The first involved the creation of a new role—a case-implementation leader, who was responsible for collecting all the information to establish coverage. This article offers practical advice on how to develop operational innovations, such as looking for role models outside your industry to emulate and identifying—and then defying—constraining assumptions about how work should be done. ... contends the author, is that business culture undervalues operations--they're not as sexy as deals or acquisitions. 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. By 2002, that figure had grown to $9.5 billion. Deals are.” Making acquisitions, planning mergers, and buying and selling divisions will get the company’s name and the CEO’s picture in business magazines. Deep change: How operational innovation can transform your company. Operational innovation may feel unglamorous or unfamiliar to many executives, but it is the only lasting basis for superior performance. SAGE Business Cases. At American Standard, the goal was to triple its inventory turns; at Progressive, to initiate claims within nine hours. Again, no. They consider it to be a low-priority activity that doesn’t deserve attention. This alternative method builds on an idea that is popular in software product development, an idea variously known as iterative, evolutionary, or spiral development. For instance, in the 1980s, Taco Bell transformed its restaurant operations by thinking about them in manufacturing rather than in fast-food terms. When they move into their first general management role, they rely on others—plant managers, engineers, customer service leaders—to mind the details of the actual work. 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. Their operational innovations dislodged some of the mightiest corporations in the history of capitalism, including Sears, General Motors, and IBM. Operational innovation is truly deep change, affecting the very essence of a company: how its work is done. The campaign will be helped immensely if catalysts can tout existing pockets of operational innovation within their own organization. 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/. Why not? Thus, it will never get off the ground without executive leadership. Read the above article and provide a summary on the below: Human Resource, technology and process improvement. But transformation today takes place at a dizzying pace. Ideas that look good on paper don’t always work as well in practice; only when a concept is actually tried does one learn what it should really have been in the first place. Deep Change: How Operational Innovation Can Transform Your Company. All rights reserved. Zero in on the assumption that interferes with achieving a strategic goal, and then figure out how to get rid of it. Claimants get faster service with less hassle, which means they’re less likely to abandon Progressive because of an unsatisfactory claims experience. 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. In 2002, Shell Lubricants reconsidered who needed to participate in its order fulfillment process. And it requires a level of integration and alignment that many enterprises are not prepared to handle. After selecting the area for innovation, the company must set stretch performance goals. Now it assigns the bed after accepting the patient—while that person is en route. Seven ways mobile technology can transform your business Brought to you by. It didn’t unveil a slew of new products. But fewer than 10% of large Or consider how American Standard, the diversified manufacturer, decided where to focus its innovation efforts in the early 1990s. For most of its history, Progressive focused on high-risk drivers, a market that it served profitably through extremely precise pricing. Discover trustworthy and timely resources in American government, politics, history, public policy, and current affairs. But fewer than 10% of large companies have made serious attempts to achieve operational innovation. Because operational innovation is by nature disruptive, it should be concentrated in those activities with the greatest impact on an enterprise’s strategic goals. Although operational innovation wasn’t the sole ingredient in Wal-Mart’s success—its culture, strategy, human resource policies, and a host of other elements (including operational excellence) were also critical—it was the foundation on which the company was built. Auto insurance is a mature, 100-year-old industry that grows with GDP. Fortunately, all of these barriers can be overcome. 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. Example: A packaged-goods maker had relied on sales forecasts for production scheduling. Because a large amount of cash was tied up in inventories, the CEO mandated that the company would have to drive down its working capital and dramatically increase inventory turns. The chain outsourced production of key ingredients so it could focus on “assembly,” not “fabrication,” in its restaurants. Another problem with conventional implementation is that it assumes that the initial specifications for an operational innovation will be accurate and complete. [See Hammer (2004), “Deep Change: How Operational Innovation can Transform your Company,” HBR, (April), 84-95]. Deep Change. The executive must have both the imagination and the charisma needed to drive major operational change. Companies must be prepared to roll with the punches and learn as they go. Just look at Dell, Toyota, and Wal-Mart. Just look at Dell, Toyota, and Wal-Mart. Other benefits for Progressive are an improved ability to detect fraud (because it is easier to conduct an accident investigation before skid marks wash away and witnesses leave the scene), lower operating costs (because fewer people are involved in handling the claim), and a reduction in claim payouts (because claimants often accept less money if it’s given sooner and with less travail). For years, Progressive did little advertising, and some of its campaigns were notably unsuccessful. It is truly deep change, affecting the very essence of a com- pany: how its work is done. More accurate pricing translates into increased underwriting profit. After the crisis passed, the company made its emergency mode standard. Zero in on the assumption that interferes with achieving your strategic goal and then get rid of it. How do operational innovation efforts begin if no one is responsible for them and no formal channels for creating programs exist? And the key to customer retention is making sure customers have rewarding interactions with the company. Once there, the organization can focus its efforts on a generation of additional changes—refinements of the innovation—that will keep it ahead of the pack until the inevitable time comes for a new wave of innovation. 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. Hardly. And despite Dell’s success, build-to-order has not swept the PC industry. A major hospital, for instance, recognized that to increase the number of patients admitted for (well-reimbursed) cardiac bypass graft operations, it needed to respond more quickly to physicians who wanted to refer a patient. Indeed, in a company consumed with improvement projects, the distinction between improvement and innovation may be lost. It recently revised its very successful Immediate Response claims process so that the representative no longer attempts to assign an adjuster as soon as the claimant calls. 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. 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%. Operational innovation is by nature disruptive, so it should be concentrated in those activities with the greatest impact on an enterprise’s strategic goals. Shell Lubricants followed a similar strategy when it transformed its order fulfillment process. Many top managers are ignorant about operations and uninterested in learning more. At its heart, every operational innovation defies an assumption about how work should be done. Both require the change of existing or the development of new business processes.  |  Type Article Author(s) Michael Hammer Date 01/04/2004 Volume 82 Issue 4 Page start 84 Is part of Journal Title Harvard Business Review Publisher Harvard Business Review ISSN 0017-8012. This article offers practical advice on how to develop operational innovations, such as looking for role models outside your industry to emulate and identifying--and then defying--constraining assumptions about how work should be done. But techniques used in other industries with seemingly very different characteristics may turn out to be unexpectedly applicable. Compared with most of the other ways that managers try to stimulate growth—technology investments, acquisitions, major marketing campaigns, and the like—operational innovation is relatively reliable and low cost. A consumer packaged-goods maker, for instance, based its production scheduling on sales forecasts rather than on actual customer demand. If innovation is about learning and change (Tidd et al. Foster an innovation environment; Does your business want to do the business the way it has always done. And that shouldn’t be. How would you grade the company's performance a scale of 1-5, But it continued to rely on old information systems to support the process. This offer has attracted customers in droves. No wonder operational innovation has a hard time gaining traction in an organization. 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. 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. But since operations aren’t sexy, most companies overlook them. Copyright © 2020 Harvard Business School Publishing. Innovation is often associated with changing technology or the implementation of a new solution. Operational innovation is truly deep change, affecting the very essence of a company: how its work is done. Each project typically has a narrow scope, a group of experts dedicated to it, and a sponsor whose enthusiasm is tolerated by his or her peers only as long as it is kept within bounds. Operational innovation is a step change: It moves a company to an entirely new level. In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. Improvement projects can also get in the way of innovation efforts by appearing to address similar issues. It is all too common for enterprises today to have dozens—even hundreds—of operational improvement programs under way at any point in time. Indeed, where is the real strategic advantage in operational innovation at all? (The exhibit “Reimagining Processes” shows examples of companies that have rethought these various dimensions of work.). At its heart, operations is a branch of engineering. Neither did it grow through acquisitions or clever marketing schemes. At its heart, every operational innovation defies an assumption about how work should be done. When demand for a new product wildly exceeded forecasts, an ad hoc process was created that gave the manufacturing division real-time information about customer demand, which in turn allowed them to do production planning and product distribution much more efficiently. Breakthrough innovations - not just steady improvements - in operations can destroy competitors and shake up entire industries. Operations simply aren’t sexy. The company’s growth has not only been dramatic—it is now the country’s third largest auto insurer—it has also been profitable. Maybe one plant implemented a new way of scheduling production, or a customer service center used a CRM system in a new way, or a sales team created a new way to support customers. Cross-docking and companion innovations led to lower inventory levels and lower operating costs, which Wal-Mart translated into lower prices. The trick is to turn your do-or-die mode into everyday practice. Harvard Business Review, 82 (7/8), 182-183. In the age of fierce competition, cutting back of price of the product being offered is quite difficult to attain sustainable profits. Heidi Hattendorf, director of Innovation Development, Motorola Solutions takes a deep dive into how you can create an innovation framework at your company that will positively impact your business results and culture. The core, value-creating work of enterprises has become low status. Was it positioned in a high-growth industry? Progressive then takes responsibility for getting the car fixed. Megson, L., & Hammer, M. (2004). So why don’t more companies embrace it? Business process innovation is a major success factor for the next-generation enterprise and often necessary to benefit from opportunities in a digital world. An apparel manufacturer had to regroup when the technology underlying its plans for a new approach to production scheduling did not live up to expectations; a consumer goods maker had to scale back an innovation in logistics when its implementation became more difficult than expected. That’s why companies should strive to make operational innovation not an extraordinary project but a way of life. Just look at Dell, Toyota, and Wal-Mart. This is particularly problematic because operational innovation can easily founder in a sea of competing but smaller change initiatives. Many auto insurers, by contrast, view claims as a nuisance at best because it entails paying claimants. Even areas of the business that have already been rethought can benefit from subsequent rethinking as new technologies and new customer needs make the old innovations passé. Virtually all product and service offerings have become commodities, almost no one has any pricing power, and none of this is likely to change in the near future. DOI: 10.1109/EMR.2004.25106 Corpus ID: 40777024. 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. The approach cut Taco Bell’s costs and increased customer satisfaction by ensuring a consistently high-quality product. Other companies have made similar performance gains through operational innovations. For instance, many companies implementing ERP or SCM systems merely use them to enhance existing processes. The proof is Progressive’s combined ratio (expenses plus claims payouts, divided by premiums), the measure of financial performance in the insurance industry. CQ Press. COVID-19 is an emerging, rapidly evolving situation. Others are centered on specific bodies of improvement techniques, such as Six Sigma quality or lean enterprise programs. Examples like these will help convince a leader that operational innovation can work. I have spoken with thousands of managers from hundreds of companies about operational innovation. The secret of Progressive’s success is maddeningly simple: It outoperated its competitors. Compared with most of the other ways that managers try to stimulate growth—technology investments, acquisitions, major marketing campaigns, and the like—operational innovation is relatively reliable and low cost. 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. Between 1972 and 1992, Wal-Mart went from $44 million in sales to $44 billion, powering past Sears and Kmart with faster growth, higher profits, and lower prices. Designing operations entails making choices in seven areas. Such advances don’t have to be as rare as they are. The company introduced what it calls Immediate Response claims handling: A claimant can reach a Progressive representative by phone 24 hours a day, and the representative then schedules a time when an adjuster will inspect the vehicle. No one holds the title Vice President of Operational Innovation; it is organizationally homeless. The only way to get and stay ahead of competitors is by executing in a totally different way—that is, through operational innovation. When MetLife, for instance, was implementing a new process for installing coverage of a new customer, it did so in two releases. Knowledge gained from these tests is then fed back into a fast-cycle iteration of the next version.1. And what enabled Progressive to have better prices and service was operational innovation, the invention and deployment of new ways of doing work. 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. In reality, innovation is merely doing things differently and more effectively than you have in the past. The solution? 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. Operational innovation has been central to some of the greatest success stories in recent business history, including Wal-Mart, Toyota, and Dell. It’s not hard to calculate the savings this translates into for a company that handles more than 10,000 claims each day. Companies often achieve extraordinary levels of performance under extraordinary conditions. Instead of taking between 7 and 10 days to process an insurance claim, the company's new target was 9 hours. Rather, the representative guarantees to call the claimant back within two hours with specifics about when an adjuster will see the vehicle. ... How Operational Innovation Can Transform Your Company’, Harvard Business Review, pp. An article “Deep Change: How Operational Innovation Can Transform Your Company” in the Harvard Business Review, by Michael Hammer speaks about operational innovations that take on the simple changes in everyday operations results to lower prices and better services than competitors. But fewer than 10% of large companies have made serious attempts to achieve operational innovation. 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. SAGE Reference. 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. 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. Functional line managers are too focused on meeting deadlines to have time for or interest in inventing new ways of doing things. In a similar way, conventional implementation methodologies often lead to failure when applied to disruptive modes of operation. Breakthrough innovations—not just steady improvements—in operations can destroy competitors and shake up entire industries. When demand for a new product wildly exceeded predictions, it created an ad hoc process to give real-time demand information to manufacturing, which made production planning and distribution more efficient. Overcapacity is rampant, and competition—particularly global competit… If so, you may be missing a much more reliable way to outperform your competition—operational innovation. USA.gov. The effects of operational innovation ripple outward to all aspects of the enterprise, from measurement and reward systems and job designs to organizational structure and managerial roles. Using similar analyses, other companies have pinpointed procurement, order fulfillment, new product development, post-sales customer support, and even budgeting as the place where innovation would have the greatest effect on achieving key strategic goals. Breakthrough innovations in operations—not just steady improvement—can destroy competitors and shake up industries. Even those who do follow will be at a disadvantage until they catch up. It reinvented claims processing to lower its costs and boost customer satisfaction and retention. When a company has a single operational director, it can avoid the risk that “operational innovations get lost in a sea of initiatives aimed at improving the company. By contrast, Progressive’s combined ratio fluctuates around 96%. 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