One of the problems with capability maps

Last evening I was with Alan Crawley of Optima Partners (specialists in marketing function transformation) talking about marketing operating models.  A most stimulating discussion.   Parallel to this I have been in a LinkedIn discussion with Peter Murchland about capability maps.  In it we were using marketing as an example, or, as a capability map would call it, “marketing management”.

I started the dialogue with Peter like this “I find a capability such as “marketing management” is a dangerous abstraction because “marketing management of a restaurant” is a very different capability from “marketing management of a toothpaste” which is a different capability from “marketing management of a consulting service”. Yet I have never seen a capability defined with this degree of specificity.

The dialogue then focused on the marketing challenges of Ashridge Business School where we have tailored courses, open courses, qualifications courses, weddings and research outputs such as books and articles.  I was suggesting that these may all be different kinds of marketing capability, but capability mapping does not make it easy to consider these differences because all of these types of marketing would be captured under the term “marketing management”.

Peter commented, “Taking one line of investigation, where I use APQC Process Classification Framework as an indirect path to capabilities (which surround processes), process 3 is Market and Sell Products and Services.

This is composed of:
3.1 Understand markets, customers and capabilities
3.2 Develop market strategy
3.3 Develop sales strategy
3.4 Develop and manage marketing plans
3.5 Develop and manage sales plans

This would indicate that the marketing capability can be considered to comprise three capabilities:
a) Market assessment
b) Market strategy
c) Marketing planning

We could then consider each of these capabilities (and associated processes). For example, market strategy relies upon:
i) Value proposition development
ii) Pricing strategy development
iii) Channel strategy development

(Note: this decomposition does not yet address the differences you have highlighted)”

This response seemed to illustrate the problem of a capability approach rather well.  The issue that seems to me most important in this part of the Ashridge Business School operating model is relegated to a note in brackets at the end of Peter’s analysis.

Peter’s follow on comment tried to address “the differences you have highlighted”.

When I look at the different types of marketing you have nominated, several considerations come to mind:
a) what are you encompassing within “marketing” – the market strategy element or the promotional element – two quite distinct activities
b) there may be distinct differences that emerge in dealing with products versus services
c) the differences may be addressed through the competencies of one individual performing the entire marketing function (in which case it is a moot point and unnecessary level of detail to accommodate in the capability model)”

I quote Peter because I consider him to be a high quality thinker and enterprise architect.  But I can’t help feeling that he is being held back by his capability view of the enterprise.

I shared this feeling.  “Peter, your responses most perfectly illustrate why I am uncomfortable with a capability approach. While you are thinking “marketing capability” or “marketing function” and breaking the capability down into level two and three capabilities. I am thinking, should we consider marketing a tailored course to be the same capability as marketing a wedding or a research paper? I am thinking, do I need five “marketing functions”, one for each line of business, or one function for all of ABS? If I have one marketing function should it be organized into market assessment, market strategy and market planning teams or into tailored, open, qualifications, weddings, and research teams? These questions are all best addressed with a value chain map (rather than a capability map) as the starting point.”

I continued, “I feel that starting from a capability view of the world (one that does not have 1000 different kinds of marketing capability) is a handicap. I feel you are trying to do an operating model for a sport, starting with terms like “ball contact management”. Whereas first you need to know whether you are playing tennis or hockey or rugby, because “ball contact management” is a completely different activity in these three sports.”

I am sure the dialogue will continue – I have had previous interactions with Peter on this topic.  You can follow along here – although you may need Peter to approve your membership of the group.

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Value Chain Maps

Over the years, I have become convinced that a value chain map is a more powerful and more easily accepted starting point, both in consulting and teaching, for operating model work (compared, for example, to a capability map).  This blog explains what a value chain map is.

A Value Chain Map is a high-level process map or value stream map: the term value chain coming from the strategy literature – Michael Porter.  I prefer the term value chain because it reminds me that we are trying to link operations to strategy.  But any other term is acceptable so long as the tool does the same thing.

To create a Value Chain Map, you first need to identify the different “value propositions” (the products or services) that the organization provides.  Ashridge Business School provides tailored courses for executives, open courses, qualifications courses, research papers and books and even weddings using our beautiful building.  An HR function might provide talent development, recruitment, remuneration and organisation development services.  A factory might produce standard products and specials.

Figuring out the best way of defining the value propositions is not a trivial task (see separate blog). Should I think of Ashridge as offering courses, research papers and weddings, or should I think of Ashridge as offering open courses, tailored courses, qualifications courses, etc, or should I think of Ashridge as offering finance courses, marketing courses, leadership courses, etc, or should I think of Ashridge as offering 1 day courses, 2 day courses, 3 day courses, etc?   The answer should come from the strategy: how does the strategy chunk up Ashridge’s different services into groups/segments/offers and how does this link to the way Ashridge thinks about its customers ?  If the strategy is silent on this issue, it is probably better to work on strategy than on operating models.

Armed with a way of defining the value propositions, lay out the high-level process steps needed to create each value proposition.  So for “open courses” the steps (the value chain) would be

  • Market to companies
  • Design courses for prospective clients
  • Agree terms and contract with the client
  • Deliver course
  • Invoice and collect money
  • Follow up with the client

It is helpful to keep the number of different value propositions and the number of steps in each high-level process to less than seven (aggregate if needed).  The reason is that you need to be able to hold the whole Value Chain Map in your head at one time; and a matrix of 36 (6 value propositions with 6 process steps each) is about the maximum you can cope with.  It is always possible to go into more detail later, as needed.

When you have done high-level process steps for each value proposition, you can then create a Value Chain Map.   Draw the process steps as chains of chevrons along the horizontal, placing different chains above or below each other.   Then arrange individual process steps into columns of like capability.  So that, in the Ashridge example, the “design” activity in each chain sits in one column and the “deliver” activity sits in another column, etc (see exhibit 1).

Exhibit 1

Once created, additional information can be added to the value chain map (see exhibit 2).

  1. Identify which chevrons in each chain are critical success factors as opposed to commodity factors for delivering the chain’s value proposition.
  2. Identify in which chevrons the organization currently has difficulties or is under performing. For these problem chevrons, it is often helpful to go to the next level of detail: breaking the chevron down into five or so more detailed chevrons and considering where the problem is at the next level of detail.
  3. Identify how the organization’s costs or headcount divides amongst the chevrons.

Exhibit 2

However, the main benefit of the Value Chain Map is that it provides a visual background for considering organization structure.  The people doing the work in each chevron of the map could report in two ways: along the value chain to someone responsible for ensuring that the total value chain delivers the value proposition; or within a vertical column to someone responsible for a single capability across all the value chains.  So, the people doing course design for open courses at Ashridge, could report to the head of open courses or to the head of course design for all types of courses.

Fortunately, there is a rule of thumb to help you decide which way the people should report.  The rule says that the default reporting line should be along the value chain (the design people for open courses should report to the head of open courses), unless significant improvements can be made to the value proposition by reporting in a different way.  In other words, report along the value chain unless reporting by capability significantly lowers cost or significantly improves the value delivered.

The reason for this rule of thumb is that it is easier to create the value proposition and adjust it to match changing customer preferences, if all of the people doing the work for this value proposition report to one person and are focused only on delivering this value proposition to this customer type.  The rule of thumb means that the onus is on those who want to organize by capability to create a convincing business case.  If in doubt, report along the value chain.

The wonder of the Value Chain Map is that it gives a visual representation on one page, of the core work that needs to be done to deliver the products or services; and it provides the platform for thinking about organization structure.  With a picture of the core work of the organization and how this work should be structured, you are already half way to an operating model.

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A KPMG framework

As readers of this blog will know, I am always interested in other frameworks (other than the Operating Model Canvas) because it is often possible to learn something or to see the same issues from a new perspective.

So here is a KPMG framework that I extracted from a document on LNG operating models (liquid natural gas).  Unfortunately the resolution of the exhibit is poor, so I will explain.  In the coloured column the top dark blue box says “Financial ambition” and the bottom dark blue box says “Measures and incentives”.  The three slightly lighter shades of blue are bracketed as “Business Model” – Propositions, Markets, Customers and channels.  The four

even lighter blue boxes are bracketed as “Operating model” – Core business processes; Operational and technology infrastructure; Organizational structure, governance and risk controls; People and culture.  The other two columns are “Key questions” and “Accelerators”.

So what?   First there is nothing in this categorization of business model and operating model that is different from Operating Model Canvas.  But a couple of points are worth noting.  First, the term business model is used to refer only to the front end of the Business Model Canvas.  In other frameworks, such as PA Consulting’s framework, this is referred to as “customer model” or “value proposition model”.  Business model includes customer model and operating model. So readers should be aware of the different ways different consultants use the term business model.

Second, in the operating model categories there is one for “Operational and technology infrastructure”.  This combines digital and mechanical machines and applications, which seems odd for LNG companies who have drilling rigs and IT systems. It also makes me think that the Operating Model Canvas lacks a good place for thinking about things like drilling rigs.  When they come up, I typically think of them as part of the “core processes” and also think about them again when considering locations.  But this framework gives them a bit more status.

Third, the KPMG framework has a box for “Organisational structure, governance and risk controls” and a separate box for “Measures and incentives”.  This seems a very odd split.  The question in the next column against measures and incentives is “Do you have the right metrics to incentivize the organization for end-to-end business optimization?” which is a pretty odd question, but makes me feel that this should be part of the organization box.

In the Operating Model Canvas the split is between the design of the organization – structure, people, incentive systems, culture, decision rights, etc – and the management system needed to run the organization – planning, budgeting, targeting, performance management, risk management and continuous improvement – and the scorecard that tells leaders whether they are on track. I think this is a cleaner split.

The word governance, however, has always given me difficulties in this context.  For a project, governance refers to the steering group and the design authority that the project needs to work with.  For an organization it is partly the decision rights and committees, which I think of as part of organization design, but it is also the planning, budgeting and risk processes that I position as part of the management system. So the word governance cuts across different categories in the Operating Model Canvas. As a result, I have started avoiding the word where possible, yet its usage is growing and may be confusing people rather than enlightening them.

Last point, I was intrigued by the other two columns – Key questions and Accelerators.  What is attempted here is to list the key questions for an LNG company in the current market and also the levers that managers might use to accelerate future performance.   I like the idea very much – but I did not feel that this list of questions and accelerators quite delivered.  Either it is too long so not honing in on the real insights or it is not based on good insights.  Questions like the “Are you able to respond to changing demands?” or “How are you monitoring risk and evaluating new risks?” left me flat.  I was equally unmoved by the text in the Accelerators column “5. Unit cost competitiveness.  Challenge complacency and bring insights from downstream business with a relentless focus on asset performance through lower capex and opex as well as maximum possible throughput.”

But I am determined to have a go at this format for a business I know well to see if it can be made to deliver something more dramatically insightful, as I tried to do on pages 144 and 145 of Operating Model Canvas.

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Operations Strategy Matrix and Operating Model Canvas

Last week I spoke at an interesting conference hosted by Loughborough.  It was to discuss their approach to operating model work – SOMS – standing for Service Operating Model Skills.  Also speaking were two consultants from OEE, who have partnered Loughborough on the SOMS framework: Martin and Vishnu.  This blog is about one slide that they showed which got me thinking.

The slide was a version of this matrix from the Slack and Lewis text book “Operations Strategy” third edition 2011, Prentice Hall.  The left side of this matrix is “Performance objectives” which leads to “market competitiveness” on the right side.   The bottom axis is operational “Decision areas” leading to “Resource usage” at the top of the matrix.   The boxes in the matrix are used to layout the main elements of the operations strategy or operating model.

This matrix is familiar.  But, for some reason, the way it was presented by Martin and Vishnu, using a case study of a bank, got me thinking in two ways.  First, if instead of “Performance objectives” we use “Value proposition”, the matrix would have the same focus as the Operating Model Canvas.  I will come back to this.   Second, if instead of “capacity”, “supply network”, “process technology” and “development and organization”, we use POLISM – processes, organization, location, information, suppliers and management system – the matrix then has the same decision areas as the Operating Model Canvas.

So the big thought going through my head: is the Operating Model Canvas, just a reinvention of the Slack/Lewis operations strategy matrix?  The answer seems to be yes.  So the next question: is the Operating Model Canvas superior and if so why?

I have little doubt that the POLISM categorization of operations decisions is superior: more strategic, more complete and more managerially friendly.  It does not include capacity, in terms of numbers of people or size of machines.  But, for me, the sizing issue is a second order issue.  First you define the operations strategy. Then, given the strategy and the plans for the next period, you decide how much capacity to build for the next period? (I should point out that under the broad heading of capacity Slack and Lewis, include location and buildings, so it is close to the L in POLISM)

Where the Slack/Lewis approach may be superior is in the way it lays out “performance objectives”.  The Operating Model Canvas has “value proposition”.  But does not sub-divide the concept of value proposition in any structured way.  So I have spent a couple of days trying different ways of laying out a value proposition using a similar format.  See a couple of attempts below.  The first is for my course Designing Operating Models (see www.ashridge.org.uk/dom).  The second is about Test Equipment

My conclusion is that one row should be devoted to describing the product/service: is it a piece of test equipment or a management course?  The rest of the rows should describe the main features of the value proposition, particularly those that are expected to give advantage (the USP) (coloured in reddish orange).  If POLISM is put along the top axis, the bottom axis can then be used to summarize the aspects of the “operations strategy” that are most important to each of the elements of POLISM: the words that you might expect to find on an Operating Model Canvas.   If you have used the Operating Model Canvas tool, you will know that you should describe on the Canvas, (in addition to the value chains and the org chart) those aspects of operations that are most important to delivering the value propositions: exactly the same thought as the descriptions in the Slack/Lewis matrix.

So the Slack/Lewis format allows a more fined grained presentation of the value proposition, and hence a more fine grained connection between the value proposition and  POLISM.  Worth thinking about.  I will include it in my next course on Designing Operating Models and see how the participants like it.

Of course the Slack/Lewis format has other weaknesses.  It does not lay out the value chain. Hence my lettering in the top left box of the examples (my attempt to lay out a value chain in a very small space!)   As a result, the Slack/Lewis format does not visually show that the OLISM parts of POLISM exist to help make the P of POLISM (the bit that creates the value proposition) work.

But, as I keep repeating in this blog series, it is always worth understanding other people’s frameworks because most will have a dimension that is better than your own model.

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The forces that are driving operating model change

At various stages in the last few years I have had a check list of trends (mainly tech trends) that managers should be considering when they are reviewing processes or operating models.  Things like “automation” or “digitization” or “mobility” or “social media”.  The basic idea is to encourage managers to think about whether they are exploiting these new technologies enough in their new process or operating model designs.

So I am always on the look out for an article that synthesizes down all these different trends into a manageable number to think about.  In 2017, two articles got particular attention from me, one from BCG and one from McKinsey.

The BCG report “Twelve forces that will radically change the future of work” by Vikram Bhalla, Susanne Dyrchs and Rainer Strack has five trends that interest me (the other seven are about changes in the customer desires or the workforce).  The five are:

– automation: nearly half of all jobs in the US can be automated

– big data and advanced analytics: 2.5 quintillian of data are generated every day

– access to information and ideas: 7.6 billion people will be using mobile devices

– simplicity in complexity: 74% of managers believe that complexity is hurting performance

– agility and inn0vation: 90% of managers say that agility is needed to execute strategy

The McKinsey article “The next generation operating model for the digital world” by Albert Bollard, Elixabete Larrea, Alex Singla and Rohit Sood only has five trends.  The five are:

– Lean process design: streamline processes and eliminate waste

– Digitization: digitize both customer experience and day-to-day operations

– Business process outsourcing: drive the next generation of outsources and offshoring

– Advance analytics: provide intelligence to facilitate decisions

– Intelligent process automation: to replace human tasks

What should we take away from these two authoritative sources?  First, neither includes the big fad of the last five months Artificial Intelligence (although it underpins two or three of the McKinsey list and two of the BCG list).  Second, there are some notable similarities and differences.   Both include automation and analytics.   BCG has access to information, agility and simplicity.  McKinsey has lean, digitization and outsourcing.

So here is my list –  ALODSAMOSA

  • Automate (including artificial intelligence)
  • Lean
  • Outsource
  • Digitize (both the customer interface and operations)
  • Socialize (take advantage of social media)
  • Analyze (collect big data with sensors and analyze)
  • Mobilize (enable people to work anywhere)
  • Offshore
  • Simplify (cut complexity)
  • Agilify (reduce the time it takes to change)

The question to ask of any process or any operating model is “Are we exploiting the trends of ALODSAMOSA?”  It is a bit of a mouthful, but quite catchy once you have said it a couple of times.

What additional or different items would you suggest?  What about printed manufacturing? What about “environmentalize”?  What about dignity at work?  And then there are age old concepts such as “specialize” or “empower” or “align”.

 

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The impact operating model work has on strategy

I am working with a client at the moment on an “operational review”.  I am still at the “explain the methodology” stage:  one of my roles is to skill up the project team so that they can use the Operating Model Canvas and associated toolbox.

The session today demonstrated the power of operating model work in helping challenge and crisp up strategy.  The organisation has a mission statement, three strategic priorities, corporate values and so on.  But the work we were doing today on a stakeholder map and a value chain map demonstrated some weak or unclear thinking in the strategy.

When we laid out the stakeholder map we had a hard time distinguishing between those stakeholders that are “customers” or “beneficiaries” from those that are “business partners” or “suppliers”.   The organisation is a charity.  Some of the confusion was about the funders and don0rs.  Were these funders suppliers or customers?  This depended on whether the charity decided what work to do and then looked for funders to support the work (making funders into suppliers/business partners) or whether the charity was offering its services to funders and it was the funders who decided what work should be done.  Frustratingly the strategy did not make this clear: the charity seemed to be doing both but the words in the strategy suggested that the charity was focusing on the first.

Another confusion was about the logic for the charity work.  When we picked a specific beneficiary and asked why the charity was doing work for this beneficiary, we were not sure whether it was to help the beneficiary as the end objective or to achieve some larger goal through helping the beneficiary. Again, the strategy documents and mission statement did not help us resolve this.

Some similar confusions occurred as we worked on the value chain map. We tried listing the different types of customer/beneficiary that the organization seeks to help; so that we could articlate value propositions (services) and draw out value chains (processes) for each beneficiary.  But this depended on answers to the previous questions.  Was the organization trying to help funders spend their money or was the organization trying to help a particular beneficiary? Also, was the primary beneficiary the person receiving the service or the people who benefited at one level removed? Think for example of helping a disabled child in order to ease the burden on a family.  Was the objective “ease the burden on families” or “help a disabled child”.

In a future blog, I hope to be able to illuminate this example with more specifics.  But, at the moment, the work is confidential and hence this material is well disguised.   The core point I am making, though, is that tools like the stakeholder map and the value chain map, force strategists to make choices, construct hierarchies of objectives and clarify mission in a way that is often missing from the tools used in strategic planning. This is because it is hard to design the operations without making these choices.  As a result, working on the operating model can lead to clearer and better quality strategies.   Maybe all strategic plans should include, at the back end, an Operating Model Canvas, as a forcing device to encourage crispness and clarity.

One conclusion we were able to make today: the first step in the project will need to be focused on clarifying the strategy.  Once this is done, we can then consider whether the current operating model will need to change.

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Operating models and agile

I recently gave a talk at the European Organization Design Forum on the topic of agile organizations.  This forced me to think deeply about what agile is and how it relates to organization design.  So let me share some of these thoughts here and expand the topic to include operating model design.

First a definition of agile: “being able to turn on a dime for a dime” and “being able to change faster and more cheaply than your competitors”.   These phrases are taken from Craig Larman, who was part of the team who coined the term agile as being relevant to the lean and six sigma community.  In this community, agile is associated with short-period (often six-week), test-and-learn projects, at the end of which priorities and direction can be reset based on what has been learned.  It is also associated with “minimum viable product”: the way of testing a new idea.

So what has it got to do with operating models or organization?  First, when making change, an agile approach to the change is probably wise. Don’t try to plan it all out and then execute. Instead, make some change quickly and then reassess.  Of course, in many tall hierarchies, the quick-cycle, test-and-learn approach is hard to make happen because, to get approval for change, top layers in the structure often want a fully-worked and costed business case.  Changing the plan and the business case every few weeks is hard both administratively and politically.  So one of the implications of agile is that we need to have decision processes in organizations that focus more on “intent” rather than “plan”, and decentralize achievement of intent down to teams that can operate in an agile way.

Second, there are lots of components of organization and operating models that are not, and never will be, agile.  In fact your ability to succeed in period A is often a function of your willingness to make commitments now that may cause you to be inflexible in period B.   Think for example of a company competing for a contract with Tesco or Walmart.  To win the contract, the company often has to demonstrate that it has built the capacity and developed the systems needed to serve this customer.  This capacity and technology can then become legacy problems if the customer changes its needs.  Yes you can build flexible capacity and systems, but typically these are more expensive than dedicated solutions: so there is a trade off.

The choice of the head of the organization is another example of a decision that is typically anti-agile.  Every leader has strengths and weaknesses.  If circumstances change so that the weaknesses become a significant disadvantage, it typically takes a year or two before the head can be changed.

If we think through the components of an operating model – POLISM – we can see the tensions that agile raises.   A process needs to be “leaned” to deliver a particular value proposition.  But this will make the process costly or less effective for delivering slightly different value propositions: the process becomes anti-agile.

Organization structure, even if controlled by holacracy (the self organizing method), takes time to change: it becomes anti-agile.

Location is expensive to change not just because of leases and the moving of people and equipment, but also because of other elements of the operating model that are influenced by location – supplier relationships, customer relationship, attractiveness for employees, etc.  So location can be anti-agile.

Legacy information systems are frequently a cause of lack of agility.  But, there is often no way round the problem, especially with bespoke software.

Supplier relationships can be anti-agile: effective relationships often take years to build.

Finally, management processes and scorecards can be anti-agile.  An organization that has been driven for ten years on a metric of sales margins, will take some years to convert to a return on capital metric or a sales volume metric.

So, when we design organizations or operating models we are often deliberately designing in aspects that will be anti-agile. Nevertheless, there is still benefit to the agile thought.  We need to think quite hard every time we make a design choice that is anti-agile, whether we are doing the right thing.  The simple question to ask is “once the new design is up and running, if circumstances change, how long will it take to change to another design both from a political and executional perspective.?”  For those of you who have used the tool “The nine tests of good organization design”, you will recognize the ninth test – “the flexibility test”.

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