Strategy in the Context of Operating Model Design

We started our article series with focus on the Operating Model Canvas methodology with a deep dive into the details of each of the canvas domains.  An operating model in itself is obviously just “a means to an end”. Prior to any operating model work is a necessary step – strategy.

Any work on operating model design must be 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, important, and executive-like. 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 sound authoritative and in charge; but do these types of statements 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 subsequent 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. Showing how all the pieces of the puzzle fit together is one of the aims of an operating model.

Connecting Strategy with Operating Model

In a nutshell, connecting strategy with the operating model means translating organizational 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.

Prioritizing 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 organizations).

Rationale and Goals

Rationale and goals are answering the question of what we actually want to achieve. This may concern the whole organization or a part of it. For example, commercializing 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 organizations 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 organization will have many stakeholders, but for the purposes of operating model design we place focus on those that generate value for the organization and those that consume value in exchange… For example, although shareholders are an important stakeholder group for an organization, shareholders are not value creating ones.

Customers and Revenue

Customers, on the other hand, are creating value for the organization by providing revenue. In the case of non-commercial organizations, it is the beneficiaries of the activity: charity. They 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 organization.

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. Organizations create value for stakeholders in their products and services; the stakeholders then give that organization back value in a different form in return for the benefits they see in the offer.

Creating Value Offers

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” organization, the picture for an existing unit would not be complete without both assessing the outside world and its own resources and knowhow (internal capabilities) to deliver value. External factors involve analyzing 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. Cleary, the latter offer has more chances to succeed provided the markets are economically viable.

Several Iterations

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 (counter clockwise 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. If there is more than one value stakeholder group identified, the analysis must be performed for each group. For example in elderly care, seniors themselves and their families are two separate value stakeholder groups.

Imperatives and Objectives

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. It will also include what it will not address. Out of scope statements might note that it may target only part of the organisation. Or it can exclude certain units, geographies, products or beneficiaries. These imperatives will frame the operating model design by creating hard boundaries and constraints. It 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!