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. No one holds the title Vice President of Operational Innovation; it is organizationally homeless. Breakthrough innovations--not just steady improvements--in operations can destroy competitors and shake up entire industries. 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. Breakthrough innovations in operations—not just steady improvement—can destroy competitors and shake up industries. In that release, a new project-management tool was also introduced to control the process. That took only a few months and delivered substantial reductions in cycle time, as well as a 15% productivity gain. Such advances don’t have to be as rare as they are. 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. Instead of taking between seven and ten days for an adjuster to see the vehicle, Progressive’s target is now just nine hours. Did it diversify into new businesses? Example: A packaged-goods maker had relied on sales forecasts for production scheduling. Hardly. Was it positioned in a high-growth industry? This two-hour window gives the company the opportunity to assign the right kind of adjuster given the specifics of the case, so that a junior adjuster is not confronted with a complex accident beyond his level of expertise. Why? It should not be surprising that executives without experience in operations do not look there for competitive advantage. Here's an example of what they look like: Your reading intentions are also stored in your profile for future reference. The author also discusses the best way to implement operational innovations. Here, a claimant simply brings the car to a Progressive claims facility at a convenient time and leaves it there, picking up a loaner at the same time. Two major forms of innovation can be distinguished: business model innovation and technology innovation. 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. Operation and Service Management How Operational Innovation Can Transform Your Company by Michael Hammer Submitted So why don’t more companies embrace it? (Because insurance is a regulated industry, rates are on file with state insurance commissioners.) Even those who do follow will be at a disadvantage until they catch up. When members of the company’s executive committee saw it, they were incredulous: “We do this?”. The campaign will be helped immensely if catalysts can tout existing pockets of operational innovation within their own organization. Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer DIRECT QUOTE: "In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. Some companies, even when confronted by a competitor’s innovations, will not rush to emulate them. Companies need to adopt a new approach to implementing operational innovations. So why don’t more companies embrace it? Fortunately, all of these barriers can be overcome. Operational innovation may feel unglamorous or unfamiliar to many executives, but it is the only lasting basis for superior performance. Redesigning procurement or transforming product development will not, even though it might be much more important to the company’s performance. Deep Change. Companies must be prepared to roll with the punches and learn as they go. Those terms refer to achieving high performance via existing modes of operation: ensuring that work is done as it ought to be to reduce errors, costs, and delays but without fundamentally changing how that work gets accomplished. In other words, the game must now be played on the field of operations. Operational innovations fuel extraordinary results. NIH USA.gov. SAGE Business Cases. Why not? They created a two-page diagram illustrating the endless series of steps every order went through, the redundant moves of the product between factories and depots, the accumulations of inventory, and the enormous delays. 84–93, viewed 11 October 2010. 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. 4. This is particularly problematic because operational innovation can easily founder in a sea of competing but smaller change initiatives. Most auto insurers have combined ratios that fluctuate around 102%—that is, they run a 2% loss on their underwriting activities and recover the loss with investment income. In 2002, Shell Lubricants reconsidered who needed to participate in its order fulfillment process. The results included a dramatic drop in inventory, an improvement in customer service, and a major reduction in the total cost of product deployment. That’s why Progressive concentrated on streamlining claims; making it a more pleasant experience for customers would directly affect overall performance. And the key to customer retention is making sure customers have rewarding interactions with the company. 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. 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. Knowledge gained from these tests is then fed back into a fast-cycle iteration of the next version.1. The company has also devised even better ways of assessing an applicant’s risk profile to calculate the right rate to quote. What’s more, important innovations are not limited to individual departments but involve end-to-end processes that cross departmental boundaries. Overwhelmingly, they’ve told me that their senior executives did not understand, support, or encourage it. Many top managers are ignorant about operations and uninterested in learning more.  |  Harvard Business Review, 82 (7/8), 182-183. (The exhibit “Reimagining Processes” shows examples of companies that have rethought these various dimensions of work.). Why bother to be the first on the block to develop and deploy a new way of working? National Center for Biotechnology Information, Unable to load your collection due to an error, Unable to load your delegates due to an error. At its heart, operations is a branch of engineering. In fact, even those who aren’t aggressively opposed to the innovation will find a protracted transition unsettling and disquieting. https://hbr.org/2004/04/deep-change-how-operational-innovation-can-transform-your-company A program was instituted to transform manufacturing from a conventional push-based system to one pulled by actual demand using a system known as Demand Flow Manufacturing. For instance, many companies implementing ERP or SCM systems merely use them to enhance existing processes. In 2002, Shell Lubricants reinvented its order fulfillment process by replacing a group of people who handled different parts of an order with one individual who does it all. Thus, it will never get off the ground without executive leadership. Most industries today are struggling with low-growth, even stagnant, markets. And despite Dell’s success, build-to-order has not swept the PC industry. 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. Customers were delighted, and overall costs dropped dramatically. But transformation today takes place at a dizzying pace. This kind of situation can cripple operational innovation because an organization has only so much capacity for change. Neither did it grow through acquisitions or clever marketing schemes. How would you grade the company's performance a scale of 1-5, Absent such specific targets, innovation efforts are likely to drift or degenerate into incremental improvement projects. Deep Change: How Operational Innovation Can Transform Your Company (HBR OnPoint Enhanced Edition) by Michael Hammer , (No reviews yet) Write a Review Experiment with changing one or more of these elements in your own operations: What results are to be produced, who should perform the necessary activities, where should they be performed, in what sequence, and how thoroughly each activity must be performed. Add to My Bookmarks Export citation. NLM The adjuster not only examines the vehicle but also prepares an on-site estimate of the damage and, if possible, writes a check on the spot. By the time its competitors imitate this latest innovation, Progressive will no doubt have moved onto something else. In a similar way, conventional implementation methodologies often lead to failure when applied to disruptive modes of operation. Or consider how American Standard, the diversified manufacturer, decided where to focus its innovation efforts in the early 1990s. Operational innovation means coming up with entirely new ways of filling orders, developing products, providing customer service, or doing any other activity that an enterprise performs. Designing operations entails making choices in seven areas. It makes it easy to scan through your lists and keep track of progress. A hospital, for instance, was able to respond to physician referrals more quickly when it challenged the assumption that beds had to be assigned before patients could be accepted. Companies that bake operational innovation into their culture make competitors continually scramble to catch up with the changing rules. Overcapacity is rampant, and competition—particularly global competit… Indeed, in how many organizations is such information available at all? Operational innovation is truly deep change, affecting the very essence of a company: how its work is done. First, the stories are worth telling: Operational innovations fuel extraordinary results. It requires specifying what results are to be produced and deciding who should perform the necessary activities, where they should be performed, and when. It is truly deep change, affecting the very essence of a company: how its work is done. 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. Companies often achieve extraordinary levels of performance under extraordinary conditions. There are many reasons why theoretically imitable operational innovations have staying power. Michael Hammer wrote in his article, “Deep Change: How Operational Innovation Can Transform Your Company”, that Operational Innovation is truly a deep change, affecting the very essence of a company and how its work is done1. In reality, innovation is merely doing things differently and more effectively than you have in the past. Copyright © 2020 Harvard Business School Publishing. In the second release, a new information system was installed that facilitated data collection and the production of documentation and also offered enhanced reporting capabilities. The core, value-creating work of enterprises has become low status. 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. For most of its history, Progressive focused on high-risk drivers, a market that it served profitably through extremely precise pricing. Deep change - how operational innovation can transform your company @article{Hammer2004DeepC, title={Deep change - how operational innovation can transform your company}, author={M. Hammer}, journal={IEEE Engineering Management Review}, year={2004}, volume={32}, pages={42-42} } For instance, in the 1980s, Taco Bell transformed its restaurant operations by thinking about them in manufacturing rather than in fast-food terms. They consider it to be a low-priority activity that doesn’t deserve attention. In reality, they will be neither. Companies often achieve extraordinary levels of performance under extraordinary conditions; their problem is performing extraordinarily in normal situations. Zero in on the assumption that interferes with achieving a strategic goal, and then figure out how to get rid of it. 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. One reason, contends the author, is that business culture undervalues operations--they're not as sexy as deals or acquisitions. The solution? ... contends the author, is that business culture undervalues operations--they're not as sexy as deals or acquisitions. It reinvented claims processing to lower its costs and boost customer satisfaction and retention. But techniques used in other industries with seemingly very different characteristics may turn out to be unexpectedly applicable. Deep Change: How Operational Innovation Can Transform Your Company - Operational innovations fuel extraordinary results -- They can destroy competitors and shake up entire industries. Here are guidelines for reinventing your own work processes: Benchmarking within your own industry probably won’t lead to breakthrough innovations. CQ Press. 2004 Feb;22(1):19-45. doi: 10.1016/S0733-8627(03)00115-9. Others are centered on specific bodies of improvement techniques, such as Six Sigma quality or lean enterprise programs. Read the above article and provide a summary on the below: Human Resource, technology and process improvement. Some competitors who attempt to imitate the innovation won’t understand it, and others won’t be able to implement it. The new approach lowered Taco Bell’s costs and increased customer satisfaction by ensuring consistency and by allowing restaurant personnel to focus on customers rather than production. In theory, that is a powerful argument, but in the real world, operational innovations have legs. Innovation isn’t as complex as it may seem—you just have to be open to change. A consumer packaged-goods maker, for instance, based its production scheduling on sales forecasts rather than on actual customer demand. But the stories are also repeated because there are, frankly, not many of them. Operational innovation should not be confused with operational improvement or operational excellence. Innovation may seem like more of a luxury than a necessity. 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). The proof is Progressive’s combined ratio (expenses plus claims payouts, divided by premiums), the measure of financial performance in the insurance industry. After the crisis passed, the company made its emergency mode standard. Following these suggestions should accelerate your efforts. Operational innovation may feel unglamorous or unfamiliar to many executives, but it is the only lasting basis for superior performance. 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. When MetLife, for instance, was implementing a new process for installing coverage of a new customer, it did so in two releases. Breakthrough innovations - not just steady improvements - in operations can destroy competitors and shake up entire industries. Still others are defined in terms of outcomes, such as accelerating time to market or presenting a single face to customers, or focused on improving a particular aspect of the enterprise (procurement or customer service, for example). More accurate pricing translates into increased underwriting profit. The executive must have both the imagination and the charisma needed to drive major operational change. 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. How operational innovation can transform your company. 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. How many executives receive data about order fulfillment cycle time, 0r the accuracy of customer service responses, or the cost of each procurement transaction, or the percentage of parts that are reused in new products? 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. Each of these three companies fundamentally rethought how to do work in its industry. 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. And the shortened cycle time reduced Progressive’s costs dramatically. But fewer than 10% of large companies have made serious attempts to achieve operational innovation. Just look at Dell, Toyota, and Wal-Mart. 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. The innovation paid off and led to a successful IPO a few years later. After selecting the area for innovation, the company must set stretch performance goals. By offering lower prices and better service than its rivals, it simply took their customers away. Cross-docking and companion innovations led to lower inventory levels and lower operating costs, which Wal-Mart translated into lower prices. Breakthrough innovations--not just steady improvements--in operations can destroy competitors and shake up entire industries. Find new ideas and classic advice for global leaders from the world’s best business and management experts. Seven ways mobile technology can transform your business Brought to you by. Operational innovation is a step change: It moves a company to an entirely new level. Finance and strategy are at the top, marketing and sales occupy the middle tier, and operations is at the bottom.” An insurance CEO once quipped that managers work hard at operations so they can be promoted to the executive level, where they can stop worrying about operations. The restaurant chain reduced the amount of on-site food preparation by outsourcing to its suppliers, centralizing the production of key components, and concentrating on assembly rather than fabrication in the restaurants. Harvard Pilgrim Health Care has applied techniques of market segmentation, common in consumer goods but not in health insurance, to identify patients most likely to have a medical crisis and to intervene before the crisis occurs. This offer has attracted customers in droves. It is truly deep change, affecting the very essence of a com- pany: how its work is done. 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