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Arindam Chaudhuri, Editor-in-Chief, 4Ps B&M Chief Consulting Editor's Desk
Rajita Chaudhuri
Steven Philip Warner Guest Column
Steven Philip Warner
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Operational ceos design businesses with the same rigour and discipline that they expect their teams to bring to designing new products, identifying clear requirements for operational performance and evaluating alternative operating model designs.
Issue Date - 20/10/2011
The challenges facing CEOs have never been greater: increasingly demanding customers, rapidly changing technology, accelerating industry dynamics, global competition. This tough business environment has seen the emergence of a new generation of ‘operational CEOs’. These are results-driven, operationally-savvy executives who realise that strategy on its own isn’t enough; delivering results requires a mastery of operational strategy. They take their inspiration from companies like Southwest Airlines, Toyota and Zara, who have leveraged operational strategy to create innovations that have profoundly altered the dynamics of their industries.

Managing outcomes
Being operational doesn’t mean that CEOs need to manage operations directly. Instead, they focus on managing the outcomes. They understand that businesses and their operations need to be explicitly designed, not just left to evolve organically, and that they have a critical role in defining the performance that each part of their business must deliver. They design businesses with the same rigour and discipline that they expect their teams to bring to designing new products, identifying clear requirements for operational performance and evaluating alternative operating model designs. They realise that sometimes incremental improvements aren’t enough; significant changes to their company’s operating model may be required to deliver the results they need.

Operational CEOs understand that all components of what a business does, from customer acquisition to customer service and support, need to be viewed in an operational context. They know the strengths and limitations of their current operating model and how it is different from their competitors. They have a firm grasp of the key operational metrics for every part of their business and understand the interdependencies between them and the performance trade-offs involved.

Designing & implementing new operating models
Start-ups have the chance to create their operating models from scratch – which is why they can be so dangerous. Operational CEOs understand how the limitations of their current operating model can constrain the strategic options available to their business. They also recognise the potential of operational innovation to change the basis of competition. They know the key design decisions businesses in their industry need to make and the time and cost involved in making changes to the different components of their operating model. Faced with significant uncertainty, operational CEOs put a premium on flexibility, and they design operating models that can respond rapidly to new opportunities and changing market conditions.

Zara: fast fashion delivers results
Zara, the Spanish fashion retailer, demonstrates how operational innovation and a radically different operating model can redefine the basis of competition and deliver superior business results. The company’s strategic vision is to deliver value-based fashion – fast. Zara can get new clothing designs from the drawing board onto store shelves in as little as two weeks, while it takes most retailers four to twelve months. The key to the company’s success is a high-speed operating model that integrates every aspect of the business, from product development to retail.

For Zara, time is more important than the cost of production. Its success lies in being able to adapt what it is offering in the shortest possible time to match what customers want. Unlike most of its competitors, Zara doesn’t manufacture most of its clothing in China. Instead it produces half its garments in Spain, either at its own factories or at supplier factories that are tightly integrated with its own. The other half are produced by outside suppliers, most of whom are located in Spain and Portugal. This ‘production in proximity’ model allows Zara to produce new garments in small quantities and get them into its stores quickly. This enables Zara’s designers, who are co-located with production, to experiment with new designs and adjust the company’s product lines and in-store inventory very quickly, based on which new products are hits and which are failures. The design teams can do this because they get real-time feedback from the stores’ point-of-sale systems. This operating model also has a profound impact on demand. Customers know that Zara stores only carry small quantities of stock, which creates a scarcity effect, leading to customers buying products that they like on the spot rather than risking that they will sell out.

Zara’s innovative operating model has delivered an inventory turn rate much higher than its competitors and enabled it to sell 85% of its stock at full price, compared to an industry average of 60 to 70%. Its success has supported the company’s growth strategy and enabled Zara to overtake Gap in 2008 to become the largest fashion retailer in the world.

Reconnecting strategy and operations
No one would appoint a CEO who couldn’t understand a company’s balance sheet or profit and loss account. But many senior executives have important gaps in their knowledge of operations. All CEOs need to know the right questions to ask to decide if their company’s operating model can deliver the business performance they require. They need to know which operations design decisions they need to be actively involved with. And they need to know how to manage the outcomes of operations to ensure that their strategic vision delivers results. If they don’t, they and their companies will lose out to competitors – those that are led by more results-driven, operationally-savvy CEOs.

Sanchit Verma           
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