This item appears on. The effects ripple outward to all aspects of the enterprise. Megson, L., & Hammer, M. (2004). The fact that the great majority of deals are unsuccessful does not deter executives from pursuing them. In this environment, the only way to grow is to take market share from competitors by running rings around them: by operating at lower costs that can be turned into lower prices and by providing extraordinary levels of quality and service. Companies that follow traditional implementation methodologies inevitably take too long. There is so much to be done, and so much that must be integrated with everything else, that years can pass before the innovation is implemented and its benefits start to flow. Just look at Dell, Toyota, and Wal-Mart. USA.gov. 2002 Nov;80(11):115-23, 134. But fewer than 10% of large Even today, not all auto insurers offer immediate claims response. Example: A packaged-goods maker had relied on sales forecasts for production scheduling. Instead of taking between seven and ten days for an adjuster to see the vehicle, Progressive’s target is now just nine hours. The cost of storing a damaged vehicle or renting a replacement car for one day—around $28—is roughly equal to the expected underwriting profit on a six-month policy. In an economy that has overdosed on hype and in which customers rule as they never have before, operational innovation offers a meaningful and sustainable way to get ahead—and stay ahead—of the pack. A consumer packaged-goods maker, for instance, based its production scheduling on sales forecasts rather than on actual customer demand. A hospital, for instance, was able to respond to physician referrals more quickly when it challenged the assumption that beds had to be assigned before patients could be accepted. For example, a company that has always done the ‘brick-and-mortar’ business may lose out if the trend is changing to a mix of online business with in-store trading.  |  It is truly deep change, affecting the very essence of a company: how its work is done. Indeed, where is the real strategic advantage in operational innovation at all? ... contends the author, is that business culture undervalues operations--they're not as sexy as deals or acquisitions. Many top managers are ignorant about operations and uninterested in learning more. Creating new ways, not just better ways, of working has been central to some of business’s greatest success stories: think Wal-Mart’s cross-docking distribution system, or Dell’s build-to-order model. The Harvard Business Review article "Deep Change: How Operational Innovation Can Transform Your Company" contains the following example of operational innovation at Progressive Insurance. Progressive Insurance completely reinvented claims processing—slashing the waiting time for vehicle repair estimates from ten days to nine hours and catapulting sales from $1.3 billion in 1991 to $9.5 billion in 2002. There are many reasons why theoretically imitable operational innovations have staying power. In the late 1990s, IBM invented a new product-development process that caused a 75% reduction in the time to develop new products, a 45% reduction in development expenses, and a 26% increase in customer satisfaction with these new products. In reality, innovation is merely doing things differently and more effectively than you have in the past. Breakthrough innovations in operations—not just steady improvement—can destroy competitors and shake up industries. As a result, Shell has cut the cycle time of turning an order into cash by 75%, reduced operating expenses by 45%, and boosted customer satisfaction 105%—all by introducing a new way of handling orders. HHS In addition, many executives who rose through the ranks of finance or sales aren't familiar with operations--and they aren't interested in learning more. Most often they start as grassroots movements, fostered by people sprinkled throughout organizations who are passionately committed to finding and exploiting opportunities for operational innovation. For instance, many companies implementing ERP or SCM systems merely use them to enhance existing processes. Hardly. Again, no. Copyright © 2020 Harvard Business School Publishing. The innovation paid off and led to a successful IPO a few years later. Cross-docking negates the assumption that goods need to be stored in a warehouse, build-to-order that goods should be produced based on forecasts and destined for inventory. This was the goal from the outset; Shell simply reached it in manageable steps. SAGE Reference. Innovation is often associated with changing technology or the implementation of a new solution. Financial data dominate the discourse in the modern organization, although operational performance is the driver of financial results. Breakthrough innovations - not just steady improvements - in operations can destroy competitors and shake up entire industries. Executives who understand how operational innovation happens—and who understand the barriers that prevent it from happening—can add to their strategic arsenal one of the most powerful competitive weapons in existence. At a major semiconductor maker, for instance, a group of middle managers who were frustrated with the complexity and poor performance of their order fulfillment process decided to make a case for change to executive management. Under this system, the claimant is spared the hassle of dealing with body shops, the Progressive adjuster works in a climate-controlled environment that allows more careful inspection, and the body shop doesn’t have to get between Progressive and its customers. Auto insurance is a mature, 100-year-old industry that grows with GDP. View Homework Help - Deep change from MGMT MGT 665 at Ace Institute of Management. Customers were delighted, and overall costs dropped dramatically. Business process innovation is a major success factor for the next-generation enterprise and often necessary to benefit from opportunities in a digital world. Companies often achieve extraordinary levels of performance under extraordinary conditions; their problem is performing extraordinarily in normal situations. Beginning in 1994, Eastern Electric, a UK power utility, created a process that reduced the time needed to initiate electrical service by 90% and its cost by 66%. Those terms refer to achieving high performance via existing modes of operation: ensuring that work is done as it ought to be to reduce errors, costs, and delays but without fundamentally changing how that work gets accomplished. And it requires a level of integration and alignment that many enterprises are not prepared to handle. Examples like these will help convince a leader that operational innovation can work. Why not? But fewer than 10% of large companies have made serious attempts to achieve operational innovation. Instead, find operating techniques that have been successful in other industries and apply them to your business. Harv Bus Rev. By contrast, Progressive’s combined ratio fluctuates around 96%. How operational innovation can transform your company. One of the best known of these is cross-docking, in which goods trucked to a distribution center from suppliers are immediately transferred to trucks bound for stores—without ever being placed into storage. Deep Change: How Operational Innovation Can Transform Your Company (HBR OnPoint Enhanced Edition) by Michael Hammer , (No reviews yet) Write a Review Deep Change: How Operational Innovation Can Transform Your Company. Most senior managers focus on strategic planning, budgeting, capital allocation, financial management, mergers and acquisitions, personnel issues, regulatory concerns, and other macro issues, very different from the design work at the heart of operational innovation. The information they usually get does little to focus their attention on the mechanics of operations. More accurate pricing translates into increased underwriting profit. Breakthrough innovations--not just steady improvements--in operations can destroy competitors and shake up entire industries. Time, cost, and customer satisfaction all get major boosts from operational innovations. Another problem with conventional implementation is that it assumes that the initial specifications for an operational innovation will be accurate and complete. Setting up reading intentions help you organise your course reading. Other companies have made similar performance gains through operational innovations. Nor did it grow at the expense of its margins, even when it set low prices. Fortunately, all of these barriers can be overcome. In theory, that is a powerful argument, but in the real world, operational innovations have legs. The core, value-creating work of enterprises has become low status. Innovation may seem like more of a luxury than a necessity. The improvements continued when the next release brought people from the various departments together into cross-functional teams. For years, Progressive did little advertising, and some of its campaigns were notably unsuccessful. Once one company introduces a new way of doing things, all competitors can follow, and before long all are back on the same level playing field. Operational innovation may feel unglamorous or unfamiliar to many executives, but it is the only lasting basis for superior performance. One business school student recently observed to me, “There seems to be a hierarchy in the business world. 2005) then the question to be answered is what comes first and how does the organisation implement an innovative strategy or a strategy for innovation? Operational innovation has been central to some of the greatest success stories in recent business history, including Wal-Mart, Toyota, and Dell. Deep Change: How Operational Innovation Can Transform Your Company - Operational innovations fuel extraordinary results -- They can destroy competitors and shake up entire industries. But operational innovation entails a departure from familiar norms and requires major changes in how departments conduct their work and relate to one another. After selecting the area for innovation, the company must set stretch performance goals. Overwhelmingly, they’ve told me that their senior executives did not understand, support, or encourage it. Benchmarking within your own industry is unlikely to uncover breakthrough concepts. Denial of competitor superiority and a disinclination to truck with operations are powerful forces of nature, and so is organizational inertia. They offer the prospect of nearly immediate gratification, and the bold stroke of a deal is consistent with the modern image of the executive as someone who focuses on grand strategy and leaves operational details to others. The first involved the creation of a new role—a case-implementation leader, who was responsible for collecting all the information to establish coverage. Their operational innovations dislodged some of the mightiest corporations in the history of capitalism, including Sears, General Motors, and IBM. (Because insurance is a regulated industry, rates are on file with state insurance commissioners.) Similar observations can be made about Dell and Toyota, organizations whose operational innovations have become proper nouns: the Dell Business Model and the Toyota Production System. 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. In that release, a new project-management tool was also introduced to control the process. Did it go global? In an economy that has overdosed on hype and in which customers rule as never before, operational innovation offers a meaningful and sustainable way to get ahead—and stay ahead—of the pack. Most industries today are struggling with low-growth, even stagnant, markets. The approach cut Taco Bell’s costs and increased customer satisfaction by ensuring a consistently high-quality product. Time, cost, and customer satisfaction—the dimensions of performance shaped by operations—get major boosts from operational innovation. It didn’t unveil a slew of new products. They’ve ascended to the highest levels of the enterprise without ever getting their hands dirty. Others are centered on specific bodies of improvement techniques, such as Six Sigma quality or lean enterprise programs. It’s not hard to calculate the savings this translates into for a company that handles more than 10,000 claims each day. Normal planning and budgeting focus on investments in new equipment, products, and services and take account of process improvement. They consider it to be a low-priority activity that doesn’t deserve attention. As one manager said, “In our company, operations is not glamorous. Concentrate on reinventing work processes that will have the greatest strategic impact. The question is particularly significant because operational innovation is needed now more than ever. Inventing a new way of operating that achieves the target need not be simply a matter of crossing your fingers and hoping for inspiration. A program was instituted to transform manufacturing from a conventional push-based system to one pulled by actual demand using a system known as Demand Flow Manufacturing. This is particularly problematic because operational innovation can easily founder in a sea of competing but smaller change initiatives. This approach has many benefits. By 2002, that figure had grown to $9.5 billion. Operational innovation is a step change: It moves a company to an entirely new level. Executive leadership then loses heart, and the denouement is inevitable. Progressive, for instance, realized that the key to its profitable growth is customer retention because acquiring new customers through commission-based agents is very expensive. Read the above article and provide a summary on the below: Human Resource, technology and process improvement. Most industries today are struggling with low-growth, even stagnant, markets. Preview. At one major PC maker, an effort to do so was suppressed by both the head of manufacturing (who was concerned that it would lead to outsourcing) and the head of marketing (who was afraid of alienating the retail channel), and top leadership was too preoccupied with other matters to intervene. In an economy that has overdosed on hype and in which customers rule as never before, operational innovation offers a meaningful and sustainable way to get ahead--and stay ahead--of the pack. Finally, because no one holds the title Vice President of Operational Innovation, it doesn’t have a natural home in the organization, so it’s easily overlooked. In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. Zero in on the assumption that interferes with achieving a strategic goal, and then figure out how to get rid of it. One way to accomplish this is to turn the special-case process into the norm. This offer has attracted customers in droves. But operational innovation entails a depar- ture from familiar norms and requires major changes in how departments conduct their work and relate to one another. But in the early 1990s, the insurer believed that much larger companies were about to enter this niche and emulate its approach to pricing; the company’s managers realized it couldn’t compete against larger players on a level playing field. Get the latest public health information from CDC: https://www.coronavirus.gov, Get the latest research information from NIH: https://www.nih.gov/coronavirus, Find NCBI SARS-CoV-2 literature, sequence, and clinical content: https://www.ncbi.nlm.nih.gov/sars-cov-2/. Here, a claimant simply brings the car to a Progressive claims facility at a convenient time and leaves it there, picking up a loaner at the same time. This alternative method builds on an idea that is popular in software product development, an idea variously known as iterative, evolutionary, or spiral development. Designing operations entails making choices in seven areas. I have spoken with thousands of managers from hundreds of companies about operational innovation. The solution? Operational innovation is truly deep change, affecting the very essence of a company: how its work is done. Progressive is also deploying in select markets what it calls a concierge approach to claims handling. 1. So Progressive decided to win the game by changing the rules. That’s why Progressive concentrated on streamlining claims; making it a more pleasant experience for customers would directly affect overall performance. These stories are well known for two reasons. This second release delivered another 20% productivity improvement, as well as a 20-point increase in customer satisfaction. They created a two-page diagram illustrating the endless series of steps every order went through, the redundant moves of the product between factories and depots, the accumulations of inventory, and the enormous delays. Progressive then takes responsibility for getting the car fixed. For most of its history, Progressive focused on high-risk drivers, a market that it served profitably through extremely precise pricing. Experiment with changing one or more of these elements in your own operations: What results are to be produced, who should perform the necessary activities, where should they be performed, in what sequence, and how thoroughly each activity must be performed. Furthermore, because every proposed major change in operating procedures is invariably greeted with a chorus of “it will never work,” a lengthy implementation period gives opponents an extended opportunity to campaign against it. Executives who understand how operational innovation happens--and who understand the barriers that prevent it from happening--can add to their strategic arsenal one of the most powerful competitive weapons in existence. This two-hour window gives the company the opportunity to assign the right kind of adjuster given the specifics of the case, so that a junior adjuster is not confronted with a complex accident beyond his level of expertise. Operational innovations fuel extraordinary results. Claimants get faster service with less hassle, which means they’re less likely to abandon Progressive because of an unsatisfactory claims experience. Operational innovation is by nature disruptive, so it should be concentrated in those activities with the greatest impact on an enterprise’s strategic goals. But fewer than 10% of large companies have made serious attempts to achieve operational innovation. The question is particularly significant because operational innovation is needed now more than ever. [See Hammer (2004), “Deep Change: How Operational Innovation can Transform your Company,” HBR, (April), 84-95]. Seven ways mobile technology can transform your business Brought to you by. What’s more, important innovations are not limited to individual departments but involve end-to-end processes that cross departmental boundaries. 84–93, viewed 11 October 2010. Operational innovation means coming up with entirely new ways of filling orders, developing products, providing customer service, or doing any other activity that an enterprise performs. The answers hinge on some unpleasant characteristics of contemporary corporate leadership. So why don’t more companies embrace it? These catalysts take it upon themselves to find a leader who can grasp what they have in mind and then spearhead the innovation effort. All rights reserved. One begins with one’s best estimate of the innovation, builds a first version of it, and then tries it out with customers or users. If so, you may be missing a much more reliable way to outperform your competition—operational innovation. As more time passes and more money is spent without the innovation or its payoffs seeing the light of day, organizational support leaks away. How would you grade the company's performance a scale of 1-5, Harvard Pilgrim Health Care has applied techniques of market segmentation, common in consumer goods but not in health insurance, to identify patients most likely to have a medical crisis and to intervene before the crisis occurs. This easy-to-implement change quickly delivered a degree of performance improvement. This site needs JavaScript to work properly. 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