Chapter 1: To execute your strategy, first build your foundation
Some companies are growing and making money in the face of tough global competition, having more
productive employees, get more from investments, and have more success with strategic initiatives.
These companies execute better because they have a better foundation for execution (FfE). They
embedded technology in their processes and implemented IT systems for (core) operations, making IT
an asset rather than a liability and creating a foundation for business agility.
Companies that have digitized core processes have higher profitability, a faster time to market, and
get more value from IT investments. Yet, these companies have 25% lower IT costs. These are the
benefits of an effective FfE.
What is a foundation for execution?
A FfE is the IT infrastructure and digitized business processes automating a company’s core
capabilities. It usually evolves from a few basic infrastructures, then encompassing basic transaction
processes, and eventually including distinguishing business capabilities. Building a foundation doesn’t
focus only on competitively distinctive capabilities, it also requires rationalizing and digitizing everyday
processes. It digitizes routine processes to provide reliability and predictability in processes that must
go right. The best companies go beyond routine processes and digitize capabilities that distinguish
them from competitors.
Paradoxically, digitizing core business processes makes the individual processes less flexible while
making a company more agile. Digitizing business processes therefor requires decisions about what
capabilities are needed to succeed. Once these new processes are installed, they free up management
attention from fighting fires on lower-value activities, giving them more time to focus on how to
increase profits and growth.
The FfE also provides a platform for innovation: digitized processes provide better information on
customers and product sales, providing ideas for new products and services.
Do you have a good foundation for execution?
Companies that don’t have a foundation supporting its strategy often don’t have alignment between
departments, a lack of agility, see IT as a bottleneck, don’t have the right information available, have
a lot of automatable tasks, senior management dreads discussing IT and IT value is unclear. An
effective FfE depends on tight alignment between business objectives and IT capabilities.
Most companies put in business processes and IT systems using a straightforward logic: management
defines a strategic direction; the IT unit designs a set of IT-enabled solutions to support it; the IT unit
delivers the applications, data, and technology infrastructure to implement the solutions. This process
starts over each time a new strategy is defined. This process goes wrong in (at least) 3 ways:
- The strategy isn’t clear enough to act upon, so the company builds IT solutions rather than IT
capabilities;
- Even if the strategy is clear enough, the company implements it in a piecemeal, sequential
process. Each strategic initiative results in a separate IT solution, with different technology;
- Since IT is always reacting to the latest strategic initiative, IT is always a bottleneck and never
becomes an asset shaping future strategic opportunities.
,This traditional approach to IT development (a set of silos) lets all applications individually work fine,
but together hinder the companies’ efforts to coordinate customer, supplier, and employee
processes: they don’t form a FfE. Data is error-prone, and not up to date. Companies often use a data
warehouse, but this is useful only as a reference: it doesn’t offer real-time data across applications.
Companies make efforts to integrate isolated systems supporting an end-to-end process. They link
disparate systems together, but are based on ‘miracles’ and are the systems being replaced by
acquiring companies. Depending on miracles is unwanted: technology should reliably support existing
processes. Also, existing technology should enable future capabilities. These companies need a
different approach to implementing IT-enabled business processes.
How do you build a foundation for execution?
The FfE results from carefully selecting which processes and IT system to standardize and integrate.
Eventually, these routine business activities become automatic, outcomes become predictable. To
build an effective foundation of execution, companies must master 3 key disciplines:
- Operating model – the necessary level of business process integration and standardization
for delivering goods and services to customers.
Process integration (extent to which BUs share data) enables end-to-end processing and a single face
to the customer, but forces a common understanding of data. Business process standardization
(extent to which BUs perform the same processes the same way) creates efficiencies across BUs, but
limits opportunities to customize services.
- Enterprise architecture – the organizing logic for business processes and IT infrastructure,
reflecting integration and standardization requirements of the company’s operating model.
EA provides a long-term view of a company’s processes, systems, and technologies so individual
projects can build capabilities. Companies go through 4 stages in learning how to take an EA approach
to designing business processes: Business Silos, Standardized Technology, Optimized Core, and
Business Modularity. Advancement means an increase in strategic importance of the FfE.
- IT engagement model – the system of governance mechanisms that ensure business and IT
projects achieve both local and companywide objectives.
It influences project decisions so that individual solutions are guided by the EA; it provides alignment
between the IT and business objectives of projects, and coordinates the IT and business process
decisions made at multiple organizational levels. To do so, the model establishes linkages between
senior-level IT decisions and project-level implementation decisions.
Companies apply these 3 disciplines to create and exploit their FfE (p. 10). Based on the operating
model, the EA is defined. Then, the IT engagement model specifies how each project benefits from,
and contributes to the FfE.
Why is a foundation for execution important?
Companies with a solid foundation have higher profitability, faster time to market, and lower IT costs.
Recent developments highlight the importance of a FfE:
- Growing complexity in companies’ systems can fossilize operations
,Inflexibility of companies’ technology and process environments led to an inability to adapt to new
channels, exposed by the Internet boom. It was the result of systems so complex that any change
required individually rewiring systems to all the other systems they connect to. Developing and testing
new capabilities is time consuming and every change comes risky and expensive. As competitors
pursue reuse of standard processes and systems, the inefficiencies of non-value-added variations
create strategic disadvantages. Implementing standardized, digitized processes carries costs,
particularly those associated with organizational change, but benefits are simpler technology
environments (1), lower-cost operations (2), and greater agility (3).
- Business agility increasingly depends on a FfE
Business agility (change organizational processes) is becoming a strategic necessity. Managers can’t
predict what will change, but can predict some things that won’t change: if they digitize those not
changing, they can focus on what’s changing. This way, the FfE becomes a foundation for agility. One
indicator of agility is a company’s % of revenue generated from new products. The more-agile
companies have a high % of their core business processes digitized. Here, the digitized FfE enables
managers to spend more time focusing what products would succeed and the bringing those products
to market.
- Current national and political environments demand business discipline
Companies deal with constant changes in regulations. For many companies, new regulations mean
massive expenditures without added value, but companies with a solid FfE have more transparent
information and the ability to access data more quickly. Although companies can’t anticipate new
regulations, they can increase the likelihood that needed data is readily available or can easily be
accumulated.
- Building a foundation is less risky and expensive than the alternative
A lot of companies don’t have to make massive investments in their foundation. It can be implemented
one project at a time. By spending smarter rather than more, companies can use ongoing projects to
steadily build their FfE. As they build it, IT costs decrease and business efficiencies increase, paying
dividends on the original investment.
How does a foundation for execution create business value?
Case study 1: UPS. UPS developed an EA to reflect its goals, defining 4 core processes. Tasks within
these processes were standardized, so new initiatives could leverage existing capabilities. UPS could
now expand into new services, growing into a global commerce company. These innovations build on
or leverage its existing FfE and create new opportunities.
Case study 2: Washington, D.C. The FfE is not only relevant for companies, such as the District of
Columbia. The mayor wanted all interactions to be as pleasant and efficient as possible: a single point
of entry (central point to find everything needed), guaranteed closure (assurance that requests will be
fulfilled), and benign service delivery (make interaction positive). This called for standardization and
end-to-end integration of processes. Core capabilities were set up, introducing cost savings and new
capabilities. The district is now initiating new projects incrementally, building on experiences. It’s gone
‘from worst to first’!
, Chapter 2: Define your operating model
Business strategy provides direction, an impetus for action. They are multifaceted, encompassing
decisions as to which markets to operate in, how to position the company in each market, and which
capabilities to develop and leverage. Strategic priorities can shift as a company attempts to respond
to competitor initiatives or to seize new opportunities, and therefore doesn’t offer a clear direction
for stable IT infrastructure and business process capabilities.
To best support a company’s strategy, it should define an operating model: the necessary level of
business process integration and standardization for delivering goods and services to customers. It
provides a more stable and actionable view, the first step in building the FfE. The operating model is
a choice about what strategies are going to be supported. The decision for an operating model (or lack
thereof) has an effect on the implementation of business processes and IT infrastructure. A company
without a clear operating model brings no automated, pre-existing, low-cost capabilities to a new
strategic pursuit. Instead, with each new strategic initiative, companies should effectively begin anew
to identify its key capabilities. However, selecting an operating model is a commitment to a way of
doing business, that can be a daunting choice.
But, payoff for companies with a FfE supporting an operation model is huge: greater strategic
effectiveness (related to profitability), operational efficiency, customer intimacy, product leadership,
and strategic agility.
An operating model consists of 2 dimensions: business process standardization and integration.
Standardization means exactly defining how a process will be executed regardless of where or who is
performing the process. It delivers efficiency and predictability across the company and allows
activities of different BUs to be measured, compared, and improved. The result of standardization – a
reduction in variability – can be increased in throughput and efficiency. However, it limits local
innovation and requires perfectly good systems to be replaced by the new standard.
Integration links efforts of BUs through shared data. This sharing can be either between processes,
enabling end-to-end transaction processing, or across processes to allow the company to present a
single face to customers. Benefits include increased efficiency, coordination, transparency, and
agility. It can improve customer service, provide management with better information to make
decisions, and allows 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 is around data: standard definitions and formats for data need to be
developed and shared across BUs or functions. These can be difficult decisions.
Four quadrants can be developed, representing different
combinations of business process integration and
standardization. They should adopt an operating model at
the enterprise level and may adopt different operating
models at the division, BU, region, or other level. To
decide upon a quadrant, ask yourself: “to what extent is
the successful completion of one BUs transactions dependent on the availability, accuracy, and
timeliness of other BUs’ data?”, and “to what extent does the company benefit by having BUs run their
operations the same way?”. Characteristics of each operating model:
