FOUR KEY DESIGN ELEMENTS P. 8 Operating model October 2020 How to make the redesign process a success Aligning the operating model with your strategy2 Roland Berger Operating model An operating model defines how a company goes about delivering on its purpose. Before the COVID-19 crisis, businesses already suffered from operating models which had undergone incremental and unstructured changes over time, becoming often hidden barriers to organisations delivering on their strategy. Now, through COVID-19, businesses are having to restructure under extreme pressure, and risk drifting further away from achieving their long-term goals. Redesigning and implementing a fit-for-purpose operating model is thus of paramount importance, especially through the current crisis. In this publication, we begin by highlighting the importance of an effective operating model, and then list key challenges that companies requiring such a redesign would face. We then outline our tried-and-tested approach towards leading a successful operating model redesign and unveil a succinct set of key factors that make the redesign process a success. Dear Reader, Robert Thomson Partner Kai Balder Partner Philip Dunne Partner Title: erhui1979 / iStock3 Roland Berger Operating model Title: erhui1979 / iStock An operating model describes the way a company develops and maintains the capabilities that are required to deliver its strategy and how it fulfils its stakeholder expectations. An operating model logically stems from “why“ the company exists, its purpose, and “how“ the company plans to achieve its purpose, an outcome of its strategy. The operating model articulates the “how“ of deploying this strategy in practice and the path through which the company will create value. It is not a static structure but rather a dynamic framework which constantly adapts to a changing environment. An operating model is the gears in the engine room of the company, churning and meshing together to deliver value to both internal and external stakeholders. When done right, it serves as a source of consistent and coherent guidance to all the constituents of a company. For the employees, customers, and suppliers, the operating model provides clarity about the role each part of the organisation plays in delivering on-time, on-cost, and on-quality, and in fulfilling the company's purpose. For managers, the operating model creates transparency and enables proactive and effective leadership based on facts rather than ad hoc management often described as “firefighting“. For shareholders, the operating model articulates how the company ensures that its key capabilities are developed, maintained and delivered upon. An OPERATING MODEL is how strategy is deployed in practice to create value and deliver the company's purpose What fit for purpose achieves for you4 Roland Berger Operating model The hidden cost of an unstructured legacy An imperfect operating model is often the result of historical disorderly growth. In executing their strategy, many players across heavy industry, A while we are not advocating absolute centralisation which can create lethargy we did notice that many businesses are nowhere near where they should be in terms of process alignment. 5. Uninsightful metrics To enable informed decision making, visibility on performance by product group and end market is needed. However, P in the A&D industry, system integrators such as Safran and UTC (now Raytheon Technologies) became “super tier-1s“ and were able to improve their bottom line by charging high premiums for aftermarket sales in the days when airframers used to focus on reducing the initial purchasing price of aircraft for their airline customers rather than the total lifecycle costs. With airframers' increasing appetite for the high-margin aftermarket sector, and the expected slow-down in build rates in the medium term due to the lack of new platforms, many A&D players must reassess their strategy to achieve long-term sustainable growth in what will be a highly competitive market. While developing a strategy is relatively easy, delivering it is difficult. This holds especially true when a company comprises a portfolio of acquired businesses which do not all necessarily embody the Group DNA. As a result of the efforts to respond to shifts in the market, many companies have morphed into complex, difficult to manage organisations where limited or failed post-merger integration has negated the intended benefits, and instead impaired their organic growth potential. Due to their untapped potential, these fragmented companies became coveted targets for activist investors aiming to unlock short-term financial gains through divestitures and break-ups. However, developing an operating model for an established, global company that is constantly evolving is a daunting task. Embarking on any operating model redesign without the appropriate planning, experience and project management can be risky, which is why many companies shy away from it and opt for strategic changes instead. But when strategy no longer protects margins, an operating model redesign is due. The right operating model is the means to streamline operations and enable management to implement its strategic objectives sustainably.Four key elements In many companies, the term operating model is either not clearly defined, or everyone has a different understanding of what it encompasses. For all our engagements, we first specify that the operating model is the structure that delivers, secures, and sustains the capabilities that a company requires to fulfil its strategy and stakeholder expectations. To do so, it touches nearly every aspect of a company's day-to-day business. In our definition, an operating model describes the following four key elements. Processes and tools: how the company does its business. Organisational structure: the structure in which it operates. Leadership model: how it is managed and its core values, and Governance: how it ensures adequate oversight. Our approach to development and lessons learned We have used our four-step approach to redesign the operating model of clients in various industries, including A&D, automotive and industrial products. While the duration of each step varies depending on the starting point and the allocated resources, each of the steps is fundamental to ensure fitness for purpose and buy-in for an actionable transformation. There are no shortcuts, but the resulting operating model is robust and reliably delivers strategic opportunities while adjusting to challenges. To help you avoid the most common pitfalls, we have collected the key lessons we learned in our projects and incorporated them into our proven four-step approach. On the following pages we will briefly explain our project approach and share the key lessons learned along the way. How to overhaul the operating model 7 Roland Berger Operating model Processes are the sets of activities executed by employees to transform resources into products and services, and tools enable and support the effective implementation of these activities. The Leadership model describes the company's leadership style and the values, culture and company DNA that are set and lived by the management and the employees. The Organisational model describes the company's structure, roles and responsibilities, reporting lines, footprint, and customer and supplier interfaces. It defines which activities are clustered into a role, which roles are clustered into a department, which departments are clustered into a division, and how these entities interact with each other hierarchically and functionally to deliver value to internal and external customers. The Governance model describes the rules, practices, and processes used to direct, manage, and control all operations. The primary goal of all policies is to ensure adherence to the objectives set out in the strategy and agreed on with the stakeholders. Four key elements