Bridges over Troubled Water Process Fitness

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1 Bridges over Troubled Water Process Fitness Grzegorz Gruchman Introduction BPM is promoted as an approach which can be universally applied. Its arsenal encompasses process architectures, measures and managerial roles, as well as Business Process Management Systems as its IT enabler. However, its most ubiquitous tool is process mapping, i.e. notation, techniques, methods and software tools to model process structures for analysis and design purposes. As described in the previous installment of this Article, formalization and standardization, inherent in process mapping is not necessarily embraced by everyone and is sometimes not useful or possible. Paul Harmon advocates a no-nonsense process modeling approach to performance improvement, based on modeling objectives and perceived process complexity. In general, to determine what should or could be done in this respect, processes should be modeled down to the third decomposition level. Subsequently, for each process on that level, improvement options should be considered, such as changes in job content, employee training, definition of performance measures, streamlining and/or automation. The range of options is contingent on whether the lower level, detailed process structures its tasks and their relationships can be specified, analyzed and standardized. i As Paul Harmon points out, at the lower levels of a process hierarchy this can be done for all simple, repetitive processes, as well as for some more complex ones, which require more skills and flexibility. However, some of the moderately complex processes cannot be specified using classic process mapping. Complex processes which require human creativity as their foundation are not suitable for formal specification and analysis at all. ii The approach outlined above will certainly work in any organization, provided the organization has begun an enterprise-wide modeling effort. But are there more general, broad guidelines concerning the applicability of BPM as a whole? Let s examine what various business schools and theories say on this topic. Value Disciplines In 1985, Michael Porter defined two broad competitive strategies for companies to choose from, namely, a low-cost strategy and differentiation strategy. Some time later, Michael Treacy and Fred Wiersema refined his concepts and defined the three so-called value disciplines, i.e. ways in which companies create value for Customers, namely: 1. Product Leadership 2. Operational Excellence 3. Customer Intimacy iii The value disciplines were conceived out of a three year long study of 40 leading companies in various industries. Operational Excellence is a low-cost strategy in disguise, while Customer Intimacy and Product Leadership are variations on the differentiation theme. Treacy and Wiersema stated that successful companies focus in most cases on one discipline, while meeting industry standards in others. To put it differently, such companies usually excel in one discipline and are simply good in others. As a result, industry leaders deliver a better performance than competitors that distribute their attention, efforts and resources among all disciplines more or less equally. 1

2 Treacy and Wiersema also found that the most successful companies aligned their operating models combinations of organizational structure, management systems, business processes, IT technologies and organizational culture to support their top priority discipline. This is justifiable because each value discipline has an operating model which is distinct and incompatible with other ones. Product Leadership. Companies focused on this value discipline offer innovative, state-of-the art products and services. Apple and BMW for example target Customers who look for new, different and/or unusual products. Obviously, such companies must be very creative as far as their products or services - hereinafter called simply products - are concerned. At the same time, they also have to commercialize their new products quickly to stay ahead of followers and continuously improve them using feedback from their Customers. Product leaders take a longer term view of profitability. They do not attempt to wring every bit of profit from their product. Instead, they focus on maintaining product leadership. Product leaders willingly replace their older products with more advanced ones, instead of treating them as cash cows until Customers interest has waned. Properties of true product leaders include: o As little formalization as possible o Decentralization of decision-making o Flexibility and team empowerment o Creativity as the nucleus of organizational culture Operational Excellence. Operational excellence means providing Customers with reliable products at competitive prices, delivered with maximum ease and convenience. Federal Express and Wal-Mart target Customers who value a combination of price, quality and convenience, with price as the most important factor. To achieve a competitive advantage, the operationally excellent company continuously seeks ways to minimize costs and optimize its core business processes with high efficiency and reliability in mind. From a profitability point of view, operationally excellent companies tend to aim at a single transaction, conducted with as many Customers as possible. Their recipe for success includes the following characteristics: o Formalized management systems and procedures o Centralized decision-making o Integrated production, delivery and product service processes, optimized and standardized to minimize costs and assure convenience for Customers o A culture of continuous process improvements and reduction of waste, coupled with emphasis on quality Customer Intimacy. A company competing using a Customer intimacy discipline combines detailed customer knowledge with operational flexibility to respond promptly to Customer needs, from customizing a product to fulfillment of special requests. Companies such as IBM and Amazon.com target Customers who are concerned primarily with obtaining the product which fully meets their needs and requirements. A company emphasizing Customer Intimacy aims to maximize profit over the lifetime of their relationship with each Customer. To that end, the company offers every possible option to ensure long-term Customer loyalty. Therefore, o Formalization is applied with care o o o Business processes are built around Customer segments provide high level of responsiveness and flexibility People working with Customers are properly empowered Organizational culture stresses care about and fulfillment of Customers needs 2

3 Kaplan and Norton Process Clusters. Robert S. Kaplan and David P. Norton are famous for inventing of the Balanced Scorecard, a core of effective strategic management systems, particularly useful for companies undergoing transformation efforts. However, in their book, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, they also provided some process-oriented guidelines on the implementation of value disciplines. iv While Treacy and Viersema described the characteristics of successful companies in general, Kaplan and Norton explicitly related the value creating disciplines to generic process clusters within a value chain, namely product innovation, operations management and customer management processes. They also prescribed critical success factors for each process cluster and, by default, each value discipline as well. Product Innovation. The product innovation cluster consists of processes required to identify opportunities for new products, manage R&D portfolio, develop new products and rapid deployment in the market. Obviously, product innovation processes are most important to establish and maintain Product Leadership. In addition to product innovation processes, excellent marketing processes are key to quickly exploit market opportunities and channel product development efforts. Regarding other clusters: o Operations management processes are flexible, to accommodate changes in product lines and to allow product changes based on feedback from Customers o Customer management processes are effective in capturing Customer ideas for new products and services, as well as in educating Customers about benefits arising from new or improved functionality Operations Management. Operations management processes are essentially the basic components of supply chain and encompass sourcing, procurement, production, distribution and delivery activities. Such processes are naturally critical for Operational Excellence. Within operationally excellent companies, the production processes are very efficient, with lowcost, consistent high quality outputs, and short cycle times as critical success factors. Distribution and delivery processes are also low-cost, timely and as error free as much as possible. To ensure good quality of inputs, procurement is based on long-term relationships with reliable suppliers. As for the other process clusters: o Customer management processes focus on understanding the preferences of target Customers, simple and convenient order handling, plus reliable post-sales service concerning delivery status, billing and returns o Innovation processes focus not on new products, but on processes as such, to lower their costs, as well as to improve quality and responsiveness of operations and customer management activities Customer Management. Customer management processes maintain and expand relationships with targeted Customers. This cluster encompasses such processes as selection, acquisition and retention of Customers, as well as growing relationships with them. These processes are in the crosshairs of companies that practice Customer Intimacy as their selected value discipline. Customer management processes are crucial for identification of target Customer segments, developing and communicating the right value proposition for those segments, assuring high level of Customer satisfaction and finally, for building long-term relationships and loyalty. As for the other clusters: o The aim for operations management processes is to offer a broad product portfolio o The aim for innovation processes is to identify new ways to create value for Customers, as well as to anticipate future Customer needs and preferences 3

4 Exploration and Exploitation Having examined what business school have to say, we ll turn our focus to organizational theory, where the concepts of exploration and exploitation are compelling topics. In a nutshell, those concepts are related to two fundamentally different and opposite groups of innovation activities. Exploitation involves a search for innovations rooted in existing knowledge and the technological capabilities of a company. Therefore, it results in improvements of products and technologies a company already has. The more innovation activities are grounded in already existing knowledge within the company, the more exploitative is their nature, Exploration, on the other hand, involves a search for innovations based on knowledge that did not already exist within the company. Such a search may lead to new, different products and technologies. The more innovation activities are based on new knowledge introduced into the company, the more exploratory they are. The relationship between exploitation, exploration and process management was studied empirically by Mary J. Benner and Michael Tushman, using data collected over more than 20 years. Both performed thorough, rigorous research on the effects of process management methods, Six Sigma in particular, on technological innovation measured by patents submitted by companies in the photography and paint industries. v The results are very interesting and somewhat disturbing at the same time, as they suggest that too much focus on process management may be dangerous to a company s health. In their study, Benner and Tushman discovered that increased use of process management practices led to: o An increase of innovations built on knowledge existing within a firm and o A decrease of innovations based on new knowledge Benner and Tushman suggest that process management practices lead to a focus on incremental efficiency improvements of existing processes, at the possible expense of more effective radical process changes and breakthrough product innovations. They suggest also this may hurt longterm adaptation and competitiveness, since excessive focus on formalization, standardization and improvement of existing processes can impede larger scale organizational change and the development of new capabilities. As a result, Benner and Tushman suggest caution in the adoption of process management for the company as a whole. In particular, they caution against the application of process management methods within product development and marketing processes, areas responsible for creating new products, as well as discovery of new markets and new customer segments. They also state that...companies need to balance two types of activities: improving current operations to be competitive in the short term, and exploring for new knowledge for the future. Too much process management across all levels of an organization makes it easier to implement but can strangle bolder, breakthrough innovations. Conversely, it's difficult to focus on systematic, continuous improvement in quality and cost if the entire organization is focused on big innovations for the future. vi Prospectors, Analyzers, Defenders and Reactors The concepts of exploitation and exploration provide a very useful background for another classification of strategies, well established in organizational theory. The classification was originally articulated by Raymond Miles and Charles Snow, who divided organizations into the following categories, summarized in the figure below. 4

5 Each category has distinct characteristics and focus, depending on the degree of exploration and exploitation: 1. Prospector. An organization which continuously searches for market opportunities. A Prospector often creates change on the market and forces competitors to respond. It is an environment-oriented and risk-taking organization. Because of its strong concern for product and market innovation, a Prospector is not fully efficient in its operations. An organization of this kind is decentralized, and it also has a low degree of formalization and standardization. The 3M company can be classified as a Prospector. 2. Analyzer with innovations. Such an organization runs on two tracks simultaneously. An Analyzer with innovation moves into a new market or begins production of a new product, albeit only if its viability has been already demonstrated by somebody else. At the same time, it pays attention to improvements in efficiency of its existing operations. An Analyzer with innovation is moderately decentralized, it also has a moderate to high degree of formalization and standardization. IBM (again) is an example of such organization. 3. Analyzer without innovations. Like an Analyzer with innovations, an Analyzer without innovation enters new markets or begins production of a new product as a follower. However, it generally has limited or no product innovations on its own and it copies product innovations of others. Instead, it focuses its innovation activities in the production processes area. Its structural properties, concerning centralization, formalization and standardization, are the same as for Analyzer with innovations. Panasonic Corporation represents this Analyzer subtype. 4. Defender. An organization without innovations in the product area. A Defender does not look for new market opportunities and devotes most of its attention to efficiency improvements in its operations. It is an internally oriented and a very cost conscious 5

6 organization, focused on defending and protecting its markets. A Defender is heavily centralized, formalized and standardized. The Coca-Cola Company is the best Defender example. 5. Reactor. An organization which is neither innovative nor efficient. It lacks a coherent strategy and is usually unable to respond effectively to environmental change. Therefore, we shall not say another word about such an organization. vii What Can We Learn This review of schools of thought casts some doubts on the applicability and success of a full scale BPM approach at the enterprise level, i.e. for the organization as a whole and from top to bottom, regardless of its value proposition or strategy type. The results of this review are summarized on the above figure, which paints a pretty consistent picture. Using it as a springboard, we can state several hypotheses with reasonable certainty. On the enterprise level of analysis, full scale BPM, o has the highest chance of success in operationally excellent companies. o should also fit nicely in companies relying on Customer intimacy, albeit not necessarily in the whole Customer management process cluster. o is relatively least suited for companies using product leadership to lure Customers As for the strategy types, full scale BPM, o is most suited for Defender companies and Analyzers without innovations o is also well suited for Analyzers with innovations, although not in the area responsible for new products 6

7 o is relatively least suited and therefore has relatively smaller chances of success in Prospector companies. On the value chain level, the sweet spot for BPM is surely the operations management process cluster. BPM can be also successfully applied, at least partially, to Customer management processes. Needless to say, BPM is also well suited for support processes, which take care of resources underlying the value chain activities. The relative importance of operations management and Customer management processes varies depending on the relative importance of those process clusters for the company as a whole. Therefore, we can also assume the following: o BPM should be viewed as relatively very important by top management in Defender type companies, striving for operational excellence o BPM should be viewed as relatively important in Analyzer type companies o BPM should be perceived as relatively less important in Prospector type companies, based on pure product leadership I believe BPM minus detailed process mapping can be beneficial for all larger organizations, as every such a company needs an overview and a coordination of activities across its business units. At the same time, it seems detailed process modeling, analysis and improvement can achieve success in most such companies, but not in all. Success or failure depends on the company s strategy and corresponding attitudes of top management towards the nature and potential benefits of this discipline. Within a company, it seems there are also areas where BPM is a perfect or a good fit, whereas there are also areas where full scale BPM is not so suitable, Specifically, this applies to product innovation, marketing and to a lesser or greater degree to customer management processes. This is due to the very nature of the activities involved in those processes, which are moderately complex and flexible, or very complex, creative and unpredictable. Therefore, formalization and standardization of such processes could do more harm than good and most probably would be met with considerable resistance. A process professional is therefore advised to evaluate all those factors, to avoid disappointments and waste of creative fuel Author Grzegorz B. Gruchman, Ph.D. References i See Paul Harmon, Artistic Processes", BPTrends Advisor, 2009/5, located at ii See Paul Harmon, Alternative Approaches to Process Analysis and Modeling, BPTrends Advisor 2006/7, located at iii See Michael Treacy and Fred Wiersema, Customer Intimacy and Other Value Disciplines, Harvard Business Review, January-February 1993, pp iv See Robert S. Kaplan and David P. Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Harvard Business School Press, 2004 v See Mary J. Benner; Michael Tushman, Process Management and Technological Innovation: A Longitudinal Study of the Photography and Paint Industries, Administrative Science Quarterly,VoL /4, pp vi See TQM, ISO 9000, Six Sigma: Do Process Management Programs Discourage Innovation?, November 2005, located at 7

8 vii See Richard M. Burton, Gerardine DeSanctis, Børge Obel, Organizational Design: A Step-by- Step Approach, Cambridge University Press, 2006 BPTrends Linkedin Discussion Group We created a BPTrends Discussion Group on Linkedin to allow our members, readers and friends to freely exchange ideas on a wide variety of BPM related topics. We encourage you to initiate a new discussion on this publication, or on other BPM related topics of interest to you, or to contribute to existing discussions. Go to Linkedin and join the BPTrends Discussion Group. 8

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