Define YourOperating Model

Designing a Foundation for Execution

Excerpted from

Enterprise Architecture as Strategy:

Creating a Foundation for Business Execution

By

Jeanne W. Ross, Peter Weill, David C. Robertson

Harvard Business PressBoston, Massachusetts

ISBN-13: 978-1-4221-8078-5

8070BC

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Copyright 2008 Harvard Business School Publishing CorporationAll rights reserved

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1

2

Define Your

Operating Model

GENERAL H. NORMAN SCHWARZKOPF once observed, “Lead-

ership is a potent combination of strategy and character. But if

you must be without one, be without the strategy.”1 Few business

executives would be comfortable leading without a strategy. Busi-

ness strategy provides direction, an impetus for action. Most com-

panies also rely on strategy to guide IT investments. Accordingly,

IT executives work to align IT and IT-enabled business processes

with stated business strategy. But business-IT strategic alignment

can be an elusive goal.

Business strategies are multifaceted, encompassing decisions

as to which markets to compete in, how to position the company

in each market, and which capabilities to develop and leverage. In

addition, strategic priorities can shift as companies attempt to re-

spond to competitor initiatives or to seize new opportunities. As a

result, strategy rarely offers clear direction for development of sta-

ble IT infrastructure and business process capabilities.

To best support a company’s strategy, we recommend that the

company define an operating model. An operating model is the

necessary level of business process integration and standardiza-

tion for delivering goods and services to customers. An operating

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model describes how a company wants to thrive and grow. By pro-

viding a more stable and actionable view of the company than

strategy, the operating model drives the design of the foundation

for execution.

The choice of an operating model is a critical decision for a

company. It’s the first step in building a foundation for execution.

An operating model enables rapid implementation of a range of

strategic initiatives. But that same operating model will fail to sup-

port initiatives that are inconsistent with the assumptions it’s

built on. Thus, the operating model is a choice about what strate-

gies are going to be supported. Take, for example, the ease with

which Charles Schwab introduced online brokerage relative to

Morgan Stanley. Schwab had already implemented low-touch sys-

tems and processes. In contrast, Morgan Stanley had built its ca-

pabilities for more customer-intimate (and higher-cost) operations.

Similarly, Amazon could add consumer products to its product list

because its operating model highlighted its capabilities in distri-

bution and online customer interactions. Barnes & Noble’s oper-

ating model was ill-suited to online sales but adapted easily to a

partnership with Starbucks, which enhanced its customers’ in-

store shopping experience.

The operating model decision (or lack thereof) has a profound

impact on how a company implements business processes and IT

infrastructure. A company without a clear operating model brings

no automated, preexisting, low-cost capabilities to a new strategic

pursuit. Instead, with each new strategic initiative the company

must effectively begin anew to identify its key capabilities. But se-

lecting an operating model is a commitment to a way of doing

business. That can be a daunting choice.

Our research suggests the payoff for making that choice can be

huge. Companies with a foundation for execution supporting an

operating model reported 17 percent greater strategic effectiveness

than other companies—a metric positively correlated with prof-

itability.2 These companies also reported higher operational effi-

ciency (31%), customer intimacy (33%), product leadership (34%),

2 ENTERPRISE ARCHITECTURE AS STRATEGY

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and strategic agility (29%) than companies that had not devel-

oped a foundation for execution.3

In this chapter we will first define the dimensions of the oper-

ating model—standardization and integration—and then describe

the four types of operating models: Diversification, Coordination,

Unification, and Replication. We will describe the critical compo-

nents of each model and show how an operating model shapes

future strategic choices. We will then discuss important consider-

ations in choosing an operating model.

Integration and Standardization: Key Dimensions of an Operating Model

An operating model has two dimensions: business process stan-

dardization and integration. Although we often think of standard-

ization and integration as two sides of the same coin, they impose

different demands. Executives need to recognize standardization

and integration as two separate decisions.

Standardization of business processes and related systems means

defining exactly how a process will be executed regardless of who

is performing the process or where it is completed. Process stan-

dardization delivers efficiency and predictability across the com-

pany. For example, using a standard process for selling products or

buying supplies allows the activities of different business units to

be measured, compared, and improved. The result of standard-

ization—a reduction in variability—can be dramatic increases in

throughput and efficiency.

Yet greater standardization has a cost. In exchange for increased

predictability, standardized processes necessarily limit local inno-

vation. And the transition to standardization usually requires that

perfectly good (and occasionally superior) systems and processes

be ripped out and replaced by the new standard. This can be po-

litically difficult and expensive.

Integration links the efforts of organizational units through

shared data. This sharing of data can be between processes to

Define Your Operating Model 3

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enable end-to-end transaction processing, or across processes

to allow the company to present a single face to customers. For

example, an automobile manufacturer may decide to integrate

processes so that when a sale is recorded, the car is reserved from

among the cars currently in production. By seamlessly sharing

data between the order management and manufacturing schedul-

ing processes, the company improves its internal integration and,

consequently, its customer service. In financial services, sharing

data across processes enables a loan officer to review a customer’s

checking, savings, and brokerage accounts with the bank, provid-

ing better information about the customer’s financial situation

and enabling better risk assessments for loans.

The benefits of integration include increased efficiency, coor-

dination, transparency, and agility. An integrated set of business

processes can improve customer service, provide management

with better information to make decisions, and allow changes in

one part of the business to alert other parts of actions they need to

take. Integration can also speed up the overall flow of information

and transactions through a company.

The biggest challenge of integration is usually around data.

End-to-end integration requires companies to develop standard

definitions and formats for data that will be shared across business

units or functions. For business units to share customer informa-

tion, they must agree on its format. Similarly, they must share a

common definition for terms like sale, which can be said to occur

when a contract is signed, when money is paid, or when product

is delivered. These can be difficult, time-consuming decisions.

Four Types of Operating Models

We have developed a straightforward two-dimensional model with

four quadrants, representing different combinations of the levels

of business process integration and standardization (figure 2-1).

Every company should position itself in one of these quadrants to

clarify how it intends to deliver goods and services to customers.

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The four general types of operating models are:

1. Diversification (low standardization, low integration)

2. Coordination (low standardization, high integration)

3. Replication (high standardization, low integration)

4. Unification (high standardization, high integration)

Define Your Operating Model

F I G U R E 2 – 1

Characteristics of four operating models

© 2005 MIT Sloan Center for Information Systems Research. Used with permission.

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Unification• Customers and suppliers may be

local or global• Globally integrated business processes

often with support of enterprise systems

• Business units with similar or over-lapping operations

• Centralized management oftenapplying functional/process/business unit matrices

• High-level process owners designstandardized processes

• Centrally mandated databases• IT decisions made centrally

Replication• Few, if any, shared customers• Independent transactions aggregated

at a high level• Operationally similar business units• Autonomous business unit leaders

with limited discretion over processes• Centralized (or federal) control over

business process design• Standardized data definitions but data

locally owned with some aggregation at corporate

• Centrally mandated IT services

Diversification• Few, if any, shared customers or

suppliers• Independent transactions• Operationally unique business units • Autonomous business management• Business unit control over business

process design• Few data standards across business

units• Most IT decisions made within

business units

Coordination• Shared customers, products, or

suppliers• Impact on other business unit

transactions• Operationally unique business units

or functions• Autonomous business management• Business unit control over business

process design• Shared customer/supplier/product

data• Consensus processes for designing

IT infrastructure services; IT applica-tion decisions made in business units

Low High

Business process standardization

5

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Companies adopt an operating model at the enterprise level and

may adopt different operating models at the division, business

unit, region, or other level. To decide which quadrant your com-

pany (or business unit) belongs in, ask yourself two questions:

1. To what extent is the successful completion of one busi-

ness unit’s transactions dependent on the availability,

accuracy, and timeliness of other business units’ data?

2. To what extent does the company benefit by having busi-

ness units run their operations in the same way?

The first question determines your integration requirements;

the second, your standardization requirements. What operating

model you choose will drive important design decisions around

the autonomy of business unit managers and the role of IT. Com-

pare your answers to the characteristics of each operating model

in figure 2-1 to see where your company fits.

Diversification: Independence with Shared Services

Diversification applies to companies whose business units have

few common customers, suppliers, or ways of doing business.

Business units in diversified companies offer different products

and services to different customers, so central management exer-

cises limited control over those business units (see the Diversifica-

tion quadrant in figure 2-1).

JM Family Enterprises (JMFE) has a Diversification operating

model. Headquartered in Deerfield Beach, Florida, JMFE had rev-

enues of $8.2 billion in 2004, making it the United States’ fifteenth-

largest privately held company.4 JMFE comprises four closely related

businesses:

1. Southeast Toyota Distributors (SET) serves more than 160

dealers in Florida, Georgia, Alabama, and North and South

Carolina with vehicles, parts, and accessories. SET dealers

sell approximately 20 percent of all Toyotas sold in the

United States.

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2. World Omni Financial Corp. (WOFC) is a diversified finan-

cial services company that provides a broad range of fi-

nancial products and services to consumers, dealers, and

lenders. Its offerings include automotive financial prod-

ucts and services, third-party servicing solutions, whole-

sale floor-plan accounting and risk management systems,

full-service inspection, automated risk decision software,

and automotive remarketing services.

3. JM&A Group offers a variety of automotive finance and in-

surance (F&I) products and services, such as new- and used-

vehicle protection plans, used-vehicle certification programs,

prepaid maintenance plans, credit life and disability insur-

ance, and F&I training and consulting services.

4. JM Lexus is the largest-volume retail dealership of Lexus

cars and sport-utility vehicles in the world.

The lower left quadrant of figure 2-2 describes JMFE’s Diversi-

fication operating model. Because the business units are synergis-

tic, they can generate business for one another. For example, JM

Lexus is a customer of JM&A; SET sells automobiles to dealers whose

customers often finance those vehicles through WOFC; and WOFC

offers loans to dealers to finance the vehicles in stock, helping in-

crease orders to SET.

JMFE provides some centralized services to its business units

through the JM Service Center. The largest of the shared ser-

vices is IT; the others are procurement services, financial services,

salon, fitness center, benefits administration, food services, corpo-

rate staffing, distributive and document services, facilities, reloca-

tion, and dealer services. Motivation for forming shared services in

2001 included cutting costs on these services and realizing quick

economies following expected acquisitions.

Historically, JMFE has grown primarily through the growth of

individual business units. SET has become the world’s largest fran-

chised Toyota distributor, and WOFC is one of the world’s largest

automotive finance companies. As JMFE’s current markets become

Define Your Operating Model 7

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ENTERPRISE ARCHITECTURE AS STRATEGY

F I G U R E 2 – 2

Four operating model examples

© 2005 MIT Sloan Center for Information Systems Research. Used with permission.

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wUnificationDow Chemical

• Local and global customers; global suppliers

• Global manufacturing, financial, HR, order management, purchasing, cus- tomer service, and other processes

• Business units all support globalchemical research, development, and sales

• Centralized management with matrixed business unit/process/geographical management

• Centralized process design imple-mented through ERP and corporate process owners

• Centrally mandated, single instance of key databases

• IT decisions made through central shared IT services organization

ReplicationTD Banknorth

• Few, if any, shared customers• Banks record independent customer

transactions aggregated centrally• Banks decide locally how to serve

their customers while implementing company practices

• Growing companywide standard processes to increase efficiencies and limit risk

• New business processes designed centrally

• Data locally owned; standard data definitions accompanying process standard implementations

• Assimilating existing IT systems of individual banks into central systems

DiversificationJM Family Enterprises

• Few shared customers or suppliers• Mostly independent transactions with

intercompany transactions at arm’s length

• Unique operations across business units

• Autonomous business unit heads reporting directly to CEO; arm’s-length transactions between business units

• Business unit control over business process design except for shared pro- curement, HR, financial, dealer, and corporate services

• Few data standards across units• Shared IT services to realize

economies of scale

CoordinationMerrill Lynch Global Private Client

• Single face to customer through multiple channels

• Customer transactions are indepen-dent, but product data is shared

• Individual financial advisers own their customer relationships

• Financial advisers customize their interactions with customers

• Financial advisers in 630 offices exercise local autonomy within bounds of their responsibilities

• Total Merrill platform provides shared access to technology and data

• IT organization provides centralized technology standards

Low High

Business process standardization

8

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saturated, the company is preparing to grow through acquisi-

tions—a common characteristic of Diversification companies. Be-

cause JMFE’s business units are run autonomously, each of them

has an operating model capturing its individual integration and

standardization requirements. By building a foundation for exe-

cution to support their individual operating models, these busi-

ness units contribute profitable growth to JMFE.

The organizing logic for Diversification companies is based on

synergies from related, but not integrated, business units. Business

units might create demand for one another or increase the com-

pany’s brand recognition, which generates enterprisewide value

despite autonomous management. Companies with a Diversifica-

tion model may pursue economies of scale through shared ser-

vices, but they typically grow through the success of the individual

business units and acquisitions of other related businesses.

Coordination: Seamless Access to Shared Data

Coordination calls for high levels of integration but little stan-

dardization of processes. Business units in a Coordination com-

pany share one or more of the following: customers, products,

suppliers, and partners. The benefits of integration can include

integrated customer service, cross-selling, and transparency across

supply chain processes. While key business processes are inte-

grated, however, business units have unique operations, often de-

manding unique capabilities.

For companies with a Coordination model, low cost is usually

not the primary driver in companywide decisions. Autonomous

business heads execute their processes in the most efficient man-

ner possible, but corporate directives and negotiations focus on

providing the best service to the customer. Strong central man-

agement defines the need for cooperation. Successful companies

rely on incentive systems and management training to encourage

companywide thinking at the business unit level. (See the Coor-

dination quadrant of figure 2-1.)

Define Your Operating Model 9

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Merrill Lynch, one of the world’s largest financial services

companies, is composed of three major business units: the Global

Markets & Investment Banking Group, Merrill Lynch Investment

Managers, and Global Private Client. Its Global Private Client (GPC)

business provides an example of a Coordination operating model

(figure 2-2). GPC delivers wealth management products and ser-

vices to individuals and small businesses through more than 14,000

financial advisers in approximately 630 offices around the world.

While financial advisers each serve their individual customers, their

services are integrated through what’s called the Total Merrill plat-

form, which gives all advisers access to the full range of Merrill

products: commission- and fee-based investment accounts, credit

products, banking services, cash management and credit cards, trust

and generational planning, consumer and small-business lending,

retirement services, and insurance products.5

GPC focuses on delivering comprehensive, innovative solu-

tions to meet the financial needs of its target customers. These

customers want to do business with Merrill Lynch through a vari-

ety of channels, such as the telephone call center, the Internet,

and advice-based interactions with financial advisers. In addition,

customers want access to non-Merrill products. GPC’s operating

model, therefore, coordinates services to its customers by provid-

ing integrated access to products across customers and integrated

access to customer data across products and channels. Such ser-

vice requires highly standardized product and customer data, but

it allows financial advisers to customize their individual interac-

tions to the needs of their customers. Merrill Lynch calls its model

providing “all things to some people,” and customized service is

important to retaining high-value customers.6

Merrill Lynch’s GPC grows by increasing the number of finan-

cial advisers who, with their access to product data, can identify

and then serve more customers. GPC also regularly innovates to

expand its product line, recently adding products such as new

credit cards and loan management services. These new services

help GPC provide a strong portfolio of products as it seeks to re-

tain its ability to provide a full range of services to clients.

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GPC’s standard technology platform and access to shared busi-

ness data enable the company to productively employ the largest

number of financial advisers in the industry. These financial advis-

ers have the industry’s best revenue per adviser, earnings per adviser,

and assets per adviser.7

Like GPC, most companies in the Coordination quadrant can

grow by extending their reach to defined customer segments in

new markets. They can also increase services to meet new, but re-

lated, customer demands. By integrating, but not standardizing,

product lines or functions, the Coordination model fosters process

expertise while enhancing customer service. This expertise attracts

new customers and sells more products to existing customers, thus

enabling profitable growth.

Replication: Standardized Independence

Replication models grant autonomy to business units but run op-

erations in a highly standardized fashion. In a Replication model

the company’s success is dependent on efficient, repeatable busi-

ness processes rather than on shared customer relationships. The

business units are not dependent on one another’s transactions

or data; the success of the company as a whole is dependent on

global innovation and the efficiency of all business units imple-

menting a set of standardized business processes. Accordingly, busi-

ness unit managers have limited discretion over business process

design, even though they operate independently of other business

units. McDonald’s, like other franchise operations, provides a clear

reference point for a Replication model. (See the Replication quad-

rant of figure 2-1.)

TD Banknorth, one of the thirty-five largest commercial bank-

ing companies in the United States, also provides an example of a

Replication model (figure 2-2). Over the past decade, the company

has grown by a factor of ten from a small community bank to the

largest bank headquartered in New England. TD Banknorth’s core

strategy is to grow through acquisitions of community banks with

customer-focused corporate cultures. The company adds value by

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introducing economies of scale and providing its banks’ cus-

tomers with new and improved products.8

Founded in Vermont in 1824, TD Banknorth grew with the

objective of understanding its customers better than anyone else.

As a result, each local bank developed its own processes and infra-

structures to meet the perceived needs of its specific customers.

But when John Petrey became the company’s CIO in September

2001, he set out to integrate and standardize its information tech-

nology. Petrey created standardized processes for bringing new

banks onto TD Banknorth’s foundation.

These new standardized processes are converting TD Banknorth

from a Diversification model, with independent operations in each

of the company’s banks, to a Replication model, in which banks

are run independently but with the same IT infrastructure and

a set of standardized core processes. To facilitate this transition, a

new Enterprise Projects Committee, headed by COO Peter Verrill,

reviews projects for their strategic impact in light of the company’s

focus on developing synergies across its banks. While Banknorth

looks for the efficiencies and predictability of standardized processes,

however, it also aims to preserve the image of a community bank

by retaining local decision making wherever feasible.

Many Replication companies grow through acquisition like

TD Banknorth, but most Replication companies can also build new

businesses from scratch. Whether companies are growing organi-

cally or through acquisition, the Replication model helps them

increase profits when management quickly installs its standard-

ized practices and technology foundation into a new unit and

then allows a local manager to build the business.

Unification: Standardized, Integrated Processes

When organizational units are tightly integrated around a stan-

dardized set of processes, companies benefit from a Unification

model. Companies applying this model find little benefit in busi-

ness unit autonomy. They maximize efficiencies and customer

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services by presenting integrated data and driving variability out

of business processes.

Unification companies typically have integrated supply chains,

creating interdependence between distributed business units. These

business units share transaction data, often including global cus-

tomer and supplier data. Standardized processes support global in-

tegration and increase efficiency. The Unification operating model

often benefits from implementation of large packaged systems to

support company standardization and integration requirements.

(See the Unification quadrant in figure 2-1.)

The Dow Chemical Company has adopted a Unification model

for its core chemicals-manufacturing business.9 Founded in 1897,

Dow Chemical develops and sells innovative chemical, plastic,

and agricultural products and services to customers in more than

175 countries around the world. From 1994 to 2004, despite a

downturn in the market, Dow nearly doubled its revenues while

growing its employee base less than 10 percent—a productivity

improvement of 8 percent per year. Management attributes much

of the company’s success to its well-tuned globally integrated

processes (figure 2-2).

Managers at Dow estimate that approximately 60 percent of

the company’s work processes are standardized. For example, fi-

nancial work processes are common around the globe. Manufac-

turing has common processes for building plants, driven in part

by the need for those facilities to be highly cost effective and en-

vironmentally secure. Standardized human resource processes allow

Dow to do performance management and to plan salaries and in-

centives around the globe in three weeks, equitably and transpar-

ently, even taking into account multiple currencies and differing

rates of inflation. Finally, some supply chain work processes (e.g.,

order to cash) are globally standardized; others (e.g., planning and

scheduling) are specific to particular products or regions.

Dow constantly reengineers processes to introduce greater

standardization and automation, as appropriate. These efforts are

intended, first and foremost, to cut costs, but they also increase

Define Your Operating Model 31

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quality, safety, and security—other important organizational ob-

jectives. Dow invests substantial resources in understanding the

costs of its processes and the impacts of its improvement efforts.

Dow sustains its integration and standardization through global

systems, such as SAP’s enterprise resource planning system, and

through a management structure that assigns owners to the vari-

ous global processes. Five of Dow’s eight global processes are housed

in a shared services organization that includes IT, purchasing, sup-

ply chain services, and customer service (including e-business),

along with expertise on six-sigma and work processes. Dow’s ma-

trixed management structure, in which managers often report to

product and process heads or to product and geographic heads,

further encourages global integration.

Unification companies invariably have highly centralized man-

agement environments. Management drives out inefficiencies and

then grows the company by leveraging economies of scale. Since

minimizing variation is key to driving efficiencies, Unification is

best suited to companies whose products and services are largely

commodities. Companies more focused on innovation may find

that the costs of standardization outweigh its benefits.

Applying the Operating Model

An operating model represents a general vision of how a company

will enable and execute strategies. Each operating model presents

different opportunities and challenges for growth. For example, the

need to integrate business processes, as in Coordination and Uni-

fication operating models, makes acquisition more challenging

because the new company must reconcile disparate data definitions.

On the other hand, the process integration of the Coordination

and Unification models facilitates organic growth through expan-

sion into new markets or extensions of current product lines.

Process standardization, as in Unification and Replication mod-

els, enables growth through a rip-and-replace approach to acquisi-

tions. When the acquisition is intended to create a mirror image, a

company can replace the systems and processes of the acquired

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business with its own. But both the Unification and Replication

models depend on leveraging processes already in place. Neither

model offers much leverage when a company chooses to expand

into synergistic, but operationally distinct, lines of business.

The Diversification model imposes fewer constraints on the

organic growth of individual business units and fewer challenges

in an acquisition. But it also leverages fewer capabilities than the

other models, thus offering fewer opportunities to create share-

holder value. Figure 2-3 summarizes the growth opportunities pre-

sented by each of the operating models.

Deploying Operating Models at Different Organizational Levels

Although most companies can identify processes fitting every op-

erating model, they need to select a single operating model to guide

Define Your Operating Model

F I G U R E 2 – 3

Different operating models position companies for different types of growth

© 2005 MIT Sloan Center for Information Systems Research. Used with permission.

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Unification• Organic: leverage economies of

scale by introducing existing products/services in new markets; grow product line incrementally

• Acquisition: can acquire competitors to leverage existing foundation; must rip and replace infrastructure

Replication• Organic: replicate best practices in

new markets; innovations extended globally

• Acquisition: can acquire competitors to expand market reach; must rip and replace

Diversification• Organic: small business units may

feed core business; company grows through business unit growth

• Acquisition: unlimited opportunities; must ensure shareholder value

Coordination• Organic: stream of product

innovations easily made available to existing customers using existing integrated channels

• Acquisition: can acquire new customers for existing products but must integrate data

Low High

Business process standardization

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management thinking and system implementations. Management

can then organize responsibilities for business units and IT based

on principles about how the company will operate most of the time.

One way companies respond to conflicting demands is to adopt

different operating models at different organizational levels. For

example, a company with a Diversification model, like JM Family

Enterprises, often adopts different models in its business units.

Johnson & Johnson (J&J) has long operated in the Diversifica-

tion quadrant. General managers in the company’s more than 200

operating companies have always had significant autonomy, and

for most of J&J’s 100-plus years of existence, analysts believed that

this decentralized management style was key to the company’s suc-

cess. But as major global customers increasingly demand integra-

tion across multiple business units, J&J responds by introducing

new organizational levels that can provide shared customer data

across subsets of related business units.10

J&J’s U.S. pharmaceutical group applies a Coordination model,

presenting a single face to health-care professionals. In Europe, its

Janssen Pharmaceutical Products applies a Replication model, pro-

viding low-cost, standardized processes for drug marketing, deliv-

ery, and monitoring. Having different operating models at different

organizational levels allows J&J to meet the multiple objectives of

large, complex companies while keeping organizational design rea-

sonably simple at the individual operating company level.

Many companies in the Diversification quadrant, including

DuPont, Citicorp, and General Electric, have multiple organiza-

tional levels, each adopting a different operating model so that

it can simultaneously meet the company’s and its own business

objectives.

Transforming to a New Operating Model

An operating model helps define the range of strategic initiatives

a company can readily pursue. As long as the operating model

presents attractive options, it provides a stable approach for deliv-

ering goods and services. If a company determines that its existing

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operating model is not well suited to its market realities, the com-

pany must shift to a new operating model. Shifting from one

operating model to another is transformational. A transformation

disrupts a company, imposing new ways of thinking and behav-

ing.11 But while companies would not want to regularly introduce

new operating models, such changes are sometimes necessary.

From Diversification to Unification:

a European packaging company

A European packaging company recognized a need to change

operating models in the late 1990s.12 At the time, the company was

organized into separate country-based business units, each of which

was responsible for its own operations. Different countries had dif-

ferent enterprise resource planning (ERP) systems, order manage-

ment processes, invoice formats, and even pricing. Each country

made its own decisions about IT systems and data standards, which

was a slow, inefficient, and expensive way to do business. Alarm-

ingly, management discovered some corporate customers were tak-

ing the same order to multiple organizations to drive down the

price by bidding one country-based unit against others!

The management team decided its key operations were sales,

order processing, new product introductions, and after-sales ser-

vice. Management decided it could accomplish those operations

better with a Unification model than with a Diversification model.

The company didn’t need to adopt a new strategy—it was still de-

livering the same products to the same customers. The change in

operating model was designed to help it deliver products and ser-

vices faster, better, and more efficiently.

To transform its operating model, management replaced the

different order management systems in each country with a central

ERP system and process. The countries now enter orders through

a browser interface with one product list, price list, and order man-

agement system for the entire business.

The company’s new operating model dramatically reduced order

management cycle time, lowered operational costs, and increased

business flexibility and agility. In the old operating model, adding

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a product with a new pricing structure required updating 15 dif-

ferent systems, which could take weeks. In the new system, one

central change is made, usually in a matter of hours. But the new

operating model had dramatic effects on the power structure of

the company, making the transition difficult. In the old model, a

country manager could, within limits, make independent deci-

sions about products, pricing, and promotions. That authority was

greatly reduced, and local managers naturally resisted the change.

Shifting from Diversification to Unification introduces trau-

matic organizational change. As companies attempt to increase

standardization and integration, they obsolete existing systems,

processes, and organizational structures and roles. Successful trans-

formations of this kind are costly, time consuming, risky—and

sometimes necessary. As we saw with the packaging company, the

rewards of the change can be substantial.

From Unification to Diversification:

Schneider National

Schneider National, a large, privately held trucking company,

built a strong Unification model in the early 1990s.13 Schneider

had highly standardized and integrated operations processes and

systems built around a centralized management model in which

most employees were based in Green Bay, Wisconsin. The company

had long been recognized as an industry leader in the effective

use of IT. Schneider was the first trucking company to implement

satellite tracking systems and then the first to integrate its track-

ing systems with both operations and customer service applica-

tions. But management decided in the early nineties that many of

the United States’ 50,000 trucking companies were dropping prices

and pushing down margins throughout the industry. Any person

with a truck could go into the trucking business, making it in-

creasingly difficult for Schneider to grow profitably.

Responding to the requests of some of the company’s key cus-

tomers, Schneider decided to offer logistics services. Management

recognized that a new logistics business could not leverage the

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company’s existing foundation for execution. Trucking demands

centralization, standardization, and integration to serve customers

who need reliable service delivery and accompanying informa-

tion. Schneider intended to provide localized, customized logis-

tics services, managed by logistics representatives who would sit

at customer sites and access local databases. Thus, the operating

platform that had regularly enabled innovation in the trucking

business was not a good fit for logistics. So when Schneider

launched the logistics business, it did so with a new and separate

management structure and segregated IT processes and operations.

Over time, Schneider has found synergies between its two

businesses. In particular, the trucking business has benefited from

some of the newer technologies introduced to support logistics.

But Schneider has two foundations for execution: one for the

Unification operating model of the trucking business and one for

the Replication operating model of the logistics business. As a

whole, Schneider has a Diversification model with some shared

infrastructure and services to benefit both businesses. Companies

with a core business adopting a Unification model, like Schneider,

may run out of opportunities to leverage that core. A Diversifica-

tion model provides opportunities to feed the core business.

The Operating Model as Company Vision

Focusing on the operating model rather than on individual busi-

ness strategies gives a company better guidance for developing IT

and business process capabilities. This stable foundation enables

IT to become a proactive—rather than reactive—force in identify-

ing future strategic initiatives. In selecting an operating model,

management defines the role of business process standardization

and integration in the company’s daily decisions and tasks.

The operating model concept requires that management put

a stake in the ground and declare which business processes will

distinguish a company from its competitors. A poor choice of

operating model—one that is not viable in a given market—will

Define Your Operating Model 19

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have dire consequences. But not choosing an operating model is

just as risky. Without a clear operating model, management ca-

reens from one market opportunity to the next, unable to leverage

reusable capabilities. With a declared operating model, manage-

ment builds capabilities that can drive profitable growth.

Because the choice of an operating model guides development

of business and IT capabilities, it determines which strategic op-

portunities the company should—and should not—seize. In other

words, the operating model, once in place, becomes a driver of

business strategy. In addition, the required architecture—as well

as the management thinking, practices, policies, and processes

characteristic of each operating model—is different from one op-

erating model to another. As a result, the operating model could

be a key driver of the design of separate organizational units.

We encourage senior managers to debate their company’s op-

erating model. This debate can force managers to articulate a vi-

sion for how the company will operate and how those operations

will distinguish the company in the marketplace. In clarifying

this vision, management provides critical direction for building a

foundation for execution.

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Chapter 2

1. ThinkExist.com Quotations Online, “Norman SchwarzkopfQuotes,” http://en.thinkexist.com/quotes/norman_schwarzkopf/.

2. The measure for strategic effectiveness was a weighted average ofthe company’s priorities for operational efficiency, customer intimacy,product leadership, and strategic agility relative to its success in meet-ing those objectives.

3. These statistics are based on a survey of 103 companies. Thesewere perceptual measures of how well the company’s existing IT-enabled business processes were addressing each of these strategicneeds. The first three strategic impacts refer to the disciplines describedin Michael Treacy and Fred Wiersema, The Discipline of Market Leaders:Choose Your Customers, Narrow Your Focus, Dominate Your Market (Read-ing, MA: Addison-Wesley, 1995). We have added strategic agility becauseof its growing importance to companies.

2

Notes

1

This document is authorized for use only by Sree Priyanka Kondeti in Sp23 – INFO TECHNOL MANAGEMENT-I-DAL (01930) at University of Texas at Austin, 2023.

4. The description of JM Family Enterprises is from (1) Cynthia M.Beath and Jeanne W. Ross, “JM Family Enterprises, Inc.: Selectively Out-sourcing IT for Increased Business Value,” MIT Sloan Center for Infor-mation Systems Research, forthcoming working paper and (2) Forbes.com, “America’s Largest Private Companies,” 2005, http://www.forbes.com/finance/lists/21/2004/LIR.jhtml? passListId=21&passYear=2004&passListType=Company&uniqueId=PTGE&datatype=Company.

5. The description of Merrill Lynch is from (1) Merrill Lynch, An-nual Report, 2004 and (2) V. Kastori Rangan and Marie Bell, “MerrillLynch: Integrated Choice,” Case 9-500-090 (Boston: Harvard BusinessSchool, March 2001).

6. Quoted phrase from V. Kastori Rangan and Marie Bell, “MerrillLynch: Integrated Choice,” Case 9-500-090 (Boston: Harvard BusinessSchool, March 2001).

7. Merrill Lynch, Annual Report, 2004.8. The description of TD Banknorth is extracted from Francisco

Gonzalez-Meza Hoffmann and Peter Weill, “Banknorth: Designing ITGovernance for a Growth-Oriented Business Environment,” workingpaper 350, MIT Sloan Center for Information Systems Research, Cam-bridge, MA, November 2004.

9. The description of Dow Chemical is extracted from Jeanne W.Ross and Cynthia M. Beath, “The Federated Broker Model at The DowChemical Company: Blending World Class Internal and External Capa-bilities,” working paper 355, MIT Sloan Center for Information SystemsResearch, Cambridge, MA, July 2005.

10. See Jeanne W. Ross, “Johnson & Johnson: Building an Infrastruc-ture to Support Global Operations,” working paper 283, MIT Sloan Cen-ter for Information Systems Research, Cambridge, MA, September 1995.

11. Clayton M. Christensen, The Innovator’s Dilemma: When NewTechnologies Cause Great Firms to Fail (Boston: Harvard Business SchoolPress, 1997).

12. The example company’s industry has been disguised, but it hasmany characteristics of the packaging industry.

13. The Schneider National vignette is drawn from Jeanne W. Ross,“Schneider National Inc.: Building Networks to Add Customer Value,”working paper 285, MIT Sloan Center for Information Systems Re-search, Cambridge, MA, September 1995.

22 Notes

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