Editor’s note: This is the third article in a series on delivering on your growth strategy through operating model optimization. For additional insights, read the previous articles in the series: “Build the engine that supercharges your growth strategy” and “5 steps to create a path toward profitable growth.”
A complete understanding of how to maximize value creation at an organization can be difficult for even the best business leaders to achieve.
Lack of alignment with customer needs, cumbersome processes, outdated technology and a disengaged workforce all can dilute profits and contribute to wasted motion and tepid investment returns. The elements of an enterprise operating model — people and culture, process, technology, organizational design model, data and reporting — all need to be aligned with an organization’s business growth strategy and refreshed often to drive value creation.
But leaders with a sound strategy supported by a well-designed and well-aligned enterprise operating model can limit the confusion and inefficiency while maximizing the value that the organization creates for customers, shareholders and employees.
“It is a universal truth that the operating model has to be accretive and supportive of the overarching business strategy,” said Jonathan Eaton, Grant Thornton Growth Advisory Services Principal. “This demands a recurring review. You have to continuously think about the maturity of the operating model and whether it’s designed to do the right thing.”
Tara Soileau, Grant Thornton Transaction Advisory Services Managing Director, likens the operating model to a people, process and technology toolkit for delivering on strategy. The operating model needs to be re-evaluated every time strategies are revisited and adjusted. If you design your operating model improperly or don’t adjust it over time, you’ll get results that reflect those mistakes.
Setting up the right performance metrics to measure your results also helps you evaluate the effectiveness of your operating model — and your strategy.
“You want to benchmark against your peer group or the broader industry, and you also want to benchmark internally to understand where you started and how that has changed as you’ve continued to modify your strategies as well as your operating model,” Soileau said. “That’s how you gauge effectiveness, know if you have something out of alignment, and maintain accountability.”
Focus on shareholders and customers
Grant Thornton Growth Advisory Services Principal Scott McGurl suggested that leaders need to constantly keep two groups of stakeholders in mind as they design their operating model for growth.
The first group is the shareholders or investors of the company for whom financial value is created. The emphasis on shareholder value creation is the fiduciary responsibility of the leadership for every for-profit organization.
Total shareholder return is directly related to the value created for the other group of stakeholders — customers.
“An operating model must be centered around the customer with differentiating capabilities emphasized to drive greater value for this group of stakeholders,” McGurl said.
Value for shareholders and customers can be enhanced through the operating model with a relentless focus on quality and process improvement. This can be accomplished by embracing principles of long-established methodologies such as Six Sigma, which focuses on streamlining and continuously improving processes in the pursuit of zero defects. This drives down costs and increases the reliability and quality you deliver to your end customers, whose satisfaction is a critical metric to be carefully managed within your operating model.
Processes supporting your operating model should be designed to make doing business with your company gratifying for your customers.
“When that happens, you add more value through the eyes of a customer, develop loyalty across your customer base and minimize churn,” Eaton said.
Technology can assist with these objectives through the advent of strategy execution platforms to plan, execute and track results of your strategy adoption. McGurl said these platforms increasingly incorporate AI, helping leaders focus their efforts on activities that are accretive to enterprise strategy and drive value creation.
Machine learning and AI also can be used along with data-driven process-analysis techniques known as process mining to understand the operating model’s effectiveness.
“It gives you the insights from a data perspective that are tied to systematic execution to be able to see the shortcomings of the operating model,” Eaton said. “When approached with agility and flexibility, this further enables continuous improvement. But you have to measure the right things and analyze the data. You can’t improve what you don’t measure.”
Elevate the right activities
When leaders construct and adjust their operating models, they can drive value with a careful focus on maximizing support for the highest-value activities. Eaton said that it’s common for 30% of a company’s portfolio to drive 70% to 80% of a company’s revenue; these “crown jewels” of a company should get priority for resources and funding.
But a deep analysis is needed to optimize the results for any company. If part of the business can be expected to drive double-digit margins for just a short time, it still might not be as valuable to the organization as another business unit that delivers smaller margins that are viewed as sustainable for years into the future.
“It’s very important to be able to analyze return on capital down to an asset level so you can make the right decisions for how to allocate dollars across the organization,” McGurl said.
Timeliness and opportunity cost also should be considered and constantly re-evaluated.
“There’s opportunity cost if you spend so much time on aspects of your operations that are not differentiating capabilities that you can’t get meaningful work done, or you miss opportunities to respond in other areas that create stakeholder value,” Soileau said. “Whether you’re looking at go-to-market timing or product development, there is a host of demands for your organizational resources. And ideally, they’re not spent on ineffective processes.”
Keeping people engaged from the C suite all the way to line employees across an organization also is an important consideration in the value creation capabilities of the operating model. People in the organization can be advocates, proponents, leaders and enablers — but they also can be antagonists or even saboteurs.
Processes need to be designed to keep people aligned while developing and maintaining a culture that will promote the accomplishment of the strategic objectives. And once again, measurement is critical, as progress is reflected in metrics for performance of people and their contributions within the operating model.
A model for building value
At a less granular level, Eaton suggested that measuring four key metrics — revenue growth, operating margin, asset efficiency and working capital — helps organizations understand their enterprise value. By comparing the change of those metrics over time and benchmarking them against industry competitors, companies can better evaluate their progress and their standing in the market.
A third-party assessment of a business’s financial data can be used to identify ways your operating model can be adjusted to improve these metrics, enhancing value creation and unlocking opportunities that might be hidden from view.
In an assessment, an organization also can look historically at what it has done with its capital, and the revenue and profits associated with those investments. Eaton suggested that this analysis can lead to value creation through customizable blueprints that encompass six focus areas that will lead to profitable growth over time:
- Organic revenue growth acceleration through nominal investment in customers, products, pricing and volume
- Physical operating model optimization for higher operating margin and better customer service
- Operating margin enhancement through cost structure and operational performance
- Enterprise operating model design improvement through SG&A expense optimization
- Dynamic pricing and variable order fulfillment model implementation to meet customers’ pricing and service preferences
- Working capital optimization and free cash flow generation through improvement of the cash conversion cycle
“For any company, working through at least two or three of these blueprints helps you identify the value levers that you can use to influence those key metrics,” Eaton said. “How can a company create value? It’s through those six blueprints.”
Companies that follow this process can fully understand how they’re driving value within the organization — and make adjustments if necessary. They can prioritize their initiatives, understanding which ones should continue, which ones need to be sequenced because of a dependency on other initiatives, and which ones are obsolete.
And ultimately, they can get better engagement from their people because the assessment is data-driven.
“Once you present the data, that makes a difference in the establishment of a case for change,” McGurl said. “It’s no longer a vision, aspiration, a goal, or even a mandate. People can see how they are supporting or detracting from the creation of value across the organization and make decisions accordingly. You can drive a great deal of organizational buy-in through personalizing the impact of each employee.”
Many Grant Thornton manufacturing clients have even put video screens at production stations so that line workers can track their productivity in real time and see the progress they’re making compared with their peers on other lines throughout the day. The healthy competition created by this gamification drives and rewards success and rapidly delivers increased employee engagement and bottom-line results.
When the people buy in, a well-constructed operating model can effectively enable achievement of organizational strategy. And the same data that motivates employees will demonstrate that success to leadership and shareholders, creating a cycle of prosperity.
“You continue to revisit the data over time to understand your successes and failures,” Soileau said. “Having all this information rooted in the data and maintained on an ongoing basis enables you to have that perpetual visibility and continue to adjust your operating model as you pivot your strategies.”
That leads to an enduring cycle of increased value creation that benefits shareholders, customers and the entire organization.
Contacts:
Jonathan Eaton
Principal, Growth Advisory Services
Grant Thornton Advisors LLC
Jonathan is best most recognized for his ability to help clients define their supply chain strategy in response to changing market conditions and other disruptive forces and subsequently helping
Charlotte, North Carolina
Industries
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Energy
- Retail & consumer brands
Scott McGurl
Principal, Growth Advisory Services
Grant Thornton Advisors LLC
Scott has worked in industry and management consulting environments for over 25 years supporting clients define and achieve their business transformation objectives.
Tampa, Florida
Industries
- Life sciences
- Healthcare
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Retail & consumer brands
Service Experience
- Advisory
- Human Capital Services
- Transaction advisory
Tara Soileau
Managing Director, Data Analytics, Transaction Advisory Services
Grant Thornton Advisors LLC
As Managing Director of Grant Thornton’s Data Analytics practice, Tara leads an international team of specialists in the transformation of growth strategy and deal evaluation throughout all phases of the transaction life cycle, bringing advanced analytics and deep insights to the forefront of data-informed strategic decisions.
Houston, Texas
Industries
- Construction & real estate
- Energy
- Manufacturing, Transportation & Distribution
- Private equity
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