In previous articles we have given attention to parts of the operating model that describe how value is created and delivered to customers. Most of the tools we propose have given focus to tracking value creation though breaking down value delivery chains into their components and rationale in order to challenge how we do things and ensure everything is exploited in the best way to delivery customer experience.
A strategy is a product of assessing and responding to the external business environment with its identified opportunities and constraining forces created by legal implementation of controls that a society places on business. The so called “PESTLE” elements influence the strategy and therefore appear in the value propositions that drive the value delivery chains that we use to get to grips with designing our operating model. Compliance to legislation is inherent in the strategic choices made and we see it in the value delivery stages as the activities conform to various sets of regulation.
Whilst customer value focus is laudable in any organisation it has to be delivered within a controlled environment to avoid financial chaos, or brand failure within the wider society. Organisations need direction in terms of managing strategy, its deployment and its effectiveness. Value delivery chains are what most people identify as day to day operations but keeping those “business as usual” flows of value running in a well-co-ordinated managed way is also required. This is what the management system is all about; it is the glue that keeps the firm together in serving its goals, stakeholders and vision. One could argue that this is about forces that constrain the day to operation. The external forces manifest in two ways in the operating model: firstly in the strategy itself and secondly in those specific activities for implementing specific responses to external forces.
In the Operating Model Canvas we see PESTLE emerging through propositions in the central arrow and to specific responses in management system bar. To illustrate the difference we might see a value activity in the central arrow being – undertake money laundering checks – whilst we might see – manage money laundering risk – in the management system bar. The first is a day to day process in the “value delivery activity”, the second a specific “management activity” to ensure it happens and consequences of non-adherence are managed via risk management.
Constraining or moderating forces heavily influence the management system; one could even argue that these constraints are really what the management system section is all about. The management system balances the operating model allowing the firm to be correctly controlled and behave within its business environment and within greater society.
Depending on the organisation type and size the impact on the operating model may be significant both in cost and effort.
- Corporate Governance
- Sector Specific
- Corporate Social Responsibility.
Corporate governance is the system of business rules, practices controls and processes by which a company is directed and controlled. Corporate governance involves balancing the interests of a company’s many stakeholders, such as: shareholders, management, employees, customers, suppliers, financiers, government and the community.
Corporate Governance has a greater or lesser impact on an organisation depending on its size and its legal status. A small company can manage itself quite well with informal management systems and common sense, but beyond a few employees the overhead of good governance gets proportionately bigger. Keeping the firm well managed has a significant impact on operating model activities, creating work that potentially detracts from our earlier goal of creating customer value.
People in “Lean” call this type of work essential non-value-added activity i.e. it adds no value in the eyes of the customer, but has to be done. The management system bar in our operating model is full of “essential non value adding” activity and we have to be careful that in the zest for the elimination of waste we don’t jeopardise good corporate governance.
Size is not the only dictating factor on the impact of corporate governance. A small proprietor led company has limited requirements beyond basic company law requirements; decisions are made and carried out quickly and relatively effortlessly; the more public the organisation becomes the more challenging the management overhead becomes.
A Public Limited Company has to adhere to Corporate Governance requirements to protect the public, investors who buy shares in the market. Structures are in place to control the behaviour of management to create balance between the goals of management and the goals of other stakeholders. Here we see non-executive directors and committee structures to enforce the balance that being “public” requires.
Public bodies have to provide transparency to tax payers and ensure that everything is done correctly step-by-step to clearly state processes and controls. There is little room for pragmatic decision making and entrepreneurial risk taking. Their governance structure may well include boards of trustees and political stakeholders – often the structures are complex and the processes slow.
Regulation forms the basic minimum of management system requirements on the basis that you have to comply or get fined or closed down.
In the last twenty years or so regulation has increased substantially as society seeks to enforce ethical behaviours in line with developing social norms.
There are two categories of regulation: firstly general regulatory requirements that all firms have to obey and specific sector regulation designed to control specific sector risks to society; the sector choice impacts on the level of constraint and by definition reduces the flexibility of how you trade and operate.
It may well limit your ability to differentiate value for clients affecting the value delivery chains and the operating model that supports them. In some cases is may well force a firm to take a “cost leadership strategy” giving focus to efficiency rather than offering different things to clients because regulation forces players to trade in a similar or identical way.
Some argue that industries like financial services are defined by regulation and this opinion is held up by the fact that in recent years the majority of change initiatives in the sector are regulatory driven projects.
Corporate Social Responsibility
All organisations are part of a wider world – society. What the organisation does and how it affects the wider world in its activities has become increasingly important.
The changing face of (CSR) and business ethics, with the growth in social media with an increasingly “sensation” hungry journalistic environment has, in recent times, created social pariah status for some iconic brands.
“The bigger the organisation is and the bigger its scale of social impacts on society as a whole, the more scrutiny it faces”.
These CSR stances taken by firms are often above and in advance of regulation in pre-emptive defence; as regulation frequently follows behind proceedings fixing problems after the event.
So, the bigger you are and the more public facing you are, the heavier the overhead of management processes within your operating model becomes. The choices made within this aspect of the operating model are a firm’s appetite for strategic risk and its social conscience.
The ethical stance and corporate social responsibility approach that the firm decides to implement in protection of its position in the greater society adds to the activities in its management systems.
The operating model canvas has a separate block for the management systems and this provides adequate balance with activities that provide value to customers.
It places management activities like: strategy making, constraints, risks, controls and measurement in a specific visible area to ensure the operating model serves all stakeholders and demonstrates how the operation conforms to the norms of behaviour expected within a modern society.
By splitting out the value delivery activities from management activities it ensures that the right proportion in focus is given to activities that create value for clients and warrants that the management overhead are understood. Customer centricity and good governance are clearly seen and identified and not mixed together in a muddle.
In a further article we will explore how to populate the management system section and what some of the views and outputs will be to describe this key section of the operating model canvas.
Authored by David Winders and Kiill Derevenski
 Political Economic Social Legal Environmental PESTLE
 Value Delivery Chains A composite term combining Value Chains and Value Streams see previous articles.
 A. Cambell et al 2017, The Operating Model Canvas, vanHaren, Netherlands.
 Synonyms: Sustainable Non Value Added Activity (SNVA) Business Non Value Added (BNVA)