Co-authored with Dr. Johanna Anzengruber
This is article 2 of 6 in the Organization Capability series. The first article, Organization capability: The missing piece connecting organization design and the operating model, introduced the series.
Organization capability has to fill the gap of optimizing processes and rewards while the work is taking place — a gap that is left by the way most leaders approach the operating model and organization design. Effective organization capability means processes and rewards work well, and are mutually reinforcing. And that can only happen once a great deal of learning about the new ways of working has happened.
Why is there confusion in the first place about organization design, the operating model, and organization capability?
Of the three, organization design is the most well-defined (Jay Galbraith’s Star Model, McKinsey’s 7S, etc.) For the operating model and organization capability, in contrast, there are no leading models or well-defined frameworks that are commonly accepted. They also are much more recently used terms. If you do a Google search for either term, the most widely cited articles or web pages are offerings from consulting companies in the past 20 years. What’s missing in both cases is a succinct definition that can help guide decision making, and a way of integrating both with the organization design.
The specific challenges are different for the operating model and for organization capability.
Challenges with the operating model. There are many examples of defined operating models for specific organizations, with each organization creating its own. These often take the form of graphical depictions of the company’s activities which need to be executed effectively, providing a high-level view of the business’ core processes. Yet precisely because they are graphical and high level, they lack the details needed to understand how each process works in practice, and how to overcome the challenges of competing strategic and operational objectives. For example, Shell’s operating model (https://reports.shell.com/annual-report/2020/strategic-report/strategy-business-and-market-overview/our-business-model-explained.php) specifies the main activities and processes of upstream production and downstream delivery of oil and gas with no details on what happens in practice day-to-day.
Even more confusing, in most large organizations, each business unit and function often talks about their own “operating model” as if the term means the same thing for the entire enterprise as it does for the subparts. Yet the core processes of the business model at the enterprise level are much broader than for any one business unit. And each function’s operating model by definition is going to be about the function itself more than the enterprise as a whole.
Challenges with organization capability. The situation with organization capability is not any better. Leaders often call out the capabilities needed for successful strategy execution, while assuming what is meant by “capabilities” is clear. We personally have worked with a number of leading global companies that have attempted to do a rigorous exercise around building and improving their organization capabilities. They can usually identify high-level concepts such as quality, go-to-market efficiency, innovation, etc. Yet translating those high-level concepts into the details needed to bring the capability to life usually runs into substantial challenges. What’s missing is a clear framework for defining and building the capabilities.
To bridge that gap, we start with defining the scope and details for the operating model and organization design. From there we will show how organization capabilities, properly defined and implemented, can be the missing pieces that bring the organizational system into alignment.
There is no “defined playbook” for which comes first. However, in practice, the order most organizations follow is (a) first define the operating model based on the strategy and business model, then (b) do the organization design, followed by (c) build the organization capability needed to implement the operating model and organization design.
Next article: The operating model and organization design strengths and weaknesses
For more details and a deeper dive into this topic, please join us for the workshop Optimizing Capability to Drive Business Performance in Chicago November 7-9, 2023.
