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Table of Contents
The Background of Operational Innovation..................................................4
What role does it play in business process management? ..........................6
I. Business Strategy....................................................................................7
II. Business Process Architecture ...............................................................7
III. Process Performance Measurement......................................................7
IV. Organizational Alignment.......................................................................8
A System for Excellence...............................................................................8
Value to Profit Cycle.....................................................................................9
About the Author...........................................................................................9
References: ..................................................................................................9
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The Background of Operational Innovation
Operational Innovation is the invention and deployment of new ways to achieve a higher level of
performance within a company. This method should not be confused with operational
excellence or operational improvement. Operational innovation is a structured approach to
identify new ways of providing world-class services and products to customers at a reasonable
price. In doing so strategies are monitored at the enterprise level while systems are managed
at the organizational level. One of the most profitable examples of Operational Innovation is the
cross-docking method used by Wal-Mart. Wal-Mart does not believe in allowing goods trucked
into its distribution center from suppliers to sit for any period of time. As soon as the shipment
arrives, it is immediately transferred to trucks bound for stores without ever being unloaded and
stored. This method allows Wal-Mart to maintain lower inventory levels which correlates to
lower operating cost thereby translating into lower prices for customers.
There are other profitable companies using operational innovation to fuel extraordinary results.
Such companies as Progressive insurance have experienced profitable gains in a market that is
considered saturated and high risk. By using operational innovation, Progressive insurance was
able to level the playing field with larger insurance companies that sell automobile insurance
policies to high-risk drivers. Progressive came up with a method called Immediate Response
Claim handling. The way this innovative technique work: As claimant contacts a Progressive
Representative by phone regardless of time of incident and let them know that they were in an
accident. The representative then schedules a time for an adjuster to inspect the vehicle.
The adjuster who operates out of a mobile office is then dispatched to inspect the vehicle within
a nine hour turnaround. The adjuster examines the vehicle, prepares an onsite estimate of
damages, and if possible, writes a check for the claimant before ever leaving the site. There are
so many benefits to this operational innovation. The claimant gets faster service with less hassle
which means they are more likely to be loyal customers to the company. Progressive does not
have to pay for the cost of storing a damaged vehicle or renting a replacement vehicle while the
vehicle is being repaired. Just these two benefits alone calculate significant savings which links
to higher profit margins for the company in whole.
Michael Hammer wrote in his article, “Deep Change: How Operational Innovation Can
Transform Your Company”, that Operational Innovation is truly a deep change, affecting the
very essence of a company and how its work is done1
. Mr. Hammer believes that Operational
Innovation is by nature disruptive and has an outward ripple effect to all aspects of the
enterprise. Therefore the questions becomes how do we implement operational innovation
within our company? Michael Hammer who I would like to identify as the architect in this work
noted that there are organizational barriers preventing many companies from taking advantage
of operational innovation. Within these barriers I have put together some executable actions that
could be taken to move the company in the right direction to achieve the desired results.
Barrier 1: Business culture undervalues operations – there are four key
organizations of a business. The four organizations are Marketing, Finance, Operations, and
1
“Deep
Change:
How
Operational
Innovation
Can
Transform
Your
Company,”
by
Michael
Hammer
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Human Resources. Operations are considered the profitability component that keeps the
company afloat. For example: a call center used to process claims can be incorrectly viewed as
an unnecessary expense that could easily be outsourced. The problem with this thinking is the
company undervalues the overall effectiveness of the call center and therefore eliminates one of
its key components to reduce immediate cost. This can be very detrimental to customer
retention, profits, and overall operational effectiveness. Another example of this is when
companies view their Human Resources organization as a huge expense that can also be
outsourced. Human Resources main function is to supply the company with the best talents
while complying with regulatory obligations set by the government. To outsource this component
would mean almost immediate death of the company’s most viable resources (employees). In
addition, with the right operational innovation there is a strong possibility that HR can show and
prove positive cash flow for the company. There are companies such as Disney, HealthEast,
Southwest, and Wachovia who have reported an increase in revenue from their HR
organization. As a result of offering their HR services to external customers these companies
were able to add real dollars to their bottom-line. The services offered included training, temp
services, building a culture, and executive recruiting2
.
Barrier 2: Operations are out of sight and out of mind – Operations is the driver of
financial results. All company officers and managers should be required to spend some time
learning the core part of the business – Operations. Every function of the company is uniquely
different. However, each function has an interdependent relationship with the core part of the
business. HR has to find, hire, train, and compensate the employees working in operations.
Finance has to maintain and monitor the budget to ensure operations have what it needs to
create and produce the product(s) or service(s) offered. Marketing has to generate creative
ways to constantly inform customers of new product(s) or service(s) created by operations.
Finally each senior executive has a responsibility to know and assist with resolving any and all
issues preventing operations from delivering on promises made to external customers.
Barrier 3: Nobody owns it – Operational Innovation has a hard time gaining traction in a
company because no one owns it either at the enterprise or organizational level. Any type of
innovation involves end to end processes that cross departmental boundaries. For Operational
Innovation to be effective and improve bottom-line results, it must be owned at the enterprise
level. Authority must be given at the officer level to ensure new and innovative ways to
effectively and efficiently complete work at the organizational level. As market conditions
constantly change and become more and more saturated with new and innovative products and
services, it is imperative for companies to examine their value proposition to the customer.
Therefore it imperative for an officer level employee to know, understand, and deploy new
workflow strategies that will keep the core business refreshed, energized, and nimble. This will
allow the company to create new opportunities to capitalized on uncontested markets.
Barrier 4: Improvement Versus Innovation – Many times businesses are crippled by
the number of change initiatives competing for priority. Their goal is to be effective and efficient
with how they deliver world-class products or services to their customers. What generally
2
“Transforming
HR
Into
a
Revenue-‐Impact
Function
to
Increase
Your
Strategic
Impact,”
by
Dr.
John
Sullivan
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happens is the company undergoes some form of improvement initiative that is in direct
correlation with their bottom-line results. Many times this approach immediately kills innovation
giving life to improvement. This can come in the form of a technology based implementation
such as a new enterprise resource planning, customer relationship management, or supply
chain management software solution. Although there is nothing wrong with implementing a new
software solution. However, it can become problematic if the company fails to take a complete
inventory of its resources before implementing the solution.
Innovation should not take the back seat to improvement because one is easier to define,
deploy, and implement. Both should be carefully considered, researched, and decided based on
what will generate the best return on investment. For example if a company has a software
solution already in house with the infrastructure that can accommodate customization to fit the
business need; the company should choose to acquire the resource to customize the software
that is currently being used. The customization will save the company the cost of purchasing
the new software solution. It will reduce the cost for deployment and training staff. Disruption in
producing the product or service will be significantly minimized or eliminated. Finally there will
be a minimum to no impact to employee morale because they will be familiar with the existing
software with upgrades.
Barrier 5: Full Leadership Buy in – Unfortunately there are many leaders who are
unable to see the value in grassroots movement required to make Operational Innovation work.
They see it as an unnecessary distraction pulling vital resources away to work on the initiative.
Many times leaders quickly place a halt on the initiative giving it a low priority in the greater
scheme of things. Going back to the impact Progressive has on the auto insurance market.
Many auto insurers view auto claims as a problematic child because it involves paying the
claimant. They consider the activity as a low priority that deserves little or no attention.
However, Progressive realized that it was better to keep existing customer because it was
expensive to pay commission-based agents to acquire new customers. It is safe to say that this
initiative was started from a grassroots idea that gained traction from a senior level executive
who saw the value in the work. Now Progressive has a rewarding interaction with its existing
customers generating billions of dollars in sales each year.
What role does it play in business process management?
There are three levels in the business process management methodology. The levels are
identified as the Implementation level, Business Process level, and the Enterprise level.
Documented in each level are major process initiatives that have become popular over the
years. This article only focuses on one initiative, which is the Enterprise level. Within the
Enterprise level the following initiatives exist; the Business Strategy, Process Architecture,
Process Performance Measurement, and Organizational Alignment. To understand and deploy
operational innovation a leader must know where, when, and how to implement new ways to
achieve higher performance within the company. The Enterprise Level of the Business Process
Management methodology provides the roadmap to achieve success in deploying and
implementing operational innovation.
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I. Business Strategy
The business process change methodology provides a vetting process to take place in
determining the best course of action when selecting an operational innovation initiative. At the
enterprise level a business strategy is created outlining the goals and policies of the company.
In other words, by implementing this product or service the customer will receive a higher
product or service value thereby increasing brand loyalty resulting in a multiplication in profits for
the company. When an operational innovation is created using the business strategy as its
foundation, the company officers can quickly address how the initiative can strengthen the
company’s position while minimizing its weaknesses in the market serve. For example; Wal-
Mart was able quickly surpass Sears and Kmart in growth and profits because the company was
able to reduce its cost through its operational innovation initiative.
II. Business Process Architecture
Embedded in the Business Process Architecture is the value chain. A value chain is a process
that begins when the company decides to create a new product or service and concludes when
a customer is satisfied with the product or service3
. To design an operational innovation
initiative, the company must define the value chain. Every relationship within the process must
essentially be defined with the end results in mind. For example: an end result for a company
could be deploying new ways to achieve the highest profitability margin for the company and its
investors. In the business process architecture, specific strategic goals are identified for the
operational innovation initiative.
III. Process Performance Measurement
To understand the effectiveness of the operational innovation initiative, internal and external
measures need to be
identified and agreed
to at the enterprise
level. These
measures can be in
the form of internal
and external
customer feedback
or any other key
performance indicators approved by the senior executive. When successfully implemented,
shareholders and stakeholders are seeing an increase in revenue while the customers are
satisfied with the quality and cost of the new or improved product or service. Figure 1.1 above
provides an overview of the process for measuring the performance of Operational Innovation.
3
Business
Process
Change,
Paul
Harmon
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IV. Organizational Alignment
When organizations are properly align and understand the core part of the business, great
success is bound to follow for the company. In the pursuit of operational innovation, each
organization must know and appreciate the position it plays in achieving world-class results. The
focus to achieve these results must be in customer intimacy, product and service leadership,
and operational excellence. As each organization creates value in these three areas,
uncontested markets are created giving the company access to higher profit margins.
Furthermore the company will experience acceleration in growth, revenue, and position across
industries. For example; Cirque du Soleil achieved the same level of revenues within a twenty-
year time period that took their competitor Ringling Bros. and Barnum & Bailey more than a
hundred years to attain4
. By aligning their organization to meet the need of its customers, the
company was able to create operational innovation through themed shows. Their world-class
products and services allowed the company to knockdown countless barriers attracting
customers worldwide across multiple industries.
A System for Excellence
It is very difficult to impossible to achieve operational innovation without having the proper
systems in place. By understanding the role that business process management plays in
operational innovation,
companies are able to
consistently execute its
business strategies. By
providing value to its
customers and shareholders
the company gain a larger
share of the market thereby
increasing its profit margin. At
the enterprise level, the
company views the entire
system looking for
opportunities to improve its
business relationships,
customers’ experience, and
shareholders’ value. In other words, at the system view the company sees at a high level the
complex relationships from the supplier to the customer. In this manner the company can
assess the overall performance of the system. The above example provides a high level
illustration of a system view of Computer C Wholesalers products to customer value.
In the case of Wal-Mart, the company looked at the interrelationships between its suppliers,
transportation, stores, to customer. This helped the company to better understand the true value
it offered to its customers and shareholders. By taking a system view, Wal-Mart realized it could
4
Blue
Ocean
Strategy,
W.
Chan
Kim
and
Renée
Mauborgne
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significantly cut the cost of storage by implementing a cross-docking process. Casella Wines
who is the maker of Yellow Tail Wines realized great opportunity when the company took a
similar approach as Wal-Mart and began viewing its interrelationships. The company identified a
way to produce and sell wine as a social drink to customers who were not traditional wine
drinkers. Yellow Tail crossed pollinated the beverage industry gathering customers that include
beer drinkers, cocktail drinkers, and other drinkers of non-wine beverages. When a company
performs a system view of its products and services, it unlocks hidden opportunities to achieve
operational innovation. Not only does the company retain its traditional customers but also it is
able to attract non-traditional customer to its products or services such as the case with Yellow
Tail.
Value to Profit Cycle
Before a company is able to achieve operational innovation every leader at the enterprise level
must know and understand what J Griffin Group call the “Value to Profit” Cycle. The cycle
begins with an idea for a proposed
initiative to move the organization
to operational innovation. The idea
is then vetted to the organization
leadership to deliberate and
hopefully approve. The leadership
team examines the idea to ensure
it aligns with the enterprise goal
for the year. Once the leadership
team approves the idea, an
initiative is formed and a team is
established to build and implement the organizational strategy. The strategy is then vetted back
to the leadership team and approve for implementation. Through the implementation, processes
are created and introduced to the culture for execution. From the culture feedback is provided
back to the leadership team with recommendations for improvement. Above is figure 1.3 to
show the illustration of the “Value to Profit” Cycle.
About the Author
Maurice Spann is the Cofounder and President of J Griffin Group, LLC. His work includes
leading continuous improvement initiatives for small businesses and Fortune 500 companies.
Customizing and executing continuous improvement strategy and delivering process
improvement training to project champions, stakeholders, and process owners.
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References
(Deep Change: How Operational Innovation Can Transform Your Company, 2004)
(Business Process Change , 2007)
(Blue Ocean Strategy, 2005)
