The Theory of Everything in Operations
Achieving operational excellence through interoperability and improved business functions
The entire operations arena is ripe for a step change. The thinking on operational excellence to date has focused almost exclusively on improving performance in various functions, while the concept of interoperability—the ability to collaborate across functions, business units and enterprises—has been largely neglected. The central idea of A.T. Kearney's Theory of Everything in Operations is that, to achieve operational excellence, organizations must not only improve performance within functions but also promote collaboration across functions.
In recent years, growth has not been high on most CEOs strategic agendas—for obvious reasons. However, for those companies that have pushed through the global recession to achieve their growth ambitions, and even managed to establish global footprints, growth has not been all that was expected or promised. While it has yielded the expected size and scale, it has also given rise to more complexity in operations, which in many cases outweighs the projected benefits. Attempts to address the additional complexity through rudimentary business process reengineering or heavier investments in IT have generally failed. Isolated efforts focused on improving discrete functions, such as purchasing or supply chain, have proved equally unsuccessful.
The failure of these initiatives cannot be blamed solely on poor implementations or on resistance to change by people in individual functions or business units. Instead, a silo mentality often exists within large organizations as team members focus only on their own functions or business units. Such a limited focus prevents the individual parts of the organization from contributing to overall operational excellence.
Another factor is the disconnect that exists between operations strategy and operational execution. When different parts of an organization pursue their own objectives, companies are vulnerable, particularly during times of unprecedented business challenges such as those we face today: Companies that once occupied comfortable niches are being attacked by emerging market competitors with (potentially) superior business models and fundamentally different economies.
Then there is the volatility in demand, in the price of raw materials and in currencies that is turning diligent planning into a hazardous gamble. At the same time, internal and external stakeholders are becoming more discerning as they aim to assess the impact of the business on distant markets and future generations.
Today, ensuring that execution within individual business units delivers on your overall operational strategy has never been more important.
Roadblocks to Operational Excellence
In a recent survey, we asked executives in leading American and European companies to identify the major roadblocks to operational excellence.1 They cited several common barriers: distant geographies and diverse cultures, incompatible product lines and inconsistent processes, complex operating systems and varying design systems.
However, they also said that initiatives undertaken to address these problems were usually limited to isolated improvement projects within functions that fell far short of a comprehensive integration effort, and that responsibility for integrating with others usually fell to the heads of individual units. Many called it a piecemeal approach, saying it reflected the fact that top management's priority was generally revenue growth from business units and cost savings from functions. Importantly, the survey also revealed a significant amount of uncertainty as to what operational excellence is and how to achieve it.
What Is The Theory of Everything?
Like the Theory of Everything in the field of physics, A.T. Kearney's Theory of Everything in Operations aims to link existing approaches for improving operational excellence by evaluating performance in two key spheres—the much-considered sphere of functional excellence and the much-neglected sphere of interoperability.
A plethora of models and experience exists on the topic of functional excellence (though it remains a challenge for many companies). Interoperability, by comparison, is largely new and unsolved in the business community despite the fact that IT departments and the military have been paying attention to the concept for many decades. NATO defines interoperability as "the ability to operate in synergy in the execution of assigned tasks"—a definition that can be usefully carried over to the business realm. For our purposes, interoperability is defined as enabling cross-functional, cross-business unit and cross-enterprise collaboration.
A number of international companies instinctively recognize the benefits of interoperability. Best Buy organizes staff in cross-functional teams geared to customer value rather than product requirements. Google makes sure its public relations and IT groups work together to reach out to new key stakeholder groups, including policymakers, in support of corporate objectives. Kraft Foods has its business units share funding of product development in line with the corporate innovation strategy.
And The Hay Group uses relationship management strategies to collaborate with all players up and down its value chain, including working closely with academia to develop market intelligence that provides its clients with a competitive advantage.
We have identified seven dimensions of interoperability: operations strategy, business systems, relationship management, implementation management, performance management, information and knowledge management, and culture and people development (see figure 1). The sidebar, The Magic Seven, discusses each dimension in more detail.
Overall, interoperability allows organizations to generate more value from all business units. Less time, money and human resources are required to deliver superior output. And independent units are integrated more easily into the organization's operating model to deliver the desired results faster and more effectively.
Theory of Everything in Practice
The first step toward operational excellence as defined by the Theory of Everything in Operations is to map the company's core functions on a matrix that scores each one in terms of its functional excellence and its interoperability (see figure 2).
Interoperability. Mapping the current and desired position of each function on the interoperability axis requires knowing two things: (1) the readiness of the function to work in unison with other functions, and (2) the desired level of interactions with other functions.
An example of low interoperability might be a purchasing function that follows engineering specifications unquestioningly, without participating at all in their definitions. This essentially reduces purchasing to a purely transactional role.
By contrast, an example of true interoperability can be found in the automotive industry, where new product development teams are often built with staff from several functions, with R&D providing project leaders, and purchasing, sales, after sales, quality and production staffing the engineering teams. This ensures customers' preferences are addressed from concept to production. Similarly, in the pharmaceutical industry, cross-functional teams from QA, engineering and operations are brought together to improve manufacturing, quality and overall equipment effectiveness.
Functional excellence. Mapping the current and desired positions on the functional excellence axis is relatively easy, and requires knowing two things: (1) the current performance of the function and its potential for improvement, and (2) the desired level of excellence necessary to align with the overall strategy.
Operational excellence requires not only improving performance within functions but also promoting collaboration across functions.
The position on this axis can be defined using the evaluation models that already exist for most functions. For example, a top score in functional excellence in purchasing would mean that the purchasing strategy is fully aligned with internal requirements and market dynamics, that the methods to reduce costs and increase value with suppliers are differentiated, and that purchasing performance is measured according to its value contribution.
Ideal Level of Operational Excellence
The Theory of Everything in Operations is not a dogmatic model—meaning all functions do not necessarily have to move to the upper-right corner of the matrix, indicating that they have achieved a high level of functional excellence and a high level of interoperability. Figure 3 illustrates three levels of operational excellence.
Many companies suffer from the franchise model with too little operational excellence. In terms of functional excellence, the company fails to invest in its core functions, those that have a major impact on the company's overall success. In terms of interoperability, individual functions and units act like independent entities, often competing for business with functions and units within the same company. This failure to collaborate causes a disconnection between strategy and operations, making the company vulnerable to external challenges. The good news is that there is lots of potential to improve performance in this scenario.
Through interoperability, less time, moneyand human resources are required to deliver superior output.
On the other hand, some companies suffer from the dogmatic model with too much operational excellence. A strict interpretation of the Theory of Everything in Operations could lure companies to the upper-right corner of our matrix. In terms of interoperability, they invest a substantial amount of money to overcome cultural and structural barriers and conflicting strategic priorities. The associated changes have a profound effect on the structure of the company—indeed, far beyond what is required to achieve competitive advantage. In terms of functional excellence, they tend to overspend on securing excellence in functions that have a relatively small impact on overall results.
The ideal model is the ultimate level of operational excellence. To achieve equilibrium, companies tailor a specific approach to their corporate strategy, their growth ambitions, the history of the company and local market conditions. Once this balance has been achieved, operations can safely work in unison toward the company's overall strategic objectives. Companies that reach this stage can easily repel attacks from new competitors, are sufficiently agile to master the challenges of economic cycles, and are able to meet the ever-increasing expectations of internal and external stakeholders.
The Outlook
The Theory of Everything in Operations reaches far beyond the traditional realm of operations consulting. While operations consulting so far has looked inward, focusing on cutting costs and realizing synergies, the Theory of Everything represents a paradigm shift as it is outward-looking, focusing on reconciling operations with strategy.
Contacts
Wim Plaizier is head of the operations practice for EMEA.
Patrick Van den Bossche is head of the operations practice for the Americas.
Terry Innerst is head of the operations practice for Asia-Pacific.
1 2010 Operational Excellence survey of 65 executives in North America and Europe.
Copyright 2011, A.T. Kearney, Inc. All rights reserved.
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