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Strategy in the Context of Operating Model Design

by David Winders and Kirill Derevenski :

We started this series with an article on the Operating Model Canvas.  We then did deep dives into each of the canvas domains. We now want to address the work that is done before developing an operating model: the strategy.”

Any work on operating model design is necessarily preceded by reflection with clear identification and explanation of what one actually wants to achieve. In the context of operating model design, strategy means reflection and clear identification of the desired outcomes required; with these outcomes being clearly communicated to those tasked with operating model development.

Strategy Today

There is much talk about strategy, it sounds exciting, senior, important, and executive. An investment prospectus or an annual report would be full of “strategy”. These glossy booklets talk about “turnaround”, “back to profitable growth” and “shareholder return” , the presented strategies sounding authoritative and in charge; but do these types of statement help us build the business?

Unfortunately the reality is that the majority of published strategies often fail in their effectiveness. People have high hopes for strategies with subsequently high expectations of them. More often a published strategy leads to disappointment, with the clearness and substance falling short of what people really hoped it would tell them.

Many individuals involved in day to day activity cry out for the clarity of a good strategy:

  • “Where are we going?”
  • “How does it all fit together?”
  • “We seem to drift from one crisis to another – where is the strategy?”

These comments, or others like it, are commonly heard in offices and factories across the world. This is because, while teams may understand the overall strategy direction, they lack clarity on what they actually need to do to achieve it. Another way to describe this would be to say there is “a disconnect” between the strategy and the day- to- day operation. After all, very few team members feel that they are responsible for strategy, but each individual is responsible for their part of the operating model.

Whilst most understand their own role in the operation few are clear of how what they do fits in with what everyone else does. This is one of the aims of an operating model in showing how all of the pieces of the puzzle fit together.

Connecting strategy with operating model

In a nutshell, connecting strategy with operating model means translating organisational rationale and goals into concrete objectives for operating model design. These objectives, or design imperatives, need to express the strategy in clear terms. They describe outcomes that practical people can use to start thinking about “what” and “how” to build or transform the operation from where it is today to where it needs to be tomorrow.

Prioritising rationale and goals is the key part of this initial step. In business design, same or similar outcomes may be achieved in a number of ways by making choices; but ‘if you do not know where you are going, any road will take you there’.

The main steps involved in strategic reflection for operating model design are demonstrated in the graphic below. It focuses on delivery within clear boundaries such as regulation, operational constraints and the anticipated costs for an operating model. It undertakes this reflection through identification and positioning of value creation offers to achieve desired rationale and goals.

We shall explore each of the areas in subsequent articles; in the meantime the main ideas are as follows (please note that they apply in equal measure to commercial and not-for-profit organisations).

Rationale and goals are answering the question of what we actually want to achieve. This may concern the whole organisation or a part of it. For example, commercialising a new idea may require a different operating model and so the goal is clear-cut. On the other hand, the goal of ‘entering a new market’ will require precision as to what geographic area and (possibly) with what product to go. When ‘increasing shareholder value’ is a goal, we should keep in mind that there are sales and costs facets to that equation and thus need to be clear to which we are targeting (or both). Non-commercial organisations too will have their rationale and goals like assisting others through charity, spreading knowledge or running countries.

Once rationale and goals are captured, we must define which value stakeholders will help us achieve our goals in the most effective way – who do we target. Clearly, any organisation will have many stakeholders, but for the purposes of operating model design we place focus on those that generate value for the organisation and those that consume value in exchange… For example, although shareholders are an important stakeholder group for an organisation, shareholders are not value creating ones.

Customers, on the other hand, are creating value for the organisation by providing revenue. In the case of non-commercial organisations the beneficiaries of the activity: charity. Mutual, club or public body, create value that is perhaps measured in something else other than money.

Suppliers or partners often are considered as value stakeholders as they create value through their innovation or expertise which contributes to the value of the organisation.

Many value stakeholders exchange value, both providing value and consuming it; this is where the idea of value propositions, or value offers, come in to play in the field of marketing and product design. Organisations create value for stakeholders in their products and services; the stakeholders then give that organisation back value in a different form in return for the benefits they see in the offer.

Once value stakeholders are identified some models suggest that we can move straight to creating value offers. While it is possible to do so for a “clean slate” organisation, the picture for an existing unit would not be complete without both assessing the outside world and its own resources and know how (internal capabilities) to deliver value. External factors involve analysing the business environment within which it operates and its competitors. Internal analysis means examining its infrastructure, assets, knowledge and core competencies. So, external and internal factors come together in the mix when considering of designing value offers.

In many instances, we will find that this value stakeholder analysis will frame tighter groups. This will make our value creating offer to specific groups so much more targeted and concrete. For example, a value offer (say, a car) for people earning over $100K may look different from a value offer (a car, again) for urban males aged 35-55 earning over $100K. Clearly, the latter offer has more chances to succeed provided the markets are economically viable.

We may need several iterations of value stakeholder analysis to define the value offer precisely. The key is to do it in a pragmatic and timely way to move along at a brisk pace. Two to three iterations will be sufficient for most purposes.

In most instances, the pathway for iterations would be going “clockwise in the graphic above”:

  1. intended beneficiaries
  2. external environment
  3. competition
  4. internal capabilities

It is important to note that there is no strict order and indeed it is also possible to start with internal capabilities and follow the route the other way (anticlockwise as drawn below).

  1. internal capabilities
  2. competition
  3. external environment
  4. intended beneficiaries

The only concern with this alternative flow using internal capabilities as the starting point is that care must be taken here to avoid internally centric analysis.

Keep in mind that each value offer is aimed at a discrete stakeholder group and it follows that if there is more than one value stakeholder group identified, the analysis and value offer identification must be performed for each separately identified group. For example in elderly care, seniors themselves and their families are two separate value stakeholder groups with separate needs and wants.

Once our value creation offers are defined, we can distill them into imperatives and objectives for operating model design. These are a set of up to 10 statements of what the proposed model will address and perhaps what it will not address. Out of scope statements might note that it may target only part of the organisation, or exclude certain units, geographies, products or beneficiaries. These imperatives will frame the operating model design by creating hard boundaries and constraints for the proposed solution, and will be referred to often to validate design choices down the road.

What is next?

This article makes clear the connection between strategy and operating model design. It also shows why Value Delivery Chains form the cornerstone of the Operating Model Canvas. In subsequent articles we will explore each of the strategy analysis tools in more detail – stay tuned!

 

The Transformation Journey from an Idea to its Ongoing Operational Success

By David Winders and Kirill Deverenski. October 2018

The last ten years have shown great promise in operational change with new and different ways of communicating how a business should be structured to deliver value to its stakeholders. Materials have moved away from stuffy journals and methods, often kept under lock and key by transformation consultancies, to bright simple and vibrant books and materials.

Continue reading The Transformation Journey from an Idea to its Ongoing Operational Success

On Importance of Information and Technology in the Operating Model Design

By David Winders and Kirill Deverenski. September 2018

This article concludes the series in which we have explored the six domains presented in the 2016 book Operating Model canvas. The purpose was to expand on each area and give some advice on how to populate each one with particular emphasis on linkage to value.

Information represents how the operating model considers the management of technology, information and data. In most cases this equates to information technology; it is interesting to note that in the past some organisations used to refer to their IT as IS (Information Systems) or even IS&T (Information Systems & Technology) so this Information domain clearly makes sense.

Continue reading On Importance of Information and Technology in the Operating Model Design

Form That Follows Function – Physical Organisation and the Operating Model

By David Winders and Kirill Deverenski. July 2018

In this series of articles we have explored each zone or theme of the Operating Model Canvas in order to provide better guidance on how to use the themes to describe the operating model.

The main message that has been presented in this series is that the operating model should be based on maximising the value provided to the client of the firm. In other words, “we need to design the operation to deliver the most value in the most efficient way”. In many cases, it is a balance between providing the most value against the financial impact of doing so (whether in costs or revenues) where compromises have to be made; this has been seen in several of the preceding articles. Physical organisation is no different.

Continue reading Form That Follows Function – Physical Organisation and the Operating Model

On Importance of Location in Operating Model Design

By David Winders and Kirill Deverenski. June 2018

Despite the recent profound changes in globalisation reach, management science and cultural awareness, location is perhaps one of the operating model areas of interest that is often taken for granted and not challenged during the process of operating model design and implementation.

Continue reading On Importance of Location in Operating Model Design

Charting Supplier Relationships in the Operating Model Design

by: David Winders and Kirill Deverenski. April 2018

In our earlier articles we have looked at the Value Delivery Chains and how to identify and heatmap the necessary prerequisites for its successful delivery. Here we are focusing on the all-important supplier relationships that any organisation will need to put in place to succeed.

Continue reading Charting Supplier Relationships in the Operating Model Design

Operating Model Canvas – The Management System.

Operating Model Canvas – The Management System.

by: David Winders and Kirill Deverenski. April 2018

In previous articles we have given attention to parts of the operating model that describe how value is created and delivered to customers. Most of the tools we propose have given focus to tracking value creation though breaking down value delivery chains into their components and rationale in order to challenge how we do things and ensure everything is exploited in the best way to delivery customer experience.

Continue reading Operating Model Canvas – The Management System.

Heat-mapping value: Identifying where to invest effort for Operating Model Design

By: Kirill Derevenski & David Winders March 2018

In the earlier article we spoke about placing value delivery chains at the heart of a Target Operating Model. We continue in this post with clear identification of necessary prerequisites for subsequent detailed operating model design using the Operating Model Canvas methodology.

Continue reading Heat-mapping value: Identifying where to invest effort for Operating Model Design

Putting value delivery chains at the heart of a Target Operating Model

by Kirill Derevenski & David Winders February 2018

An optimal Target Operating Model (TOM) is a representation – and a concrete realisation – of how an organisation is best structured to deliver maximal value to its beneficiaries. It contains a number of clearly defined and described elements – organisational makeup, supplier relationships, location mapping, information flows, decision grids and management systems – all composed in the best way to optimise value delivery chains to intended recipients.

Continue reading Putting value delivery chains at the heart of a Target Operating Model