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The authors argue that organization design needs to play a more active role in the explanation of differential performance and outline a set of ideas for achieving this both in theoretical and empirical research. Firms are heterogeneous in terms of (1) how well they do things, capturing persistent productivity differences, and (2) how they do things – and both reflect firms’ organization design choices. Both types of heterogeneity can be persistent, and are interdependent, although they have typically been studied separately. The authors propose a simple formal framework – the “aggregation function framework” – that aligns organization design thinking with the emphasis on performance heterogeneity among firms that is characteristic of the strategy field. This framework allows for a more precise identification of how exactly organization design may contribute to persistent performance differences, and therefore what exactly are the assumptions that strategy and organization design scholars need to be attentive to.

The authors examine how firms can achieve organizational ambidexterity, that is, how they can successfully engage in concurrent exploitation of existing competencies and exploration of new competencies in their search for new products. Existing research has identified three enablers to manage these fundamentally different activities: temporal separation, structural separation, and the creation of context. Studying the strategic orientation, organization design, and performance of a unique sample of mid-sized German manufacturing firms, the authors find that the controlled interplay of decentralized decision making and formalized processes and goals is another effective means to manage the challenges of pursuing an innovation strategy balancing both exploitative and exploratory activities. The findings of this study suggest that this balanced control constitutes a fourth enabler of ambidexterity.