Deep Change How Operational Innovation Can Transform Your Company

1. Deep ChangeHow Operational Innovation Can Transform Your Company Michael Hammer Harvard Business Review May 2004 Presented by Chen Tai Yun

2. Outline • Introduction • The Payoffs • Organizational Barriers • Making It Work • Getting Implementation Right • Is It Sustainable?

3. Introduction • Progressive Insurance (an automobile insurer) • In 1991 -> $1.3 billion • In 2002 -> $9.5 billion • It’s a mature, 100-year-old industry that grows with GDP • It’s business: consumer auto insurance • It operates only in the United States • It did little advertising, and some of its campaigns were notably unsuccessful.

4. Introduction (cont.) • It didn’t unveil a slew of new products. • Combined ratio=(expenses + claims payout)/premium • Most auto insurers have combined ratios around 102% • Progressive insurance’s combined ratios around 96% • The country’s third largest auto insurer • Success reasons -> Offering lower prices & Better service • What enabled Progressive to have better prices and service was operational innovation, the invention and deployment of new ways of doing work.

5. Introduction (cont.) • Operational innovation should not be confused with operational improvement or operational excellence. • Operational improvement or operational excellence • Operational innovation • Success stories in recent business history : • Wal-Mart • Between 1972 and 1992, $44 million in sales to $ 44 billion, powering past Sears and Kmart with faster growth, higher profits, and lower prices • Cross-docking

6. Introduction (cont.) • Toyota : Toyota Production System • Dell : Dell Business Model • These stories are well known for two reasons: • Operational innovations fuel extraordinary results • Operational innovation is rare • Executive who understand how operational innovation happens • It can add to their strategic arsenal one of the most powerful competitive weapons in existence

7. A Powerful Weapon

8. The Payoffs • Progressive focused on high-risk drivers, a market that it served profitably through extremely precise pricing. • It reinvented claims processing to lower its costs and boost customer satisfaction and retention. • Immediate Response claims handling • Benefit • Claimants get faster service with less hassle • The shortened cycle time reduced Progressive’s costs dramatically

9. The Payoffs (cont.) • However, no single innovation conveys a lasting advantage. • Introduced a system: 800 number or Web site • The better ways of assessing an applicant’s risk profile to calculate the right rate to quote. • Example • Eastern Electric power utility • IBM • Shell Lubricants

10. Organizational Barriers • The only way to get and stay ahead of competitors is by executing in a totally different way- operational innovation. • Operational innovation is truly deep change, affecting the very essence of a company: how its work is done. • The effects of operational innovation ripple outward to all aspects of the enterprise. • measurement、reward systems、job designs、organization structure、managerial roles

11. Organizational Barriers (cont.) • Yet senior managers rarely perceive operational innovation as an important endeavor. • Some unpleasant characteristics of contemporary corporate leadership: • Business culture undervalues operations • Example: one manager said, ”In our company, operations is not glamorous, Deals are” • Operations simply aren’t sexy.

12. Organizational Barriers (cont.) • Operations are out of sight (and out of mind-set) • At its heart, operations is a branch of engineering, and it requires a skill set and a mind-set different from those needed in most other executive activities. • Example: a major semiconductor maker (order fulfillment process) • Nobody owns it • No one holds the title Vice President of Operational Innovation. • Technologically based: ERP & SCM & Six Sigma

13. Making It Work • To find a leader who can grasp what they have in mind and then spearhead the innovation effort. • Example • Progressive Insurance • Customer retention (rewarding interactions) • American Standard • Demand Flow Manufacturing (DFM) • After selecting the area for innovation, the company must set stretch performance goals. • American Standard: the goal was to triple its inventory turns • Progressive Insurance: to initiate claims within nine hours

14. Making It Work (cont.) • Following these suggestions should accelerate your efforts: • Look for role models outside your industry • Taco Bell (outsourcing) • Harvard Pilgrim Health Care (market segmentation) • Identify and defy a constraining assumption • Cross-docking • Build-to-order (BTO)

15. Making It Work (cont.) • Make the special case into the norm • One way to accomplish this is to turn the special-case process into the norm. • Example: a consumer packaged-goods maker (ad hoc process) • Rethink critical dimensions of work • Designing operations entails making choices in seven areas. • Reimagining Processes

16. Reimagining Processes

17. Getting Implementation Right • The Innovator’s Dilemma, Clayton Christensen • Conventional market-analysis tools lead organizations astray when applied to disruptive technologies. • Conventional implementation methodologies often lead to failure when applied to disruptive modes of operation. • Failure reasons : • Take too long (it will never work) • It assumes that the initial specifications for an operational innovation will be accurate and complete.

18. Getting Implementation Right (cont.) • Companies need to adopt a new approach to implementing operational innovation. • It’s popular in software product development • Iterative or evolutionary or spiral development • Knowledge gained from these tests is then fed back into a fast-cycle iteration of the next version. • Companies would also be wise not to try to implement an innovation all at once.

19. Getting Implementation Right (cont.) • Example • MetLife • Step1: create a new role - a case-implementation leader • Step2: a new information system was installed • Shell Lubricants • Step1: it release brought all the departments involved in the process under a single manager. • Step2: it release brought people from the various departments together into cross-functional teams.

20. Is It Sustainable? • Example • Dell (build-to-order) • Toyota • Operational innovation is a step change • It moves a company to an entirely new level • Progressive has created a culture • Immediate Response claims process • Concierge approach • Operational innovation offers a meaningful and sustainable way to get ahead - and stay ahead - of the pack.