If innovation is about learning and change (Tidd et al. Because operational innovation is by nature disruptive, it should be concentrated in those activities with the greatest impact on an enterprise’s strategic goals. 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. National Center for Biotechnology Information, Unable to load your collection due to an error, Unable to load your delegates due to an error. Example: Taco Bell transformed its restaurant operations by thinking about them in manufacturing—not fast-food—terms. | Executives who understand how operational innovation happens—and who also understand the cultural and organizational barriers that prevent it from happening more often—can add to their strategic arsenal one of the most powerful competitive weapons in existence. Yet senior managers rarely perceive operational innovation as an important endeavor, nor do they enthusiastically embrace it when others present it to them. Other companies have made similar performance gains through operational innovations. In reality, innovation is merely doing things differently and more effectively than you have in the past. As one manager said, “In our company, operations is not glamorous. Improvement projects can also get in the way of innovation efforts by appearing to address similar issues. This is particularly problematic because operational innovation can easily founder in a sea of competing but smaller change initiatives. ... How Operational Innovation Can Transform Your Companyâ, Harvard Business Review, pp. When MetLife, for instance, was implementing a new process for installing coverage of a new customer, it did so in two releases. In an economy that has overdosed on hype and in which customers rule as never before, operational innovation offers a meaningful and sustainable way to get ahead--and stay ahead--of the pack. How would you grade the company's performance a scale of 1-5, It requires a skill set and a mind-set different from those needed in most other executive activities. Here are guidelines for reinventing your own work processes: Benchmarking within your own industry probably won’t lead to breakthrough innovations. The Harvard Business Review article "Deep Change: How Operational Innovation Can Transform Your Company" contains the following example of operational innovation at Progressive Insurance. In the final release, each team member was trained to handle an entire order. 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/. The first involved the creation of a new role—a case-implementation leader, who was responsible for collecting all the information to establish coverage. By replacing a group of seven people who each handled different parts of the order with one person who does it all, Shell cut cycle time by 75%, reduced operating expenses by 45%, and boosted customer satisfaction by 105%. Toyota has confidently opened its factories to visitors from other automakers and yet continues to expand its productivity lead. 2004 Feb;22(1):19-45. doi: 10.1016/S0733-8627(03)00115-9. USA.gov. And it requires a level of integration and alignment that many enterprises are not prepared to handle. Operational innovation is rare. 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. It requires specifying what results are to be produced and deciding who should perform the necessary activities, where they should be performed, and when. The effects ripple outward to all aspects of the enterprise. It doesn’t fit into R&D, where product innovation is based. Progressive, for instance, realized that the key to its profitable growth is customer retention because acquiring new customers through commission-based agents is very expensive. 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. For example, a company that has always done the âbrick-and-mortarâ business may lose out if the trend is changing to a mix of online business with in-store trading. Here's an example of what they look like: Your reading intentions are also stored in your profile for future reference. https://hbr.org/2004/04/deep-change-how-operational-innovation-can-transform-your-company It is truly deep change, affecting the very essence of a company: how its work is done. Was it positioned in a high-growth industry? Just look at Dell, Toyota, and Wal-Mart. 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. Innovation is often associated with changing technology or the implementation of a new solution. Companies that bake operational innovation into their culture, as Progressive did, make competitors continually scramble to keep up. Why? Business process innovation is a major success factor for the next-generation enterprise and often necessary to benefit from opportunities in a digital world. Why? Foster an innovation environment; Does your business want to do the business the way it has always done. Innovation isnât as complex as it may seemâyou just have to be open to change. 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. Did it diversify into new businesses? ... contends the author, is that business culture undervalues operations--they're not as sexy as deals or acquisitions. For instance, because they are disruptive by nature, projects should be concentrated in those activities with the greatest impact on enterprise strategic goals. 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. In a similar way, conventional implementation methodologies often lead to failure when applied to disruptive modes of operation. 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. Companies would also be wise not to try to implement an innovation all at once. Innovation may seem like more of a luxury than a necessity. HHS 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. Operation and Service Management How Operational Innovation Can Transform Your Company by Michael Hammer Submitted Progressive operates only in the United States. (Because insurance is a regulated industry, rates are on file with state insurance commissioners.) But fewer than 10% of large companies have made serious attempts to achieve operational innovation. Or is it open to change. And the shortened cycle time reduced Progressive’s costs dramatically. The author also discusses the best way to implement operational innovations. 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. But fewer than 10% of large companies have made serious attempts to achieve operational innovation. Executive leadership then loses heart, and the denouement is inevitable. In the age of fierce competition, cutting back of price of the product being offered is quite difficult to attain sustainable profits. But in the early 1990s, the insurer believed that much larger companies were about to enter this niche and emulate its approach to pricing; the company’s managers realized it couldn’t compete against larger players on a level playing field. For years, Progressive did little advertising, and some of its campaigns were notably unsuccessful. Operational innovation is truly deep change, affecting the very essence of a company: how its work is done. The trick is to turn your do-or-die mode into everyday practice. 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. If so, you may be missing a much more reliable way to outperform your competition—operational innovation. Managers looking to innovate should consider changing one or more of these dimensions to create a new operational design that delivers better performance. This easy-to-implement change quickly delivered a degree of performance improvement. But operational innovation entails a depar- ture from familiar norms and requires major changes in how departments conduct their work and relate to one another. It should not be surprising that executives without experience in operations do not look there for competitive advantage. Zero in on the assumption that interferes with achieving a strategic goal, and then figure out how to get rid of it. Preview. Companies that follow traditional implementation methodologies inevitably take too long. 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. This second release delivered another 20% productivity improvement, as well as a 20-point increase in customer satisfaction. Send the patient to the hospital immediately, and assign the bed while the patient is in transit. The only way to get and stay ahead of competitors is by executing in a totally different way—that is, through operational innovation. Find new ideas and classic advice for global leaders from the worldâs best business and management experts. They enter the organization through finance, strategy, or marketing and build their reputations on work in these domains. Adjusters no longer work out of offices from nine to five but out of mobile claims vans. I have spoken with thousands of managers from hundreds of companies about operational innovation. As more time passes and more money is spent without the innovation or its payoffs seeing the light of day, organizational support leaks away. Operational innovation should not be confused with operational improvement or operational excellence. The approach cut Taco Bell’s costs and increased customer satisfaction by ensuring a consistently high-quality product. Following these suggestions should accelerate your efforts. Just look at Dell, Toyota, and Wal-Mart. 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. 1. Put these all together, and Progressive’s remarkable growth becomes comprehensible. But it continued to rely on old information systems to support the process. The business of emergency medicine: a model for success. Hardly. At a major semiconductor maker, for instance, a group of middle managers who were frustrated with the complexity and poor performance of their order fulfillment process decided to make a case for change to executive management. Harvard Business Review, 82 (7/8), 182-183. By contrast, Progressive’s combined ratio fluctuates around 96%. It is truly deep change, affecting the very essence of a com- pany: how its work is done. Wal-Mart is now the largest organization in the world, and it owns one of the world’s strongest brands. 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. 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. After selecting the area for innovation, the company must set stretch performance goals. These catalysts take it upon themselves to find a leader who can grasp what they have in mind and then spearhead the innovation effort. Zero in on the assumption that interferes with achieving a strategic goal, and then figure out how to get rid of it. 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). Thus, it will never get off the ground without executive leadership. This offer has attracted customers in droves. Fortunately, all of these barriers can be overcome. This kind of situation can cripple operational innovation because an organization has only so much capacity for change. One reason, contends the author, is that business culture undervalues operations—they’re not as sexy as deals or acquisitions. Wal-Mart pioneered a great many innovations in how it purchased and distributed goods. [See Hammer (2004), âDeep Change: How Operational Innovation can Transform your Company,â HBR, (April), 84-95]. Did it go global? Overcapacity is rampant, and competition—particularly global competition—is fierce. Deep Change. 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. Another problem with conventional implementation is that it assumes that the initial specifications for an operational innovation will be accurate and complete. Each of these three companies fundamentally rethought how to do work in its industry. But fewer than 10% of large After the crisis had passed, the company decided to adopt this emergency mode of operation as its standard one. The secret of Progressive’s success is maddeningly simple: It outoperated its competitors. 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