impromptu meetings.
• Culture: the worldview and behavioural patterns shared by members (Schein), an emotionally charged interpretive filter that channels behaviour ("the way we do things around here"). It can be a strong integration mechanism, but divergent subcultures can create psychological barriers.

Structuring criteria (Figure 8.4):

Magnitude and pace: extra detail

Figure 8.5 compares two change paths that reach the same total alignment: Change Path A in a few big, intermittent, fast steps and Change Path B in many small, steady steps. The y-axis shows accumulated change (magnitude), the x-axis time (pace); the slope of the line shows the speed. There are two quite different "mid-sized" steps: a focused radical change (narrow scope, high amplitude) and a comprehensive moderate change (broad scope, low amplitude); both are medium-sized but very different to manage. Timing ranges from intermittent (the right moment matters) to constant. A radical result (strategic change) can be pursued by revolutionary and by evolutionary means; it is a mistake to equate strategic change automatically with radical means and operational change with gradual means.

The demand for revolutionary change: sources of rigidity and triggers

Revolution is an abrupt and radical change within a short period that overthrows the status quo (a "big bang", frame-breaking). It is needed when rigidity is so deeply rooted that small pushes do not work. Sources of organizational rigidity:

Triggers because the window of opportunity is short: competitive pressure (eroding position, downward spiral, bold turnaround), regulatory pressure (public sector, banks, utilities, antitrust break-ups) and first mover advantage (cashing in on dissipation-sensitive know-how or limited patent periods before others enter).

The demand for evolutionary change

Evolution is a constant stream of moderate changes that gradually accumulate: each change is small, but the cumulative result can be large. Valuable "mutations" are retained, dysfunctional ones discarded, so a new model evolves out of the old, "like shedding old skin" (metamorphosis). It is needed because (1) strategic alignment often hinges on widespread organizational learning, which is slow (new routines, competences and ways of understanding require time to experiment, reflect, discuss, test and internalise) and (2) power is too dispersed for anyone to impose radical change. Some authors call for ambidextrous organizations using both, but once one mode is chosen it limits the use of the other, hence the paradox.

The discontinuous alignment perspective in more detail

Firms do not develop gradually: change meets resistance, tension builds and is released like an earthquake. People prefer stability; structures, processes, procedures, competences, power and culture solidify into a consistent configuration, especially after success. Stability is not harmful in itself: it is needed to work efficiently, and constant change creates confusion, insecurity and conflict. But its downside is rigidity, which small nudges cannot overcome: a coordinated assault and "shock therapy" are required (e.g. business process reengineering of the whole value chain at once, Hammer). The period of turmoil must be short, followed by a new equilibrium. Revolutions are often triggered by crises (environmental jolts such as new technology, recession, regulation, new entrants) or by a growing sense of misfit; "under pressure things become fluid" (Lewin: unfreeze and refreeze), so managers may prolong or even induce a crisis to create urgency. Change requires strong leadership that knows when to trigger an earthquake. Example: Goldman Sachs building the digital bank Marcus from scratch instead of adding "digital veneer".

The continuous alignment perspective in more detail

Revolution creates its own boom-and-bust cycle: after an exhausting revolution the organization longs for stability, change momentum collapses and the firm ossifies until the next shock. This is like running a marathon by sprinting and standing still; the tortoise beats the hare (Aesop). Revolution is often a substitute for diligence and reflects an obsession with short-term results (and quick recognition for managers). Continuous alignment is long-term oriented: everyone must continuously learn and unlearn (changing shared cognitive maps). A crisis actually inhibits this: "in the cold everything freezes", because crisis makes people seek security and focus on the short term instead of experimenting. Firms must continuously adapt, avoid inertia with flexible structures, an open culture and enough job security to tolerate ambiguity. Evolution requires a firm-wide effort: it can be led from the top, but not imposed from the top; leaders cannot learn on behalf of the organization. Example: Stora Enso (from copper mining in the 13th century to iron, paper and pulp, and now "the renewable materials company").

Managing the paradox: navigating in more detail

Over the long term, environmental change is episodic: periods of relative stability interrupted by short, dramatic periods of instability. Following natural historians Eldredge and Gould this is called punctuated equilibrium (Gersick; Tushman and O'Reilly). In stable periods gradual change is appropriate; during discontinuities drastic measures are needed (Greiner). Strategists, often with delay or overreaction, try to catch up with the environment, like a ship's captain "with one hand on the wheel and one on the throttle".

Strategic change in international perspective: extra detail

• Prevalence of mechanistic organizations: machine bureaucracies (English-speaking countries, France) have clear hierarchy, strict task differentiation, formalised processes and depersonalised, calculative relationships; they show high inertia (turf, status, positions), so revolution is often needed and the discontinuous perspective is preferred. Organic "clans" (Ouchi; Japan, and to a lesser extent Germany, the Netherlands, Nordic countries) integrate through informal communication, shared vision, trust and community, have a strong capacity for self-organization and favour continuous alignment.
• Position of employees: in mechanistic organizations people are expendable human resources; employers capture learning in systems to avoid dependence, employees hoard knowledge and job-hop. In clans people are the organization; secure positions raise tolerance for ambiguity, information is shared and firms invest in people, which suits evolutionary change. Explanations: individualism vs collectivism, labour market mobility (lifetime employment), availability of skilled self-managing workers (education, apprenticeships).
• Role of top management: where top management is the "central processing unit" with commander-type leadership, change is top-down and replacing top management is a standard turnaround measure (discontinuous perspective). Where top managers are "captains of the team" with servant-type leadership, change comes from within (continuous perspective).
• Time orientation: past- or present-oriented cultures view change less favourably; among future-oriented cultures, short-term oriented ones (most English-speaking countries: stock price sensitivity, short-term bonuses, stock options, job-hopping) prefer fast radical change, while long-term oriented ones (Japan, China, South Korea: long-term employment, growth over profit) prefer steady change.

Readings in the book's framing

Hammer (8.1) represents the discontinuous perspective: "at the heart of reengineering is the notion of discontinuous thinking"; reengineering "cannot be planned meticulously and accomplished in small and cautious steps. It's an all-or-nothing proposition with an uncertain result"; "stop paving the cow paths"; think big, set high goals, dare to take high risk. Senge (8.2) represents the continuous perspective: leaders build organizations where people continually expand their capabilities; the drive to learn is stimulated by creative tension between current reality and a compelling vision; leaders are designers, and teachers who ask challenging questions and shake up cognitive maps. Tushman and O'Reilly (8.3) bridge the two: short revolutionary periods are followed by longer evolutionary periods (punctuated equilibrium); firms must be ambidextrous, able to do both, sequentially or even simultaneously, by stimulating internal diversity (different strategies, structures and cultures side by side).