A commonly quoted statistic is that 80% to 95% of the cost of a product is determined by its design and is therefore set before the item enters manufacturing. This assumption suggests that the dominant focus of Cost Management should be during Product Development and not during Manufacturing.
However, contrary to a widely held assumption, companies can integrate a variety of Cost Management techniques not only in the design phase but throughout the product life cycle. This is to ensure that there is a substantial reduction in costs. In fact, companies achieving Operational Excellence and competing aggressively on cost might consider the adoption of some form of an Integrated Cost Management Program that spans the entire product life cycle.
An organization must have a good understanding of Integrated Cost Management and the 5 Cost Management Strategies that they can use to reduce costs but still attain the desired level of functionality and quality at the target costs.
The 5 Cost Management Strategies
The 5 Cost Management Strategies play a crucial role in the company’s integrated approach to Cost Management.
The 5 Cost Management Strategies can be applied throughout the product life cycle with one technique used during the product design and the rest during manufacturing.
- Target Costing. This is a technique applied during the design stage. Target Costing is best used when the manufacturing phase of the life cycle of a product is short.
- Product-specific Kaizen Costing. This is a technique applied during the early stages of the manufacturing phase. It enables the rapid redesign of a new product to correct for any cost overruns. The primary rule in Product-specific Kaizen Costing is that the product’s functionality and quality have to remain constant.
- General Kaizen Costing. The third Cost Management Strategy, this technique is applied during the manufacturing phase. It focuses on the way a product is manufactured with the assumption that the product’s design is already set. This technique is effective when addressing manufacturing processes that are used across several product generations.
- Functional Group Management. This is the technique that is applied in the production process. Functional Group Management consists of breaking the production process into autonomous groups and treating each group as a profit instead of a cost center. The switch to profit as opposed to cost allows groups to increase the throughput of production processes even if changes result in higher costs. It enables the change in mindset that functional group management induces.
- Product Costing. The 5th Cost Management Strategy, this is the technique that coordinates the efforts of the other four techniques. It does coordination work by providing the other four techniques with important, up-to-date information.
Target Costing vis-a-vis Kaizen Costing
Kaizen Costing as known as continuous improvement costing. It is a method of reducing managing costs. Kaizen Costing has a similarity with Target Costing but it also has its differences. (Note: Kaizen is the Japanese term for Continuous Improvement and often tied to the philosophy of Lean Management.)
Both Kaizen Costing and Target Costing can achieve results with lower resources. This is basically their similarity. On the other hand, the differences lie in their usage and involvement.
Target Costing is used on the design stage and requires the involvement only of designers. On the other hand, Kaizen Costing is used during the manufacturing stage and requires high involvement of employees. The general idea of Kaizen Costing is to determine target costs, design products, and process to not exceed those costs.
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Post-merger Integration is a highly complex process. It requires swift action as well as running the core business activities simultaneously. There is no one-size-fits-all approach to a successful PMI Process. However, careful planning focusing on the strategic objectives of the deal and the identification and capturing of synergies will help maximize deal value.
Because of the complexity of the PMI process, it is of utmost importance that organizations—both the Buyer and Target, the integration team, and integration manager—have a guide that will provide them the detailed requirements of the process. The Post-merger integration framework has a structured approach that can direct attention to important integration areas to maximize deal value and achieve Operational Excellence. The inability to focus on priority areas can be a waste of resources, time, and investments.
The 12 Integration Areas
The Post-merger Integration framework drives a structured approach to identify important Integration Areas to focus on during the transition. There are 12 Integration Areas that need to be prioritized.
- Finance & Accounting (F&A). This is an integration area that is focused on establishing the financial sustainability of the new organization. Financial & Accounting needs clear instructions and templates for financial reporting at Closing. The better the information, the few surprises there are due to poor reporting or absence of data. Financial & Accounting has 9 sub-areas that are essentially important for organizations to have a good appreciation and understanding of.
- Legal. The role of the legal function does not end at the Closing. Many legal items need to be listed and considered immediately after the Closing. Special events, such as acquisitions of minority shares or the formation of joint venture companies must be considered. Legal is one vital area in building the sustainability of the new organization.
- HR & Personnel. Integral in the Integration Process, HR & Personnel is a key area in integration. Management of the HR Integration Team is a primary responsibility of the Buyer’s HR manager. There are 5 sub-areas under HR & Personnel that must be given important consideration.
- Corporate Communications. Successfully using the Buyer’s and Target’s corporate communication functions for announcing and explaining PMI progress is a net sum of many factors. Essentially, communicating PMI progress requires the effective use of the corporate communication functions of both Buyer and Target.
- Information Technology (IT). The goal of the ICT Integration Process is to link the ICT networks of the acquired entity with the Buyer’s corporate ICT network. It is necessary to facilitate access to systems and services provided by the Buyer and collaborate with business/market areas. Often, the integration process is let by an ICT individual from the Buyer’s corporate/company ICT or business/market area ICT.
- Corporate Culture. Corporate culture has increasingly become a critical factor in integration success, particularly in cross-border M&A. An M&A deal often impacts on corporate culture, both on the Buyer’s and the Target’s side.
- Sales & Marketing. This is a difficult sensitive area to be changed in the integration process. Sales & Marketing contribute largely to organizational financial stability, hence primary consideration must be undertaken.
- After Sales & Service. This is increasingly becoming important in value creation. It is an added-value that strengthens Sales & Marketing capability to sustain the market.
- Supply Chain Management (SCM). This is undertaken at a later phase of integration as the fundamental change requires detailed planning and calculation.
- Production. This is one critical area where more experience and planning are required in decision making.
- Technology. The extent to which the integration focuses on Technology and R&D depends on the M&A strategy. If the purpose of the acquisition is to gain technology or strengthen existing capabilities, then this is when the integration will focus on technology.
- Synergies. This an integration area that can mean new strengths and opportunities from combined knowledge and experiences.
Organizations must take adept steps in undertaking the Integration Checklist as this will enable both the Buyer and the Target to reach the most strategic state necessary for the 12 Integration Areas.
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“A problem well framed is a problem half-solved.” — Jay Galbraith
Organizational Design is more than just structures. It is having policies and strategies that are aligned with one another. When this is achieved, it allows organizations to operate at maximum efficiency and achieve Operational Excellence.
The Galbraith Star Model™ is the foundation on which a company bases its design choices. The organization’s design framework consists of a series of design policies that are controllable by management and can influence employee behavior.
Organizations use the Star Model™ framework to overcome the negatives of any structural design. Every organizational structure has positives and negatives associated with it. If management can identify the negatives of its preferred option, it can better design other policies around the Star Model™ to counter the negatives while achieving the positives.
Understanding the Galbraith Star Model™
Galbraith Star Model™ is the organization’s design framework for effective strategy execution. It consists of 5 major components.
- Strategy. This component is the company’s formula for winning. It is the goals and objectives to be achieved, as well as values and missions to be pursued. It defines the basic direction of the company. Strategy Development is essentially important in specifying sources of Competitive Advantage.
- Structure. The second component, the Structure, determines the location of the decision-making power. It is the placement of power and authority in the organization.
- Processes. Information and decision processes is a component that cuts across the organization’s structure. It is a means of responding to information technologies. Management processes can either be vertical or lateral. Either way, these are designed around a workflow from new product development to the fulfillment of a customer order. If the structure is the anatomy of the organization, processes are its physiology or functioning.
- Rewards. The fourth component provides motivation and incentive for the completion of the strategic direction of the organization. Rewards are recognition that influence the motivation of people to perform and address organizational goals. It becomes effective only when they form a consistent package in combination with other design choices.
- People. People is the fifth component that focuses on influencing and defining an individual’s mindset and skills. It looks into the human resource policies of recruiting, selection, training, and development of people needed by the organization to achieve its strategic direction. HR policies work best when these are consistent with the other connecting design areas.
The five components are essentially important. Each component has its underlying purpose and impact. How the organization can effectively align the components with each other makes a huge difference in achieving an impact. Further, in this fast-changing business environment, organizations must be keenly aware of the implications of implementing the Star Model™ framework. The Star Model may have its implications, including the interweaving nature of the lines that form the star shape.
The Man Behind the Organizational Design Framework
Dr. Jay Galbraith was an internationally recognized expert on Strategy and Organizational Design. With more than 45 years of research and practical experience, Dr. Galbraith’s extensive knowledge came from his background in information processing systems, chemical engineering, and organizational behavior. As the original creator of the Star Model and the Front-Back organization structure, Dr. Galbraith transformed organizations across a broad span of industries including consumer goods, manufacturing, health care, financial services, and telecommunications, among others.
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Peter Drucker, one of the first managerial thinkers, introduced MBO or Management by Objectives. This eventually paved the way for the birth of the Objectives and Key Results (OKR) management philosophy. Andy Grove, known as the “Father of OKRs”, introduced the approach to Intel during the 1970s. This was further popularized by John Doer by introducing OKRs at Google in 1999.
Today, successful organizations are now using OKRs. Objectives and Key Results is an efficient way to track company and team goals and measure their progress. It helps every organization’s success by cutting out unimportant goals and focusing on what truly is important within the organization.
Objectives and Key Results (OKR) has been seen as a way to communicate so that there is clarity of purpose. It is also a tool for motivating and aligning people to work together to achieve Operational Excellence. It increases transparency, accountability, and empowerment.
What is OKR?
OKR or Objectives and Key Results is a popular Management Strategy for goal setting within organizations. The goal of OKR is to define how to achieve objectives through concrete, specific, and measurable actions.
The OKR framework is structured with two framework components: the Objectives and Key Results. This is to connect company, team, and personal goals to measurable results and direct all towards one unified direction
- Objectives. The Objectives consist of a list of 3-5 high-level objectives. This is supported by initiatives—plans and activities focused on achieving the objective and moving forward the key results. Setting objectives requires a lot of thought as it goes beyond making money. In fact, it must follow defined characteristics and undertaken in a well-planned approach. This is to ensure that the objectives formulated are well-defined, focused, and achievable.
- Key Results. Key Results add metrics to objectives. These are measured on a 0-100% scale or 0 to 1.0. Under each objective are 3 to 5 measurable Key Results. It measures how far from the objective your team is. It will give them a clear direction on what to do and how to do it.
Developing the right OKR requires being able to properly define your Objectives and Key Results. One way of doing this is by using the SMART goal setting model.
A Look at the SMART Model
The SMART Model ensures that organizations get to effectively develop the right OKR. The SMART Model is the easiest way to set Key Results. Organizations just need to follow the SMART goal guidelines. Knowing what to do, as well as knowing not what to do, on an OKR journey to minimize problems and mistakes.
The use of OKR requires cultural change and change itself is difficult. But with the use of the SMART goal guidelines, organizations can get the hang of it and can be effective in its OKR journey.
Let us take a look at OKR examples that provides a clear application of the SMART model.
The first example is the use of Sales OKR. Set Objective is to increase Q2 recurring revenues. Key Results are increased average subscription size by $500 per month ($0-$1500). The second Key Result is to increase the share of monthly subscription vs. one-time contracts sold to 85% (50%-85%).
Another example is the Human Resource OKR. Set Objective is to improve internal employee engagement. Its first Key Result is conduct a monthly “Fun Friday” all-hands meetings with an external motivational speaker (0-3 meetings).
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Enterprises invest in Analytics to improve Decision Making and outcomes across the business. This is from Product Strategy and Innovation to Supply Chain Management, Customer Experience, and Risk Management. Yet, many executives are not yet seeing the results of their Analytics initiatives and investments.
Every organization putting on investment in Analytics has experienced several stumbling blocks. This differentiates the leaders from the laggards. Analytics-driven Organizations have clearly established processes, practices, and organizational conditions to achieve Operational Excellence. Their commitment to Analytics is creating a major payoff from their investments and a competitive edge.
What It Takes to Be Analytics-driven
The Harvard Business Review Analytic Services conducted a survey of 744 business executives around the world and across a variety of industries. Their focus was on the performance gap between companies that have struggled to get a return on their Analytics investment and those that have effectively leveraged their investment.
The survey showed that Analytics-driven Organizations get sufficient return on investment in Analytics. In fact, they have been highly successful in gaining a return on Analytics investment. This is gainfully achieved as organizations use Analytics consistently in strategic decision making. Executives of Analytics-driven Organizations rely on Analytics insights when it contradicted their gut feel.
Essentially, Analytics-driven Organizations have reduced costs and risks, increased Productivity, Revenue, and Innovation, and have successfully executed their Strategy. Yet, in evolving the organization’s Analytics approach, there can be 4 core obstacles that can affect their drive to getting a greater return on investment in Analytics.
The Core Obstacles to Finding Return on Analytics Investment
Let’s briefly take a look at the first 2 obstacles:
- Communication and Decision-making Integration. The lack of Communication and Decision-making Integration limits the integration of Analytics into workflows and decision processes do not reach decision-makers. As a result of these core obstacles, the use of Analytics is limited in specific areas.
- Skills to Interpret and Apply Analytics. A second core obstacle is the inadequate skills of business staff to interpret and use Analytics. In fact, the survey showed that only one-quarter of frontline employees use Analytics with only 7% using Analytics regularly.
The other two core obstacles are siloed and fragmented Analytics and time delay. These are two equally important core obstacles that can hinder the use of Analytics to maximize return on investment. Further, the 4 core obstacles are barriers to analytic success.
Are You Ready to Be an Analytics Leader?
Leaders use Analytics consistently in decision making. In fact, based on the survey, 83% of executives use it in business planning and forecasting. On the other hand, laggards only use it 67% of the time. Even in various aspects of the organization such as Marketing, Operations, Strategy Development, Sales, Supply Chain, Pricing and Revenue Management, and Information Technology, laggards use Analytics only half the time compared to Analytics Leaders.
Analytics Leaders always ensure that they establish the processes and organizational conditions to allow them to successfully deploy Analytics. In fact, to increase return on Analytics, organizations must undertake the use of four interrelated initiatives that will drive greater return on investment Analytics. These are four initiatives essential to building an Analytics-driven Organization.
One is building an organizational culture around Analytics. To achieve this the organization must have clear, strategic, and operational objectives that are set for Analytics. Second is deploying Analytics throughout all core functions of the business.
Starting with an Analytics-driven Culture can greatly facilitate cross-functional deployment of Analytics.
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When things go wrong on a grand scale, often we direct our attention to the role of the Board. Debate exudes and often gets heated up and intensifies. This often happens when the Board spends more time looking in the rearview mirror and not enough scanning the road ahead. When this happens, governance suffers.
Often, the Board of Directors spend a bulk of its time on quarterly reports, audit reviews, budgets, and compliance. However, with the change in the business environment, there is a greater need to redirect the Board’s attention on matters crucial to the future prosperity and direction of the business. One of this is Strategy Development. Achieving this requires the development of a dynamic Board with a long-term mindset capable of creating forward-looking agenda and activities that get sufficient time over a 12-month period.
The Changing Board Agenda
The Board Agenda is changing. It is becoming more dynamic and it has increasingly highlighted forward-looking activities. Long-term economic, technological, and demographic trends are radically shaping the global economy. The second Industrial Revolution now requires the Board to shift focus. The Board is now challenged to focus on matters crucial to achieving Operational Excellence and the future direction of the organization. Directors must devote more time to strategic and forward-looking aspects of the agenda. They must cease seeing the job as supporting the CEO, but instead, be strategic in making sure long-term goals are formulated and met.
Having a forward-looking Board has now become every organization’s imperative. However, this can only be achieved if there is a solid foundation that is anchored on three guiding principles. Organizations must have the right Board Member, a clear definition of the Board’s role, and greater time commitment from members. At this time when a long-term mindset has come to a fore, these have become essential.
Developing a Long-term Mindset: The 4 Essential Tactics
“Strategy without tactics is the slowest route to victory. Tactics without strategy are the noise before defeat.” – Sun Tzu
Organizations can undertake 4 essential tactics to encourage the Board to have a long-term mindset.
- Study the External Landscape. This is the starting point of creating a forward-looking mindset. The primary purpose of this tactic is to expose the Board to new technologies and market developments relevant to the company’s strategy. Studying the external landscape will challenge management with critical questions.
- Participate in Strategy Development. This tactic focuses on making strategy a vital part of the Board’s DNA. Participating in the Strategy Planning process will strengthen the Board’s role in co-creating and ultimately agreeing on the company’s strategy.
- Focus on Long-term Talent Development. The third tactic, this tactic focuses on unleashing the full power of the people. It will effectively reallocate skills and experience to a business with more potential. To achieve its expected result, the key is the Board must agree with management on a sensible approach to reviewing executive talent.
- Identify Existential Risks. This is the tactic that focused on the Risk Management of existential risks. Because of accelerating technological progress, existential risks have become a recent phenomenon. Existential risks have a great detrimental impact not only on business but also on mankind. The Boards have the duty to ensure that management teams pursue bottom-up investigations, identify key risk areas, and act on the results.
The 4 tactics are essentially effective in creating long-term mindsets. When this is achieved, Board Excellence is never far behind.
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Lean Management plays a significant role in putting in place processes, capabilities, and tools to improve how businesses operate. But, the Digital Age has increased both the opportunities for businesses who know how to react and the difficulty of getting it right.
Tasks performed by humans are now more complex be it accessing information in multiple formats from multiple sources or responding to changing market and customer dynamics at an ever-increasing speed. As an increasing number of tasks become automated or taken over by cognitive-intelligence capabilities, companies need to learn from lean management. Like a sprinter who needs all her muscles to be finely tuned and working in concert to reach top speeds, fast-moving institutions must have a system to continually synchronize strategies, activities, performance, and health.
Many organizations understand the need to change how they work and have embarked on numerous initiatives, yet few have been able to get beyond isolated success cases or marginal benefits. Most companies recognize the need for a Next-gen Operating Model to drive their business forward their Digital Transformation initiatives. But, how they develop it makes a big difference.
The Next-gen Operating Model
There are 4 core pillars of a Next-gen Operating Model. Putting these in place will ensure its successful implementation.
- Autonomous, Cross-functional Teams. The first pillar is focused on empowering the team to own products, services, or journeys. Having autonomous, cross-functional teams, organizations can become nimble in building skills across their teams. They make anchor hires for key roles, set up rotational and train the trainer programs, and commit to ongoing capability building and training for key roles.
- Flexible, Modular Platform. The second pillar is focused o supporting a faster deployment of products and services. Having Flexible, Modular Platforms will enable technology teams to better collaborate with business leaders in assessing which systems need to move faster.
- Connected Management System. The third pillar focuses on driving a culture of continuous improvement that cemented on customer needs. A Connected Management System will ensure that Management systems are evolving to create feedback mechanisms with and between various operations and teams.
- Agile, Customer-centric Culture. The fourth pillar is focused on speed and execution over perfection. Having an Agile, Customer-centric Culture is critical to success. It leads the change from the top and builds new ways of working across organizational boundaries. When functions and teams collaborate, effective time to market to reduced as well as operational risk.
The path to building up the Next-gen Operating Model follows well-defined approaches to guide organizations. These approaches will be every organization’s guide to operating model transformation during the first 12 months.
Following the 4 Critical Approaches to Operating Model Transformation
The 4 critical Approaches to Operating Model Transformation works well when there is a broad and top-down organizational mandate for change. Before anything else, organizations must make sure that the change mandate is in place so that the entire organization is aligned with the proposed change.
One of the 4 Critical Approaches is the Innovation Lab. The Innovation Lab is a dedicated unit set up to be entirely separate from the historical culture, decision-making bureaucracy, and technical infrastructure of the main business. It hatches new business models in an informal setting. It is best used when there is a need to move very quickly in response to market pressures.
Mastering these various approaches will enable organizations to better go through the Operating Model Transformation in the most effective way to achieve Operational Excellence.
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Business Process Reengineering (BPR) is a practice of rethinking and redesigning the way work is done to better support an organization’s mission and reduce costs. In all too many companies, reengineering has been not only a great success but also a great failure. After months, even years, of a careful redesign, these companies achieve dramatic improvements in individual processes only to watch overall results decline.
The promise of reengineering is not empty. It can actually deliver revolutionary process improvements, and major reengineering efforts are being conducted around the world. It can even lead organizations to achieve a successful Business Transformation.
Yet, companies cannot convey these results to the bottom line.
The Strategy that is BPR
Business Process Reengineering (BPR) is a Business Management strategy focused on the analysis and design of workflows and business processes within an organization. Often, companies direct Process Reengineering initiative on 2 key areas of business. One is in the use of modern technology to enhance data dissemination and the decision- making process. The second key area is the alteration of functional organizations to form functional teams.
As a strategy, Business Process Reengineering can greatly impact on the organization. It can help organizations fundamentally rethink how work must be done to improve customer service, cut operational costs, and become world-class competitors. It can help companies radically restructure their organizations by focusing on the ground-up design of their business process. BPR, as a strategy, can direct organizations to achieve Operational Excellence.
In the process, there are 2 dimensions that are critical in translating these short-term narrow-focus process improvements into long-term profits.
Understanding the 2 Dimensions of BPR
- Breadth. Breadth is a dimension of BPR that focuses on the range of activity types within a process. It includes the identification of activities includes in the process being redesigned that are critical for value creation in the overall business unit. Breadth can reduce overall business unit costs and can even reveal unexpected opportunities for a redesign.
- Depth. This is the dimension of BPR that focuses on the abstraction levels of process logic within a process. It refers to how many and how much of the depth levers change as a result of reengineering. Depth provides the most dramatic process cost reduction and avoids the classic reengineering pitfall of focusing on fixing the status quo.
Having a good understanding of the 2 Dimensions of BPR will open a range of opportunities for organizations to achieve innovative performance and enhancements.
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Management processes–everything from how a company manages risk to how it gets supplies for factories to how it manages and develops people–are some of the primary ways that global companies impose order and consistency on a diverse set of global operations. Companies believe that processes can help share knowledge across divisions and regions to achieve operational excellence. Likewise, seamless delivery and service processes can be central to meeting customer expectations.
In a world where the pace of competition is increasing faster than ever, best-in-class processes can create competitive advantages when it comes to innovation and risk management. However, researches have shown that companies are particularly poor at managing processes. Often there are just too many processes. Worst, executives often do not know where to begin; a Leadership Development dilemma.
The Pitfalls of Organizations
Global organizations are particularly poor at managing processes. Processes are considered one of the 3 weakest aspects of organizations and strengthening them is crucial.
Based on a McKinsey survey of executives, executives do not know what their processes are. Inasmuch as there are just too many processes, these processes do not reflect new customer needs. In fact, there exists a resistance to change that can be damaging to an organization.
Organizations have to understand that processes can go wrong on a global scale and it can bring in a lot of challenges to an organization.
The 3 Core Challenges to Global Organizations
Organizations are faced with 3 core challenges when dealing with processes and transforming them to a global scale.
- A Plethora of Processes. When there are a plethora of processes, there are just too many processes and too little value. This happens when executives are unable to differentiate between processes that are essential to creating global value and those that are inessential but offer benefits if these are consistent. Executives also fail to differentiate between processes that are crucial to customers or those that create value and those that do not. A plethora of processes is also created when the operation is in various locations or as a result of M&A activity.
- Overstandardization. How do you know that overstandardization exists? It is when processes are so rigid that they are slow to respond to new growth. As a result, there is a dramatic decrease in local responsiveness. This core challenge often arises because there is just too much concern about maximizing control and reducing risk.
- Resistance to Change. This is the third core challenge faced when change is introduced and there is resistance. Resistance to change often occurs when there is difficulty in changing customer-facing processes until the organization is faced with customer backlash. Executives often fail to understand customers’ preference for standard global service. The thinking is often directed towards country-specific variations which are not often what customers like.
Overcoming the 3 core challenges can be done. Organizations just need to take on a 3-phase approach that will ensure that all global processes are enabling performance. These are Prioritize, Optimize, and Implement. A 3-phase approach is an effective tool towards approaching Global Process Optimization in a strategic manner where value is maximized at minimal cost and complexity.
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In a recent update to Flevy, the documents marketplace has allowed select contributors to offer complimentary documents. However, it takes some digging to find these free offers. Here, we present 5:
Introduction to Strategy
What is Strategy? This 20-slide presentation provides an introduction to strategy, separating out the concepts of Corporate Strategy vs. Business (Unit) Strategy.
Introduction to Operational Excellence
This 48-slide presentation provides a high-level introduction to Operational Excellence. It explains the four building blocks: Strategy Deployment, Performance Management, Process Excellence, and High Performance Work Teams.
A Practical Framework Approach to Change
This presentation presents a flavour of some of the more necessary change components and associated tools & techniques that will require consideration during any change initiative.
Lean Thinking 101
This 32-page presentation that explains the Lean management philosophy, based on the Toyota Production System (TPS).
Delta Model Primer
The Delta Model is a growth strategy framework developed by MIT/Sloan professors to help managers in the articulation and implementation of effective corporate and business strategies.