In today’s volatile digital world, setting the right strategy for your business is only half the battle. The other half is to have a reliable model to turn these goals into day-to-day actions throughout the organization. That’s where an operating model usually comes in.
Building upon this idea, companies need to create a “dynamic operating engine.” This approach to operations is essentially ensuring cutting-edge business processes — whether in supply chain, finance, sales, HR, etc. — that are high-powered and dynamic. Currently, most business processes within companies tend to evolve organically and slowly, and easily concede competitive advantage to new, digital players. That’s dangerous.
Illustrating the power of operating models
The best illustration of the power of a dynamic operating engine is the story of what’s been called the biggest turnaround in business history: Alan Mulally’s U-turn of Ford in 2006. When Mulally arrived as CEO in 2006, the automaker had just posted a record annual loss of $12.7 billion. By 2010, Ford had posted a net income of $6.6 billion, and Ford’s stock had appreciated more than 1,000 percent from its 2008 recession lows. That’s a remarkable change by most standards. What makes it even more exceptional is how it was done.
When Mulally came aboard, he quickly realized that the employees were very busy and stretched to their limits. But the balance between time spent on internal meetings and time spent on external customer value was off. Also, Ford was having a tough time associating employees with individual accountability for business results. The measurement system for business performance was broken. Most leaders rated their results on the scorecards as “green” (on track), yet the business was wildly off target. These are typically strong indications of a poor operating model.
Mulally decided to reapply the model of Business Plan Review (BPR) meetings, which he had used while he was at Boeing. BPRs involved weekly meetings in which every department had to break down its efforts and report them in ways that indicated measurable progress. Secondly, Mulally simplified accountability by moving Ford from a structure of regional business units into a global functional model. This enabled the company to drive more efficient and effective operations — for example, by reducing the number of vehicle platforms. Mulally called his approach “One Ford.”
The idea was almost deceptive in its simplicity: to run Ford as one company, with one set of products. Thanks to the new strategy and the operating model redesign — moving to a global functional structure, increasing individual accountability, and rationalizing the number of vehicle platforms — Ford returned to profitability over the next four years. It even survived the 2008 economic crisis without a bailout from the American taxpayer.
What can we learn from Mulally’s turnaround of Ford?
Ford’s success story illustrates an important fact about the relationship between business models and operating models. An organization has a far better chance at succeeding when its operating model is strongly aligned with its business model. Business models tend to be the sexier of the two siblings. They get an oversized share of attention. Operating models aren’t given as much attention because they represent executional rigor. But two key lessons can be applied in revolutionizing business operations. First, the operating model must be in sync with the business model. And second, the operating model must be dynamic and able to keep changing over time.
The reality for most organizations is that they don’t have just one operating engine, but many (by division, by function or by country.) That makes synchronization between company strategy and operating models difficult. Also, chances are that these siloed operating engines aren’t universally dynamic. By dynamic, we mean an operating engine that continuously adapts itself to changing customer needs, business priorities, and market conditions. As a result, businesses falter as their operating models fall out of sync with the business model over time.
One-off business transformation programs aren’t sufficient, as the periodic transformations and repeated turnaround of the American automakers has shown. What’s needed is a dynamic operating model — one that’s both consistent across the company and is dynamic.
5 questions to ask when creating a dynamic operating model
Just asking a few questions can point to the robustness of your company’s operating model.
- Are we managing our business processes end-to-end (E2E), and do we know the cost of each?
- Do we know the number of touch points within each E2E process?
- Do we have one operating model for business processes across the company?
- Have we instituted practices of internal client management for business processes to ensure that process owners stay in sync with the business priorities?
- Do we organize and run business processes by applying product management practices to them?
Poor operating models on average result in a loss of one-third of the potential market performance of companies. That’s not smart. Running your company on only two-thirds of its engine power in today’s volatile world is definitely unadvisable. Proactively transforming business operation processes across functions, business units, and geographies is the best way to win in the marketplace.
