From accident to design: Can outdated operating models be modernised?

Rob Harris | 31 October 2017

Every trading business has an operating model; an assembly of people, processes, plant, technology and culture that allows the delivery of products to customers.

A significant share of these models exist by historical accident, however. Their modern-day form is often an amalgam of earlier commercial strategies, of ideas and goals of past management teams, of legacy products, of dated technologies and of historic acquisitions.

They are typically not designed for, accountable to and supportive of the contemporary ambitions of a business. As a consequence, they tend toward inefficiency, often allowing cost bases to grow unchecked, making productive change difficult and stymying responses to changing customer demands.

From $17bn loss to $10bn profit

When Alan Mulally first walked through the doors of the Ford Motor Company as the newly hired CEO in 2006, he faced this challenge on a mammoth scale.

He inherited a contemporary operating model that reflected decades of decline, a fractured organisational structure, a set of cash-hungry marquee brands, a corporate culture grown used to turf wars and commercial failure, and an on-looking business community sat waiting for a bankruptcy filing.

Firmly aligned to a broader, coherent and well-articulated commercial strategy he set about operating model renewal. Mulally consolidated a global business by product line, rationalised the vehicle range, better aligned Ford’s enviable stock of engineering talent and knowhow to its key projects, disposed of non-core brands and fostered a more open, inclusive and transparent management culture. By the time of his retirement in 2014 he had turned a $17bn annual loss into approaching a $10bn profit.

There are a legion of stories from Mulally’s time at Ford that shed light on one of the most impressive of corporate turnarounds. However, I often wonder whether the greatest insight is the way in which unchecked and under-managed operating models build their own momentum.

They start to set their own objectives that are often unrelated to commercial strategies, can escalate non-productive costs and tend to promote an internal focus at odds with the needs of an ever-evolving customer base, in the very worst cases corroding businesses from within.

Reality check

A broad stock of academic and commercial research increasingly highlights the link between consistent trading success and excellence in operating model design and maintenance.

At a summary level the path to identifying and remedying shortcomings in incumbent models is relatively straightforward. It requires a clear articulation by leadership teams and shareholders of their strategic goals – their market insights, products, delivery channels, scale and ultimately desired returns.

These ambitions need the reality check of a very honest overlay with the capabilities of existing infrastructure. This sort of analysis often provides the foundations of a future state “Target Operating Model”, one that is grounded in the real commercial needs and ambitions of a business.

The value of a shared vision of the future is immensely powerful. It provides a decision and investment framework – particularly ensuring technology budgets don’t fall foul of passing trends, but instead enabling systems and solutions that generate long-term commercial advantage. Perhaps, most importantly, it generates a sense of shared purpose – employees seeing in a very tangible way how their efforts support the collective goal.

Despite the very obvious advantages of an appropriately engineered and functioning operating model there seems a prevailing sense that operational excellence is discretionary; that somehow it falls behind the sales effort, lacks the need for product development or doesn’t quite have the relevance and urgency of strategy development.

However, when infrastructures and, by implication, cost bases get out of control they can quickly become existential crises. Businesses that operate in price-competitive markets or where they’re under constant pressure to invent don’t survive for long with dysfunctional operating models.

Or perhaps more succinctly…

“Business men go down with their businesses because they like the old way so well they cannot bring themselves to change. One sees them all about – men who do not know that yesterday is past, and who woke up this morning with last year’s ideas.” – Henry Ford

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