What's Your Operating Model (and Why You Should Think About It)?
by Sharon Flemings

I’m currently reading a really interesting book called “Enterprise Architecture as Strategy”. (Okay, so maybe this isn’t so interesting to most people). There are, however, some very critical insights into how to organize and structure your business depending on your strategy for growth, which has implications for strategic planning decisions and market differentiation. The authors refer to this as the Operating Model, which is comprised of two dimensions – business process standardization and integration. Is your business operating model structured consistently with your business strategy?

First, let’s define what business process standardization and integration mean. Standardization is the level to which your business processes (and supporting systems) are defined and executed regardless of who is executing the process and the location in which it is performed. For example, the making of a hamburger at a fast food restaurant is a standardized business process. It is executed the same way (e.g. temperature of grill, length of cooking time, etc.) in every restaurant in a chain regardless of whether it’s the night shift or day, and regardless of location. The benefit of standardized processes is the ability to measure the process, and compare it to the same process being executed by another person or in another location.

Integration is the level of linking of shared data between various organizational units (e.g. departments, cost centers). For example, if the data available to a customer service representative to take an order is the same as that available to the shipping department, we say that the processes are integrated. Integration can facilitate transactional processes such as a customer placing an order, or across processes to allow a “single face to the customer”.

The four different operating models identified by Ms. Ross, et al, are based on the combination of the level of business process standardization, and the level of process integration. Let’s identify the four models, then review some examples:

Diversification (low business process standardization, low process integration). In this operating model, business processes and systems are not highly standardized, and there is little to no integration of processes and data across the organization. Operating units control the definition of processes, and supporting system decisions are often made within the individual business unit.

Coordination (low business process standardization, high process integration). Companies with a Coordination-type of operating model have shared customers, products and/or suppliers but tend to operate as business units or autonomous functional units. There is shared data across all organizational units; however, individual business processes are defined within the unit and are not executed the same across the entire organization.

Replication (high business process standardization, low integration). Businesses with this operating model have highly standardized business processes and systems across all locations or organizational units, but have few common customers and perhaps few common suppliers. There is generally centralized control over business process design and automated systems.

Unification (high business process standardization, high process integration). Organizations with this operating model have globally integrated processes and systems (generally enterprise automated systems), and may have business units with similar or overlapping operations. System decisions, process design and other organizational decisions are made centrally. These organizations are tightly coupled, having strong interdependence between units, and have a highly centralized management model.

Okay, so much for definitions. How about some examples:

Diversification – these companies have a lot of autonomy, but may rely on shared services. Let’s take GMAC as an example. This company has a number of seemingly independent businesses under its “umbrella”. There’s GMAC Insurance, GMAC Mortgage, GMAC Real Estate, and so forth. Each of these companies has different customers and different suppliers, and each has its own management structure which operates autonomously. While there may be shared services (such as IT), there are few data standards across the company, and little shared data.

Coordination – these companies share customers, products, suppliers, and/or services, but each unit has unique capabilities. An example of this structure is USAA. While USAA originally provided only insurance services, they now offer banking and investment services. This company has multiple divisions, responsible for a set of products and services; however, there are common customers across each of the business units.

Replication – in this case, individual business units are highly autonomous, but are run in a highly standardized manner. A perfect example of this operating model is McDonalds. Each of the restaurants is independently managed and accountable for results, but all operate in the same manner. Performance is aggregated and evaluated at a higher level.

Unification – organizations with a Unification operating model are those with highly standardized and integrated processes, and find having business unit autonomy a disadvantage. The authors point to Delta Airlines, with their global centralized processes, as an example of this model.

One thing to bear in mind is that organizations may have one operating model at the highest level, but have different operating models within each of the operating units. Further, a business may evolve over time from one model to another as the organization grows and matures. There is nothing wrong with this; rather, the important point is that there is an operating model strategically chosen for the organization, and that it supports the competitive advantage and direction of the company.

There is no right answer to what model is correct for any business. It is important, however, to understand the model currently in place in your organization, and ensure it is the correct model to provide competitive advantage, and serve as a platform for future growth.

In addition to process standardization and integration considerations, additional factors such as growth and acquisition strategies and IT investment strategies are impacted by the operating model. More on those topics in future articles.
 

Works Cited
Jeanne W. Ross, Peter Weill, and David C. Robertson. Enterprise Architecture as Strategy. Boston, MA: Harvard Business School Press, 2006.

Related articles:
Understand the Current State
Identifying the Strategic Processes
The Right Use of Enterprise Architecture
Strategic Growth Through the Right Operating Model
Operating Model Implications for Technology

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