In this brief audio presentation, Bain Partner David Cooper explains how the right operating model can help consumer products companies move faster, focus on the right segments and free up resources to boost growth.
Slide 1: Hello, my name is David Cooper, and I’m a partner in the Consumer Goods practice at Bain in the New York office. And I’m here today to talk to you about winning operating models in consumer products.
Slide 2: As a firm, about seven years ago when we started to do work in the operating model area, we noticed four common reasons that were causing clients to give us a call and talk to us about taking their operating models to the next level. And these four reasons were as follows:
First, organizations were identifying that they were saddled with slow and complicated structures. So these structures had evolved over the last 20 years from siloed organizations to matrixed organizations to what we call “cube squared” organizations (matrixed organizations with a whole series of cross-functional initiatives). And it was just failing to allow speed and repeatability in the organization.
The second common observation was that talent and capabilities were not always matched to where the required work was, so not matched against the right customers, not matched against the right consumers and not matched against the right geographies.
Related to the second point, the human resources and the financial investment resources were not aligned with future profit pool growth. The way this often showed up is disproportionate emphasis on the US and developed Europe, which were not going to be growing much, and insufficient emphasis on Latin America, Asia, Africa and emerging Europe.
And finally, almost all the clients in consumer products were looking to redeploy funds. They were looking to generate fuel for growth to invest in their legitimate growth opportunities.
Slide 3: With nearly a decade of accumulated operating model experience, we’ve now settled on a proprietary operating model point of view, with respect to the definition of an operating model and what’s included in it.
The simplest way to articulate this is to say that the operating model, as depicted in this slide, is the bridge that sits in between a company’s strategy and the detailed organization design of that company. And the way we often explain this around Bain is to use a housing metaphor. If you were to say to me, “I’m nearing retirement and I’m going to build a substantial retirement home.” You could not say to me in the next breath, “And I know exactly which type of Italian tile I’m going to use in the bathroom.” There are a series of intermediate governing questions that you need to resolve. Where’s the house going to be? What kind of style is the house? What’s the design of the bathroom going to look like?
An operating model plays the same intermediate role in organization work. The operating model looks at a range of factors, from structure to management governance and cadence. But the simplest way to think about it is as a pragmatic blueprint that defines where and how the most critical work gets done. And only when you’ve defined that operating model can you proceed to do the detailed organization design work.
Slide 4: We’ve also, over the last seven or eight years, identified four universal truths about winning operating models in consumer products (CPG). The first universal truth: Get fit for purpose. While 70% of an operating model might well be consistent between one company and the next, and while that’s particularly true with companies in the same categories or competitive space, the magic is in the 30% that’s truly custom to your individual firm.
Winning universal truth No. 2: Manage the paradox of scale. Every company confronts this question: How much do I centralize? How much do I not centralize? And the simplest way to think of it is as follows: If you centralize too little, you won’t generate the economies of scale. You won’t generate the surplus profit. And you won’t be able to invest in the growth opportunities. If, by contrast, you centralize too much, you won’t be able to move quickly to exploit those surgical opportunities with local customers. This is the Goldilocks phenomenon: neither too hot, nor too cold.
Third, prevent decision congestion. It’s critically important to both get the decisions right and to get them done quickly at the right locations in the organization. I’ll expand on this in just a moment.
And finally, remember that “soft factors” matter. This isn’t just about organization structure. This is about decision rights. This is about change management. And this is about the ways of working within your company.
Slide 5: While there is no one-size-fits-all guide to what a company’s operating model should be, and while in many of our CPG categories we literally find the top two competitors both being successful and both possessing a different operating model, there is nevertheless a bit of a Rosetta Stone as to what kind of operating model might be appropriate for your particular firm.
And the three macro factors that guide what kind of operating model might be appropriate for you are indicated in the red on this page. The first factor is the nature and complexity of your product portfolio, and there are some subordinate questions about that. But broadly that’s about how consolidated that brand portfolio is and what the nature of innovation is in your portfolio.
The second aggregate factor that indicates what operating model might be appropriate are the category attributes. Are the brands global? How are consumers behaving in the category? How common or not common are the consumer preferences?
And finally and very importantly, a company’s DNA, culture and values—essentially the history of the firm, the embedded prejudices in the ways of working, needs to be considered when building the operating model for your company.
Slide 6: If there’s only one content-rich insight I can leave you with at a higher level of specificity, it’s this insight: The most successful companies concentrate decision-making at no more than two levels of the firm. And I think the best way to illustrate that is with a client vignette.
So one of my clients called me up a few years ago and they were complaining that when they had taken the Bain organization survey, they finished at the 22nd percentile on decision effectiveness and how could this possibly be? We asked them to stare at their organization structure chart and lo and behold, they had an extremely large corporate level with lots of people, lots of power, lots of decision authority.
Underneath that corporate level, they had a regional layer and each of the regions had upward of 30 or 40 executives doing lots of work and making lots of decisions. Underneath the regions were certain clusters of countries, and these had 30 or 40 people also making decisions and pushing issues.
Finally, underneath those clusters of countries were the actual countries themselves. And it was quite obvious to indicate and observe when you look at this data that each decision and each business discussion was starting up at level one and going down four layers, being worked, and winding its way back up to the top in a lowest common denominator fashion to get the decision made. It was impacting not just the speed of the decision, but the quality of the decision.
So one insight many companies have come to in this regard is: “Can we concentrate decision power and resources at fewer levels of the organization rather than more to produce the intended outcome of speed and decision quality.
Slide 7: Here are the five lessons we have gleaned over a decade of operating model experience. No. 1, put strategy first. You can’t define your operating model unless you know the strategy that operating model is intended to serve.
Establish design principles. Every one of these operating model journeys is going to yield difficult issues. If you have the design principles articulated and aligned, you’ll have a neutral arbiter to help you sort through those challenging moments.
Don’t start with boxes and lines. It’s more than structure. It’s about decision roles. It’s about the capabilities you’re building. And it’s about the soft factors that really make your company work at its most effective.
Be flexible. Every company starts out with a desire for a single overarching operating model, but life and the world don’t work that way. Different divisions are different points of evolution. Different functions are different points of evolution. Different executive leaders are different points of evolution. It’s about building the right operating model, which is flexible for adaptation, flexible for exception, and flexible for change.
Finally, manage the journey. And this really requires two streams. Stream one: Senior executive management needs to be aligned and committed as to what they’re doing and why. Stream two: At day one, start with the appropriate investments in change management and communication because it’s about more than senior management. It’s about the hearts and minds of the entire company.
Slide 8: Thank you for your time today. If you would like to discuss this topic further, feel free to contact me or any of my partner colleagues within the firm.
Read the full report: "Winning operating models"