The link between strategy and results
See how operating models put strategy to work, aligning organisation design, capabilities and people to deliver results.
Summary ideas
Turn strategy into action
An operating model translates business strategy into activity, making it a key leadership priority.
Everything is connected
Strategy, capabilities, the business environment and performance are all linked through the operating model.
Design for people
Organisations are both technical and social systems. Successful design must consider both.
Strategic brilliance is insufficient to achieve sustainable competitive advantage. While your unique vision and strategic positioning may look dazzling on paper, what truly separates market winners from those who merely survive (or not) is the quality of execution. The enduring differentiator is found not just in what you intend to do, but profoundly in how you translate that strategy into the behaviour of your organisation. The crucial linking mechanism is your operating model.
The operating model
An operating model is a framework of interrelated design categories (and the choices within these categories) that collectively shape the behaviour of the organisation. That is the technical definition. It is also a business solution that is embraced in the hearts and minds of people. Because whatever is embraced in hearts and minds is what you will see in the organisation. This is the social definition.
Both definitions are important. The operating model serves as the single, crucial intermediary that translates strategic intent into tangible organisational behaviour and on to business results. Without a deliberately designed and coherently aligned operating model that is embraced by the people who must implement it, the best-laid strategy remains a good idea waiting to happen.
The most widely recognised operating model structure is the star model created by Jay Galbraith (figure 1). It defines strategy, capabilities, structure, processes and lateral capability, rewards and people processes as primary determinants of organisation behaviour.
ORGANISATION DESIGN
1. Strategy – How does the organisation intend to win?
2. Capabilities – What must the organisation be good at?
3. Structure – How should work be organised?
4. Processes – How will teams work together?
5. Rewards – How will the organisation encourage the right behaviours?
6. People processes – How will we attract and develop the right people?
FIGURE 1
Galbraith's star model
Organisation design is the process of taking strategy as input and making design choices within each of these categories to translate this strategy into a system of productive work activity.
Many conversations about organisation design reduce the topic to the organisation chart and an analysis of costs associated with the shape (layers, spans of control) of the organisation.
CONTEXT
The broader view: organisation performance model
As the link between strategy and results, the operating model is a primary concern of C-suite leaders. If your organisation must perform work to create value, it is your operating model that directs and organises the work activity. There is a broader view, however, that puts the operating model into useful context that is worth recognising before moving onwards. This view is called the organisation performance model, or OPM (figure 2).
The OPM identifies five domains of interest that collectively influence and describe any organisation’s performance. The five domains make a system view that includes business environment, business strategy, operating model, culture and business performance. Each is easily understood.
ORGANISATIONAL PERFORMANCE
1. Business environment – What opportunities and challenges shape the organisation?
2. Business strategy – How does the organisation intend to win?
3. Operating model – How will the organisation deliver its strategy?
4. Business behaviour – How does the organisation really work?
5. Business results – Is the organisation achieving its goals?
FIGURE 2
And around it goes in a connected circle back to the business environment. Every category leads to the others. Each is important and collectively they define the full scope of C-suite attention. The presented sequence is the design path. It is not possible to design an operating model without first clarifying and agreeing business strategy. Reversing the sequence represents the diagnostic path. It is not possible to fully understand business results and organisational behaviour without looking into the operating model and its influence on behaviour.
PEOPLE
The hidden social system
A system can be understood as a collection of interdependent parts that must work together to perform some function. Tidy schematic designs with boxes and connecting lines tend to shift attention to a technical orientation. This is fine in as much as it helps us see and talk about relationships. When this technical view dominates attention, it tends to cause problems because people populate organisations and make them work.
In a technical view, the operating model is viewed as parts. These parts are boxes in an organisation chart, processes and their technology and equipment, measurement systems, etc. The behaviour of parts is easy to predict and control for impact based on well understood relationships of cause and effect. Parts behave the same regardless of time, location and condition. This view can easily translate into the view of an operating model as a complicated machine – a matter of technical design. The parts do not care how they are assembled or even if their needs are being met. Does the machine work? Whoever designed the technical machine is fully accountable for its performance.
In a social system, the parts are people. The system operates in the domain of human interests and capabilities. People are concerned about status, predictability, autonomy, relatedness and fairness. Some may lament the messiness and costs associated with human interests. However, social systems have distinct advantages. Social systems have self-awareness, experience, creativity and drive. They have an ability to learn, adapt and be responsive to their environment. In some cases, these capabilities are suppressed by the technical view and lead to problems. They are nevertheless present and ready to create value when given the opportunity.
An operating model is a fused social and technical system; a ‘socio-technical’ system. There is a benefit to pause for a reflection about the view you might unconsciously carry. Leaders often hold the technical view that an operating system is a design, a new organisation chart or a document. With this view, many leaders believe they should be the engineers of their organisation. This makes the operating model a thing to be designed and understood by the few. This is an illusion of ownership and works against the interests of widespread engagement, understanding and change.
CASE EXAMPLE
Bringing acquisitions together as one business
Private equity organisation (PE) buys Firm A. PE expects significant revenue growth with expanding profit margin. The strategic intent of PE and Firm A is to acquire companies to achieve growth targets and scale efficiencies in a target market. It purchased several related companies. One of the acquisitions has a very different delivery skillset requirement. One is in a market expected to produce outsized growth for the company. Each company comes with a legacy leader, its own way of doing business and little understanding of the other businesses now under one roof. The desired behaviour of the aggregate company is a single operations core that can deliver all business lines, cross-sell incremental solutions to clients, easily integrate future acquisitions and act like one business. The private equity firm expects to see tangible operating benefits in nine months.
Leadership understood that a complete makeover was needed to integrate the acquisition into a single company. The executive office of Firm A initiated a complete redesign of its operational core using the star model as the system design lens. The intention, and resulting outcome, was to integrate the collection of brands within a single, coherent and fit-for purpose operating model capable to hit performance targets and accommodate future growth.
SOURCES
- Galbraith, J. R. (2002). Designing Organisations: An executive guide to strategy, structure, and process. Jossey-Bass.
- Hanna, D. P. (1988). Designing Organisations for High Performance. Prentice Hall.