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Operating models that navigate business volatility
Moving from castles to ships
For decades, companies have thrived and survived by building mighty castles to protect their positions. To ward off competitor incursions, organizations identified competitive advantages, placed themselves behind barriers to entry, and built powerful organizations to realize the entity’s aims. These nearly impenetrable walls were a potent approach when change was usually predictable and manageable. A quick look around, however, is all it takes to realize that the world and business are evolving at a faster pace than ever before.
- Becoming a shipbuilder
- Focus on capabilities
- Hallmarks of successful operating models
- Operating models on the horizon
- The bottom line
Becoming a shipbuilder
Fueled by technological advancements, emerging markets, empowered consumers, and evolving regulations, the pace of change has left many castles struggling to protect themselves. The harsh reality is that stability is becoming increasingly rare in today’s marketplaces and instability makes castle building a poor choice for sustainable advantage.
The businesses that will prosper in tomorrow’s world will build ships that are able to maneuver nimbly through ever-changing business environments. Ships and their crews are keenly aware of their surroundings and are able to adapt quickly. Building ships is a strategic imperative. Companies cannot dig moats deep enough to make them immune from the external forces that change markets and customer demands.
Building ships may seem like a daunting task from inside a castle. The culture and processes of large enterprises are often structured to protect revenue and profit from legacy products and services. To prepare for change, many companies try to keep their businesses growing by creating entrepreneurial ventures outside the core culture or acquiring entities with new capabilities. Although these approaches have their place, other large enterprises are changing from within through a systematic approach taken in measured steps.
Focus on capabilities
An operating model that functions as a ship must balance today’s needs and prepare the organization for future uncertainty. New and emerging growth opportunities may need vastly different capabilities than what are in place today. Identifying those capabilities requires a holistic process that begins with a vision supported by a clearly articulated business model: “where to play” (e.g., customers, products, geographies) and “how to win” (e.g., value proposition, profit models, partnerships).
Business model planning must also account for uncertainty. Company leaders must take a hard look at the market assumptions they are making and identify alternative scenarios and the business model changes they imply. In addition, organizations should identify the key principles and anchoring decisions that are going to serve as the guardrails in the design. Business leaders should examine major trends and understand where the business may be going in the long term. Skipping this critical step can easily lead to unnecessary organizational churn, elongated timelines, and lack of alignment among key executives.
Deloitte Capability HexagonTM
Hallmarks of successful operating models
While no one operating model will work for every company, key operating model attributes reveal the hallmarks of what enterprises should consider in the near-and long-term.
Since growth in developed markets has slowed, businesses need to fortify global expansion with specific strategies to reach the next billion customers. Globally integrated operations that can expand into different markets and easily shift outputs between them are hallmarks of future success. Companies built like ships can move swiftly to the harbors where the opportunities are most promising. This ability to navigate across the globe gives companies a distinct advantage in nascent markets.
The rapid pace of change shortens windows of opportunity. The best operating models can respond to changing market conditions by quickly piloting new concepts and scaling operational efficiencies. In addition, companies with scalable operating models are quick to develop alliances that can add scale “on-demand” such as cloud computing.
Businesses and consumers have gone mobile. The best talent is spread across the globe and a flexible working model can leverage it. Effective operating models use mobile to find the best talent in the world, provide geographic and work style flexibility, and foster collaboration.
Digital technologies are disrupting business models every day. But they also provide unique opportunities. Operating models need to capitalize on the benefits of digital technologies (e.g., analytics, mobility, social outlets, cloud computing). The most effective operating models have a unified enterprise-wide digital strategy. Rather than simply “bolting on” digital technologies to their operations, successful businesses strongly consider digital enablement when designing their operating models. Operating models should be created for an “omni-channel” world and embed analytics and other digitally enabled capabilities into the fabric of the organization.
Even a leading company will be hard-pressed to “go it alone” or have a singular model in today’s business environment. Forming alliances, joint ventures, and strategic partnerships will be central to market success. Leading-edge operating models have a governance structure that balances decentralized decision making with sufficient oversight to allow for macro-level adjustments. Like a fleet of ships changing their formation, operating models should be configurable to address new threats and opportunities.
As regulators change their expectations in many countries and industries, compliance strategies should be a core element of operations. Companies with the most effective operating models understand the regulatory landscape. They define a strategy and implement a proactive approach for meeting regulatory demands. They also adapt their capabilities, such as technology platforms, to accommodate regulatory changes.
Operating models on the horizon
Based on current marketplace trends, we have seen a number of operating models emerge that are likely to thrive in tomorrow’s business environment. These operating models are being spearheaded by ships that are challenging incumbent castles.
Niche operators are small independent businesses, such as those trading on e-commerce websites like Etsy. Etsy has embraced small niche businesses that cater to specialties such as wedding products (e.g., cake toppers, stationary) and connects them with consumers through an online platform. Niche technologies have fueled the ability of small product/service businesses to thrive in the market today.
Infrastructure providers are high-volume, routine process, and service delivery companies that have made heavy capital investments. The companies tend to have world-class data storage infrastructures that allow them to scale quickly and add more customers to their network.
Aggregation platforms are companies that connect either multiple marketplace participants or those participants to consumers. This business model is not new and is part of many peer-to-peer companies. Two well-known examples are Amazon and Ebay.
Agent businesses are organizations that connect consumers and talent. Examples include Pandora and LinkedIn. Pandora connects personal music consumers to artists. LinkedIn helps business professionals stay connected within their own communities and at a global level, and now has more than 380 million members in over 200 countries.
Mobilizers are companies that unite participants who have a common goal with a set of standards and governance. The company Social Finance, Inc. (SoFi) is one example. An alternative to traditional lenders, SoFi unites early stage professionals with individual investors for student loan refinancing, personal loans, and mortgages. SoFi has connected these parties to integrate a social mission within the lending process.
The bottom line
Tomorrow’s leading companies will have flexible operating models that can support ever-changing market demands.
To build operating models that are prepared for the future, companies need a clear business strategy that defines core customers and what offerings the company will bring to market. Organizations should consider a broad set of capabilities through a structured, holistic approach that focuses on the future as much as on the present. Businesses should examine their organizations to understand how they can become ships.
To begin this transformation, business leaders should consider the following:
- First, companies must confirm that their business model and strategy have been thoroughly pressure tested. In many cases, businesses don’t fully define key strategic aspects of the business model prior to starting down the path of building the operating model. Focusing on “where to play” and “how to win” can help crystalize these priorities.
- Second, organizations should identify the key principles and anchoring decisions that are going to serve as the guardrails to guide the design. Business leaders should examine major trends and understand where the business may be going in the long term. If they don’t, they may find themselves confronted with unnecessary organizational churn, long timelines, and lack of support among key executives.
- Finally, organizations should take a deep look at capabilities, not just organizational structure. Firms that successfully create new operating models evaluate the capabilities they need to win in the marketplace and surface tensions around how those capabilities can be delivered. They then make deliberate and informed decisions. Those decisions optimize critical capabilities by confirming that the right approach to decision rights, expectations, and operating structures are in place.
Many companies realize that they need to navigate like ships and have more nimble operating models. By taking a fresh look at strategic choices, competitive threats, and needed capabilities, companies can design, plan, and develop operations that can drive sustained competitive advantage.