Design Principles For A Robust Operating Model

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Design principles for a robustoperating modelTranslating strategy into a small set of specific principlesis the crucial first step in designing an effective model.By Marcia Blenko and James Root

Marcia Blenko is an advisory partner with Bain & Company’s Organizationpractice. James Root is the leader of the practice in Asia-Pacific. They arebased, respectively, in Boston and Hong Kong.Copyright 2015 Bain & Company, Inc. All rights reserved.

Design principles for a robust operating modelStructure follows strategy.Bain Brief “Winning operating models that convertstrategy to results.”)Business historian Alfred Chandler proposed his thesisin 1962, observing that successful companies evolvetheir organizational structures based on their strategies.Chandler described how four American conglomerates that dominated their industries from the 1920sonward shifted from a functional, monolithic organizational form to a more loosely coupled multidivisionalstructure in order to address the challenges of growthand diversification.The crucial first step in designing an appropriate operating model is to translate the strategy into a set of designprinciples—simple yet specific statements defining whatthe organization must do to enable execution of the strategy. A carefully drafted set of design principles, typicallybetween 7 and 15 statements, helps align the leadershipteam around objective criteria for designing the operatingmodel. This approach can apply to an entire company,a business unit or an individual function.Chandler’s insight that the organization must evolve tosupport strategy still holds true. But the challenge hasbecome more complex as organizations must now bedesigned to support many more growth avenues, including new products, new steps of the value chain, newgeographies, new customer segments and new channels.Defining what matters mostDesign principles specify strategic requirements that theoperating model must support. They also pinpoint aspectsof the current organization that could hinder the futurestrategy and therefore must change, as well as organizational strengths that should be preserved (see Figure 1).While principles can cover a lot of ground, they usuallyaddress some combination of the following areas thatare most relevant to their business:Too often, companies make one of two missteps. Somefail to evolve their organization quickly enough to matcha shift in strategy. A European technology company, forinstance, stifled the growth of an innovative product bykeeping it highly integrated with the existing core business, which starved it of the resources, managementfocus and flexibility needed to realize its potential.The second mistake is to move full steam ahead witha new organization design that does not match howthe business will actually create value. Consider thefinancial services company that moved from multipleindependent divisions to a more integrated model inorder to encourage cross-selling. Gearing the organization around this relatively small opportunity addedcomplexity, slowed decision making and distracted thedivisions from realizing major growth opportunities intheir individual businesses.So how can companies avoid these mistakes and ensurethat they forge that link between strategy and organization? They need to go beyond structure to define theirentire operating model, the blueprint for how resourcesare organized and operated to deliver the strategy. Allelements of the operating model—structure, accountabilities, governance, essential behaviors as well as theway people, processes and technology get integrated todeliver key capabilities—must be explicitly designedto support the strategy. With this high-level blueprintdefined, more detailed organization design can follow.(For an overview of operating model design, see the1 Focus on the specific sources of value in the business.For example, a historically US-centered food company that was expanding internationally establisheda principle to “ensure a strong focus on our highpriority growth markets.” And Olam International,the Singapore-based commodities trading company,has a clear principle of optimizing the supply chainright up to the farm gate. As a consequence, Olammakes sure that local managers give relationshipswith local farmers the highest priority, because thosefarmers start the value chain. Call out the critical decisions. The right operatingmodel should make it easier to make important decisions quickly and effectively. Good principles oftenhighlight specific types of decisions that the newmodel should facilitate. For instance, a technologycompany articulated the need to “improve howproduct roadmap decisions reflect customer requirements.” A consumer products company stated that“execution of global brands, including pricing andpromotion decisions, should be highly devolved.” Define scope and business boundaries appropriately,ensuring that the model reflects opportunities forcustomer-, cost- and capability-sharing across the busi-

Design principles for a robust operating modelFigure 1: Design principles articulate how the operating model will support strategic priorities and ensurethe organization works effectivelyStrategic prioritiesDesign principles AmbitionOrganizational assessment Organizational andcultural strengthsand weaknesses Where to play, how to win Specific elements Heritage and valuesessential to success– Sources of growth– Drivers of value– Business definition Effectiveness ofcritical decisions– Target customers Gaps in key capabilities– Critical capabilities– Key decisions– Cost targetsSource: Bain & Companybusiness with us.” A medium-sized, high-growthcompany specified the need to “professionalize ourprocesses and improve coordination across productareas while minimizing bureaucracy.”nesses. A consumer products company recognizedthat the market had evolved and its product should inthe future be managed globally in many respects. Itdefined its principle: “Product development andbranding should be managed globally while maintaining local sales, marketing and customer insight.” Where firm culture plays a major role, aspects of theculture can be called out. One company that runs anonline marketplace and has grown through manyacquisitions has a principle to “preserve the entrepreneurial spirit that had driven our past success.”This statement guided the new model to includebusiness units with leaders retaining many of theirgeneral manager responsibilities.Explain which capabilities are essential to fulfillingstrategic goals, such as “support a repeatable productdesign process that balances customer requirementsand technical feasibility” or “allow us to easily add andsubtract businesses.” The latter principle, for instance,would infer an operating model that maintains minimal integration across its business units. One beverage company identified winning with25-year-old male customers as a strategic priority. Soone of its design principles highlighted insights intothese customers and point-of-sale execution as twocapabilities the operating model needed to emphasize. Articulate organizational strengths to preserve orweaknesses to address. A company that had acquireda series of businesses, all selling to the same customers, articulated a principle to “ensure that how wego to market makes it easy for our distributors to do2Clarify the role of the center in leveraging scale andexpertise. A chemicals company established a principle that “the model will have a bias for simplicity andlocal-market focus. Organizational elements that addcomplexity or centralize activities must unambiguously add value.” Another specified that “any unitthat generates more than 80% of the demand for ashared service will have responsibility for managingthat service.” And a global business services companymade it clear that the new model should leverageexpertise at the center with its principle that “allmajor bids will be supported by a global bid team.”

Design principles for a robust operating modelPutting design principles to workmately will accelerate development of the model. Seniorleaders themselves need to spend sufficient time debating,refining and then using the principles so that they takefull ownership. Delegation simply does not work.Practical use of design principles comes when a seniorexecutive team evaluates different operating model options. One service company had spent a decade acquiringbusinesses to build a global powerhouse, but its operatingmodel did not fully leverage the company’s scale or globalcapabilities in activities such as common purchasing orbranding. The executive team split into two factions, onearguing for a strong country-based model while the otherpushed for a more centralized model.Passing the “dog food” testAcross industries and countries, effective principles sharethree characteristics.First, they’re grounded in facts in order to bring objectivityto a charged environment. When companies decide theiroperating model needs to change, the discussions that follow can degrade into emotional defenses of the status quo.Principles informed by a fact-based strategy encourage impartiality, highlighting gaps and forcing difficult choices.So the team drew up, and aligned on, seven principlesaimed at improving local strength and flexibility whileusing global scale to better advantage. Based on thoseprinciples, senior leaders could objectively evaluate fouroperating model options, and the process allowed themto make a clear choice of a matrix model with functionsleading in select areas where scale and expertise mattered,such as procurement and branding. The model also specified mechanisms to promote collaboration with thecountries (see Figure 2).Second, they’re specific enough to help senior management make trade-offs. A large industrial company decidedto redesign its operating model several years ago, and thesenior team spent substantial time articulating designprinciples. But the CEO worried that some principleswere too generic to help them evaluate different operatingmodel options. “Can any of them equally apply to a dogfood company as to us?” he asked.Aligning the senior executive team on principles beforegetting into debates on operating model solutions ulti-Figure 2: Design principles provide the basis for evaluating operating model alternativesModel 3 best satisfies the design principlesOne service company’s design principlesModel 1:CountrybasedModel 2:Matrix,countries leadModel 3:Matrix,functions lead1. Leverage scale, pool capabilities andmaximize benefits for all businesses.2. Improve expertise, consistency and collaborationin marketing, sales and R&D.3. Align organization behind needs of keyglobal accounts.4. Leverage scale in relationships with suppliers.5. Improve or maintain local speed and flexibility, andcustomer responsiveness.6. Eliminate unnecessary duplication of local activities.7. Improve ability to influence regulators at all levels.EasierSource: Bain & Company3Some improvementHarderModel 4:Globalfunctions

Design principles for a robust operating modelA beacon for employeesHis question, while tongue in cheek, crystallized a realchallenge: Generic statements such as “leverage scale”or “create a streamlined organization” initially feel goodbecause people readily accept them, but they have littleexplanatory power. Any successful operating model startswith specific, clear principles that will help distinguishbetween operating model choices. For a sports appareland equipment maker, for instance, the generic “improvecollaboration across different categories” contains lessuseful direction than “make it easy for us to deliver coordinated head-to-toe apparel and footwear to stores intime for the season.”Ultimately, strong, specific design principles underpin allsuccessful operating models. Construction of a house proceeds most effectively when the owner, architect and generalcontractor have detailed discussions first about the important design features and resolve potential problems beforeconstruction starts. Similarly, writing and debating the principles for an operating model design gives senior executivesa chance to address the most vital issues, identify potentialproblems and resolve ambiguity. Strong design principlessynthesize choices that leaders have made about whatmatters most. That precludes unnecessary debates fromreopening later on.Third, effective principles stay brief. The best sets of principles fit on one page. If they exceed 10 or so, it’s best toidentify the ones that should be weighted most heavily.Moreover, they endure. One manufacturing companythat redesigned its operating model five years ago stilluses the same principles to explain the model to employees as well as to test the merit of proposed additionalorganizational changes. The best principles serve as aconstant beacon when the operating model is implemented and as it evolves.Tripping up on these three characteristics can derail theprocess. And there are a few other pitfalls that leadersshould anticipate and avoid (see Figure 3).Figure 3: Common pitfalls related to design principlesPitfallsConsequencesStrategy not sufficiently fact-based and specificto inform principlesPrinciples not grounded in strategy, likely to beinconsistent and misaligned, will not endurePrinciples bland or indistinctPrinciples don’t help make difficult operating modelchoices and trade-offsToo many principlesOperating model design solves for too many factors,dilutes the most important onesPrinciples focus too much on organizational structureLeaders don’t consider other aspects of the modelthat are essential to make structure workLeaders not aligned around robust principles,design debate descends into emotions and politicsOperating model is designed around the people,not valueLeaders abandon or dilute principlesduring implementationDesign loses coherence, costs increase,execution slowsSource: Bain & Company4

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