operating model

Manojit Chattopadhyay

Reference:Ross et al., 2008. Implementing operating model via enterprise architechture, HBR. 8069BC
 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 company’s strategy they should define an

operating model
 “A company with a strong alignment between its
strategy and its operating model is like an engine
firing on all cylinders.”

strategyand (pwc)

• Building a strategically aligned, “fit for purpose” operating model continues to be an

elusive goal for many companies.
• struggling with the symptoms of an underperforming operating model that dismisses
or ignores accountability.
• Among other things, an operating model determines behavior, workflow and process
design, IT decisions, and investment decisions.
• When an operating model is inconsistent with the broader objectives of the business,
that misalignment affects the day-to-day actions of individual employees and
ultimately creates an insurmountable gap between strategy and execution.
 *An operating model provides long-term
IT requirements*
• A firm’s 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 (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
Delta’s 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 services—some 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 Services—Employee 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 & PCs, e-mail, mobile phones, Intranet, service support
Communications
Meetings Rooms, technology & scheduling, audio & video conferencing, events
Travel Booking, expense accounting, credit cards, group meetings
P&G Global Business Services—Business 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 Decision cockpits, market mix modeling, competitive
Solutions intelligence, ad-hoc business analyses
MetLife’s 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 data—preservation 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 DIRECT’s 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 & Johnson’s 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 firm’s 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.
 Applying the Operating Model on growth opportunities

Coordination Unification
•Organic: stream of product •Organic: leverage economics of
innovations easily made available to scale by introducing existing
existing customers using existing products/services in new markets,
High
Business Process Integration

integrated channels grow product line incrementally

•Acquisition: can acquire new •Acquisition: can acquire
customers for existing products but competitors to leverage existing
must integrate data foundation, must rip and replace
infrastructure
Diversification Replication
•Organic: small business units may •Organic: replicate best practices in
feed core business, company grows new markets, innovations extended
through business unit growth globally
Low

•Acquisition: unlimited opportunities, •Acquisition: can acquire

must ensure shareholders value competitors to expand market
reach, must rip and replace
Low High
Business process standardization
Coordination and unification models benefit more from consolidated views of
customer and data across the enterprise than do diversification and
replication models.
Technical/operational model grid
Component Coordination Unification Diversification Replication
√ √
Customer data

√
Product data √

Shared services √ √ √ √
Infrastructure technology √ √ √

Portal technology √

Middleware technology √

Operational processes √ √

Decision making processes √

Application systems √

Systems component technology √

 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.