operating model

Manojit Chattopadhyay

Define An Operating Model

Business strategy provides direction, an impetus for action
Companies rely on strategy to guide IT investments
IT executives work to align IT and IT enabled business strategic
alignment with stated business strategy
Business-IT strategic alignment can be an elusive goal
Business strategies are multifaceted like which market to compete, how
to position company in each market, which capabilities to develop and
leverage
Strategic priorities can shift in response to competitors initiative or to
seize new opportunities

Thus, strategy rarely offers clear direction for development of

stable IT infrastructure and business process capabilities

To best support a companys strategy they should define an

operating model

An operating model provides long-term IT

requirements
A firms operating model is: the desired level of business
process integration and business process standardization for
delivering goods and services to customers.
The operating model describes how a firm will profit and
grow.
It drives the design of foundation for execution
It enables rapid implementation of a range of strategic
initiatives
It is also a choice about what strategies are going to be
supported
Operating model decision (or lack) has profound impact
on how a company implements business processes and
IT infrastructure.

Defining Business Process Standardization and Integration

Business Process Standardization
Standardization is the level to which business
processes are (and supporting systems) are
defined and executed regardless of who is
executing the process and location in which it
is performed.
Benefits: ability to measure the process and
compare it to the same process being executed
by another person or in another location.

Business Process Integration

Integration is the level of linking of shared data between various
organisational units (e.g., departments, cost centres). For example, if the
data available to a customer service representative to take an order is the
same as that available to the shipping department, we say that the
processes are integrated.
Benefits: it can facilitate transactional processes such as a customer
placing an order, or across processes to allow a single face to the
customer.

There Are Four Operating Models

Different Standardization Requirements

of the Four Operating Models

Deltas Unification Operating Model

Capabilities provided by Unification Model

Scale: supports efficient, reliable global
operations
End-to-end visibility of business processes
Availability of data to provide customer service
information and analyze pricing, scheduling, etc.
Rapid expansion of existing processes to new
markets or for related products and services
Supports integration of acquisitions of
competitors

Risks and Limitations of Unification Model

Highly IT dependent, needs sophisticated
back-up and recovery
Locks in existing business processes and data
definitions; not flexible for related products
and services demanding different types of
business processes
IT can become monolithic and slow
Demands enormous organizational discipline
and thus is difficult to implement

P&G's Diversification Operating Model

Strong marketing and customer focus
Ownership of unique business processes
Product and service innovation and delivery
Catalogue of servicessome mandatory,
some optional
Marketing approach to build brand
awareness and loyalty to GBS services
Ownership of shared solution business
processes
Unit price management with guaranteed
reductions over time
Scorecard of GBS performance with variable
compensation
Architecture interconnecting the different
solutions to be building blocks for innovation
New product development group to add new
solutions
Management of outsourcing partners

P&G's Diversification Operating Model (cont'd)

P&G Global Business ServicesEmployee Services & Solutions
Employee Services

Pay, benefits, policies, career development, work plans

People Management

Compensation planning, relocation, employee management tools

Facilities

Office moves, conveniences: banking, dining, fitness centers, mail &

Documents

Computers
Communications

& PCs, e-mail, mobile phones, Intranet, service support

Meetings

Rooms, technology & scheduling, audio & video conferencing, events

Travel

Booking, expense accounting, credit cards, group meetings

P&G Global Business ServicesBusiness Services & Solutions

Purchases

Strategic sourcing, supplier relationship management, procurement

service

Financial Services & General ledger, affiliate accounting, product/fixed asset accounting,
Solutions
expense,sales/marketing accounting, purchases-to-payment (include
accounts payable), banking, financial reporting

Product Innovation

Bioinformatics systems, product imaging & modeling systems

Supply Network Solutions

Demand planning systems, total order management, physical

distance systems

Consumer Solutions

Prime prospect research, CRM systems, advertising & media

measurement

Customer Solutions

Shopper intelligence, in-store action planning, trade

fund management systems

Initiative Management

Technical package & materials design, package artwork

process, portfolio tracking & reporting

Business Performance
Solutions

Decision cockpits, market mix modeling, competitive

intelligence, ad-hoc business analyses

MetLifes Coordination Operating Model

The Coordination Operating Model

Platform
Focuses on providing data visibility to meet customer needs
Single face to customer
End-to-end business processes
Allows customization of services according to customer needs and
encourages local expertise while leveraging global products and services.
The platform can be extended as firm adds markets or products.
The platform demands disciplined use of datapreservation of data
standards; timely input of data.
As products and services become commodities, can move toward
unification; coordination is not a low-cost model.
Less prone to disruption than unification and replication models.

ING DIRECTs Replication Operating Model

Multiple Operating Models

Organizations may have one operating model
at the highest level, but have different
operating models within each of the operating
units.

Johnson & Johnsons Multiple Operating Models

Target Operating Model of One Full-Service Bank

Aspirations of the Retail Banking Head

at the Full-Service Bank

Transformation of Operating Models

A business may have evolve over time from
one model to another as the organization
grows and matures.
There is nothing wrong in transition of model
rather the important point is that there is an
operating model strategically chosen for the
organization and that it supports the
competitive advantage and direction of the
company.

Business Transformation at Toyota Europe

Toyota Motor Marketing Europe 2002
Sales growing dramatically:
384,000 units in 1995
727,000 units in 2002
Toyota Europe structured as 28 independently managed
country operations:
Cars and parts ordered from 9 European manufacturing plants
All product and spare parts inventories managed within
countries
Little transparency of supply and demand
Different systems and processes in each country
Operating loss FY 2002 9.9B

Toyota's Operating Model Transitions

Toyota Europe's Transformation

Target Operating Models

An operating model provides long-term IT

requirements
An operating model provides long-term IT
requirements
A firms operating model is: the desired level
of business process integration and business
process standardization for delivering goods
and services to customers.
The operating model describes how a firm will
profit and grow.

High
Low

Business Process Integration

Applying the Operating Model on growth opportunities

Coordination
Organic:
stream
of
product
innovations easily made available to
existing customers using existing
integrated channels
Acquisition: can acquire new
customers for existing products but
must integrate data

Unification
Organic: leverage economics of
scale by introducing existing
products/services in new markets,
grow product line incrementally
Acquisition:
can
acquire
competitors to leverage existing
foundation, must rip and replace
infrastructure

Diversification
Organic: small business units may
feed core business, company grows
through business unit growth
Acquisition: unlimited opportunities,
must ensure shareholders value

Replication
Organic: replicate best practices in
new markets, innovations extended
globally
Acquisition:
can
acquire
competitors to expand market
reach, must rip and replace

Low

High

Business process standardization

The Operating Model Choice

Requires that management articulate how the firm will
profit and grow. It's a commitment.
Can be implemented gradually
Diversification allows for incremental layers of shared services
Unification allows for modular implementation (by geography or
process) of standardized and integrated processes
Replication allows for evolution of new services to be rolled out to
all sites
Coordination allows for increasingly powerful data repositories and
extension to new channels

Creates characteristic opportunities and constraints.

Imposes different demands for governance.

Operating Model Lessons from Top Performers

Make Tough Choices
An operating model is a commitment to a way of doing business. It
involves eliminating some strategic options in order to better deliver on
others.
Consider the Off-Diagonals
As firms seek more integration and standardization the Coordination and
Replication models allow for more rapid implementation and payback than
the Unification model.
Prepare for a Transformation
Transitioning from one operating model to another will always involve a
transformation. Small steps toward the targeted operating model can make
changes more evolutionary than revolutionary.
There is No Substitute for Strong Senior Management Leadership
Firms getting strategic business benefits from an operating model have
senior business leaders who are actively involved in its design,
management and implementation.