Great Strategy, but Is Your Operating Model Up to the Task?

Great Strategy, but Is Your Operating Model Up to the Task?

Redesigning the operating model may be one of the smartest investments an executive can make.

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Great Strategy, but Is Your Operating Model Up to the Task?

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Great strategy with poor execution often leads nowhere. A company might lack certain key capabilities to execute the strategy. A constant swirl of revision may hold back decision making. Product or geographic complexity may have outrun the organization’s ability to keep pace.

So how do you jump-start stalled execution? When there’s a persistent gap between strategy and execution, the culprit is usually an obsolete or misaligned operating model. Individual changes like adjusting spans and layers may help, but an integrated solution will provide deep-seated, enduring change.

Redesigning the operating model may be one of the smartest investments an executive can make. Our analysis of companies in eight industries and 21 countries finds that companies with top-quartile operating model indicators—those with clear, robust operating models—have five-year compound average revenue growth that is 120 basis points faster and operating margins that are 260 basis points higher than for those in the bottom quartile.

These high-performing companies have set up their operating models so that the main elements of the model—organizational structure, accountabilities, governance and ways of working, along with the right capabilities (people, processes and technology)—all work together to support the strategic priorities.

Consider the remarkable turnaround at Ford. In 2006, new CEO Alan Mulally not only set a new strategic path, he and his senior team also overhauled Ford’s operating model. Ford moved from regional business units to a global functional model, setting the stage for more efficient and effective operations such as reducing the number of vehicle platforms. Governance and behaviors changed as well as Mulally pushed for more open debate and honesty about where problems were cropping up. He encouraged his team to simplify the way they worked, eliminating ineffective meetings and liberating thousands of unproductive hours. Thanks to a new strategy and an operating model redesign, Ford returned to profitability without a bailout from the American taxpayer.

Many companies with superior execution have followed four practices that allow their operating models to adapt to rapid change in their markets:

Stitch the organizational seams in the best places

Every organizational structure creates boundaries between departments, geographic units or lines of business and people must learn to collaborate across them. What’s important is to define the seams in a way that reflects how the company creates value, enables better decision making and balances operating-unit accountability with economies of scale.

For example, a chemical company that had seen costs rise for several years was plagued with complexity and duplication. After it pivoted from organizing along product lines to organizing around the value chain (upstream, operations, sales and marketing), the company was able to shrink the number of organizational entities by a third. Only by changing the operating model could the company dramatically simplify the organization and fundamentally improve its cost position.

Put customer priorities at the center of the design

Many companies aspire to become more customer-focused. The ones that succeed understand not only the needs and priorities of their target customers, but also the best organizational setup to address those needs.

Take one major retail chain at which most activities were managed either centrally or regionally. Comparable store sales and customer loyalty were in decline and the senior team realized that they needed to allow local districts more leeway. The chain eliminated regional layers, centralized those activities that would benefit most from scale and shifted responsibilities around merchandising and planning to the local districts. Once districts had significant input into sales plans, space allocation and product assortment, they could better tailor each store for local customer preferences. For example, individual stores could now team up with local food brands to cross-merchandise and market products relevant to the local community. By putting customer preferences first, the chain regained its edge with consumers even as it reduced operating expenses.

Organize to develop and deliver the capabilities that matter most

It’s difficult and resource-intensive to be great at everything—in fact, it’s not necessary or even healthy. Instead, companies with highly effective operating models have decided to excel at only those few capabilities essential to realizing the strategy, while being “good enough” everywhere else.

Home furnishings retailer IKEA has anchored its cost leadership strategy to a small set of differentiated capabilities. One capability, for instance, is developing supplier partnerships that ensure more than 95% of inventory will be in stock. To support this capability, IKEA located its procurement units closer to strategically important suppliers and created strong forums for supplier evaluation and coordination.

Energize and align employees through principles, not exhaustive rules

A flexible operating model cannot work according to a paint-by-numbers design. That would lead to proliferation of rules within a rigid framework, which limits employees’ problem-solving ability and can’t possibly account for every situation.

It’s far more effective to define clear principles for how people work together within and across the seams so that the company can stay agile with minimal bureaucracy. Principles liberate people to do the right thing as long as they have the right framework. Rules remain important in some areas, such as defining safety practices in mines, but companies can limit where such explicit guidance is necessary to put the principles into practice.

When applied together, the practices described here raise the odds of producing an organization that can execute the chosen strategy with confidence.

Written by Marcia Blenko, an advisory partner in Bain & Company’s Organization practice; and Eric Garton, a partner and global leader of the practice.


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