Center for Information Systems Research

Sloan School of Management

Massachusetts Institute of Technology

RESEARCH BRIEFING
Volume V

Number 3C

FORGET STRATEGY:
FOCUS IT ON YOUR OPERATING MODEL
Jeanne W. Ross, Principal Research Scientist
MIT Center for Information Systems Research
Most companies try to maximize value from IT investments by aligning IT and IT-enabled business
processes with business strategy. But business strategy is multi-faceted, encompassing decisions as to
which markets to compete in, how to position the
company in each market, and which capabilities to
develop and leverage. In addition, strategic priorities
can shift as companies respond to competitor initiatives or seize new opportunities. As a result, strategy
rarely offers sufficiently clear direction for development of stable IT and business process capabilities. IT is left to align with individual strategic initiativesafter they are announced. Thus, IT becomes a
persistent bottleneck.
To make IT a proactiverather than reactiveforce
in creating business value, companies should define
an operating model. An operating model is the necessary level of business process integration and
standardization for delivering goods and services to
customers. By identifying integration and standardization requirements an operating model defines critical IT and business process capabilities. This briefing explores how a companys operating model
guides IT investment and enhances business agility.1
Four Alternative Operating Models
Companies make two important choices in the design of their operations: (1) how standardized their
business processes should be across operational
units (business units, region, function, market segment) and (2) how integrated their business
processes should be across those units. In making
these two choices, company management is targeting one of four operating models (as shown in Figure 1):
1

December 2005

Diversification (low standardization,

low integration)
Unification (high standardization,
high integration)
Coordination (low standardization,
high integration)
Replication (high standardization,
low integration)
All four operating models represent viable alternatives for delivering goods and services to a companys customers.
The Diversification model is a decentralized organizational design. Business units pursue different markets with different products and services, and benefit
from local autonomy in deciding how to address
customer demands. Carlson, a $20B company of
related but autonomous hospitality businesses, is an
example of a Diversification model.
The Unification model describes a centralized organizational design. The company pursues the need for
reliability, predictability and low cost by standardizing
business processes and sharing data across business
units to create an end-to-end view of operations and a
single face to the customer. Delta Air Lines standardized global business is an example of Unification.
The Coordination model focuses on integration. A
Coordination model company creates a single face to
its customers or a transparent supply chain without
forcing specific process standards on its operating
units. Toyota Europe, for example, shares product
data across country business units so they can rapidly exchange automobiles and parts to meet customer
needs.
The Replication model focuses on process standardization. Operating units perform tasks the same way
using the same systems so that they can generate
global efficiencies and brand recognition. However,
operating units rarely interact. As an example, Marriott replicates systems and processes related to a
wide range of processes, including reservations, frequent guest rewards, wake-up calls and revenue planning in each of its independently managed hotels.

This briefing expands on concepts originally described

in Aligning IT Architecture with Organizational Realities, CISR Research Briefing Vol. III, No. 1A, March
2003.
2005 MIT Sloan CISR, Ross. CISR Research Briefings are published three times per year to update CISR patrons, sponsors & other supporters on current CISR research projects.

CISR Research Briefing, Vol. V, No. 3C

Implications for IT Investment
By identifying the intended level of business process
integration and standardization, the operating model
determines priorities for development of digital capabilities and thus IT investment. Accordingly, IT investments not only address immediate business needs,
they digitize key business capabilities, thereby building a foundation for future business initiatives.
For example, CEMEX, a Replication company, has
built a foundation based on process standardization.
CEMEX has standardized eight key business
processes: commercial (customer facing and cement
logistics), ready mix manufacturing, accounting,
planning and budgeting, operations, procurement,
finance, and HR. Although the businesses reuse
processes, they do not typically share dataeach
business is run autonomously. CEMEX has leveraged its IT-enabled standardized processes in assimilating acquisitions. For example, in 2000,
CEMEX acquired Southland, the U.S.s second largest cement manufacturer, and completed assimilation
in four months. Subsequent acquisitions have been
assimilated in as little as two months.2
While CEMEX has built standardized processes,
Merrill Lynchs Global Private Client (GPC) business
has built a foundation of digitized processes to support a Coordination model. GPCs business objective
is to provide a wide range of investment products to
wealthy clients across a variety of channels (e.g. interactions with a financial advisor, online access, telephone access).3 To meet this objective, GPC developed integrated product data and standardized
customer interfaces on its Total MerrillSM platform.
But GPC does not typically standardize business
processes across the globe. GPC leverages these IT
capabilities every time it introduces a new investment
product or creates a new channel for accessing its
products. As a result of GPCs standard technology
platform and access to shared business data, the company has the best revenue per advisor, earnings per
advisor and assets per advisor in the industry.4
As a Unification company, Dow Chemical seeks
both integration and standardization to achieve effi-

Page 2

December 2005
ciencies and meet the demands of global customers.
Dow uses a single instance of SAP to support highly
standardized core processes (e.g., manufacturing,
finance, logistics) while creating a global supply
chain. Dow has leveraged these capabilities to grow
profitably both organically and through acquisitions.
From 1994 to 2004, despite a downturn in the market, Dow nearly doubled its revenues while growing
its employee base less than 10%a productivity
improvement of eight percent per year.5
By purposely not creating shared digital capabilities,
the Diversification model encourages organic growth
of individual business units and poses unlimited opportunities for growth through acquisition. But because Diversification leverages fewer capabilities
than the other models, companies need to find synergies to create shareholder value. Some Diversification
companies are introducing shared services to gain
economies of scale; others are diversifying into closely related businesses to feed a core business. For example, with its package delivery business at its core (a
Unification model), UPS has diversified into a set of
smaller, growth oriented businesses such as UPS
Supply Chain Solutions, UPS Capital Corporation,
UPS Consulting, The UPS Store, and UPS Professional Services. These new businesses cannot reuse
the existing IT and business process foundation because they operate differently, but they have become
profitable in their own right while adding value by
feeding the core business. As a result, UPS has continued to grow while boasting an operating margin
nearly three times the industry average.
Choosing an Operating Model
Although most companies can identify processes
fitting every operating model, they need to select a
single operating model to guide management thinking and system implementations. Management can
then organize business unit and IT responsibilities
based on principles about how the company will operate most of the time. One way companies respond
to conflicting demands is to adopt different operating models at different organizational levels.
For example, Johnson & Johnson has long operated
in the Diversification quadrant.6 But J&Js U.S.

Rebecca Chung, Donald Marchand and William Kettinger, The CEMEX Way: The right balance between local
business flexibility and global standardization, IMD
International Institute for Management 2005. IMD-31341.
3
V. Kastori Rangan and Marie Bell, Merrill Lynch: Integrated Choice, Harvard Business School case 9-500090, March 2001.
4
Merrill Lynch 2004 Annual Report.

Jeanne W. Ross and Cynthia M. Beath, The Federated

Broker Model at The Dow Chemical Company: Blending
World Class Internal and External Capabilities, MIT
Sloan CISR Working Paper No. 355, July 2005.
6
See Jeanne W. Ross, Johnson & Johnson: Building an
Infrastructure to Support Global Operations, MIT Sloan
CISR Working Paper No. 283, September 1995.

CISR Research Briefing, Vol. V, No. 3C

Page 3

pharmaceutical group applies a Coordination model

to present a single face to health care professionals.
In Europe, Janssen Pharmaceutical Products applies
a Replication model providing low-cost, standardized processes for drug marketing, delivery and
monitoring. Targeting different operating models at
different organizational levels allows J&J to meet
the multiple objectives of a large, complex company,
while keeping organizational design reasonably simple at the individual operating company level.
Our research has found a strong preference across
companies and industries for the Unification model.
Data collected at 103 companies in 2004 indicated
that 63% of companies were targeting Unification.
Only nine percent were targeting Diversification;
17% were targeting Coordination; and 11% were
targeting Replication operating models. The appeal
of the Unification model is that it provides a thick
foundation of digital capabilities to leverage in future business initiatives. However, implementing
that foundation requires a great deal of time, money
and management focus.
In contrast, the off-diagonal operating models
(Coordination and Replication) require less time for
building capabilities before companies can start
reusing them. These off-diagonal models abandon
the centralization-decentralization tradeoffs by allocating different decision rights to the center and the
business units. In a Replication model, local managers must accept enterprise-wide process standards,

December 2005
but they have the autonomy to manage customer
relationships locally. In a Coordination model, local
managers accept enterprise-wide data standards and
customer interfaces, but they have the autonomy to
develop products and processes to achieve local
business objectives. Companies should recognize
that each operating model creates opportunitiesbut
also creates limitations.
Making a Commitment
The operating model concept requires that management put a stake in the ground and declare which
business processes will distinguish a company from
its competitors. A poor choice of operating model
one that is not viable in a given marketwill have
dire consequences. But not choosing an operating
model is just as risky. Without a clear operating model, management careens from one market opportunity
to the next, not leveraging reusable capabilities.
In adopting an operating model a company benefits
from a paradox: standardization leads to flexibility.
By building a foundation of standardized technology, data and/or processes, our research shows a
company achieves more business agility and responds to new market opportunities faster than its
competitors. Admittedly, most companies will need
to regularly experiment with initiatives that do not
leverage their foundation. But an operating model
provides needed direction for building a reusable
foundation for business execution. IT becomes an
asset instead of a bottleneck.

Figure 1: Characteristics of Four Operating Models

Coordination

Business Process Integration

High

Unification

Shared customers, products or suppliers

Impact on other business unit transactions
Operationally unique business units or
functions
Autonomous business management
Business unit control over business process
design
Shared customer/supplier/product data
Consensus processes for designing IT
infrastructure services; IT application
decisions are made in business units

Diversification

Low

Few, if any, shared customers or suppliers

Independent transactions
Operationally unique business units
Autonomous business management
Business unit control over business process
design
Few data standards across business units
Most IT decisions made within business
units.

Replication

Low

Customers and suppliers may be local or global

Globally integrated business processes often with
support of enterprise systems
Business units with similar or overlapping operations
Centralized management often applying
functional/process/business unit matrices
High-level process owners design standardized
process
Centrally mandated databases
IT decisions made centrally

Few, if any, shared customers

Independent transactions aggregated at a high level
Operationally similar business units
Autonomous business unit leaders with limited
discretion over processes
Centralized (or federal) control over business process
design
Standardized data definitions but data locally owned
with some aggregation at corporate
Centrally mandated IT services

High

Business Process Standardization

About the MIT Sloan Center for Information Systems Research

MIT SLOAN CISR MISSION

CISR RESEARCH PATRONS

MIT CISR was founded in 1974 and has a strong track

record of practice-based research on the management of
information technology. MIT CISRs mission is to
perform practical empirical research on how firms
generate business value from IT. MIT CISR disseminates this research via electronic research briefings,
working papers, research workshops and executive
education. Our research portfolio includes but is not
limited to the following topics:

The Boston Consulting Group, Inc.

BT Group
DiamondCluster International, Inc.
Gartner
Hewlett-Packard Company
Microsoft Corporation
Tata Consultancy Services America

CISR SPONSORS
IT Governance
Enterprise Architecture
IT-Related Risk Management
IT Portfolios and IT Savvy
Operating Model
IT Management Oversight
Business Models
IT-Enabled Change
IT Innovation
Business Agility
The IT Engagement Models

In July of 2008, Jeanne W. Ross succeeded Peter Weill

as the director of CISR. Peter Weill became chairman
of CISR, with a focus on globalizing MIT CISR research and delivery. Drs. George Westerman, Stephanie
L. Woerner, and Anne Quaadgras are full time CISR
research scientists. MIT CISR is co-located with MIT
Sloans Center for Digital Business and Center for
Collective Intelligence to facilitate collaboration between
faculty and researchers.
MIT CISR is funded by Research Patrons and Sponsors
and we gratefully acknowledge the support and contributions of its current Research Patrons and Sponsors.

CONTACT INFORMATION
Center for Information Systems Research
MIT Sloan School of Management
5 Cambridge Center, NE25, 7th Floor
Cambridge, MA 02142
Telephone: 617-253-2348
Facsimile: 617-253-4424
Email: cisr@mit.edu
http://mitsloan.mit.edu/cisr

Mission and Contact Information as of August 1, 2009.

Aetna Inc.
Allstate Insurance Company
American Express Corporation
AstraZeneca Pharmaceuticals, LP
Biogen Idec
Campbell Soup Company
CareFirst Blue Cross Blue Shield
Care USA
Celanese
Chevron Corporation
Det Norske Veritas (Norway)
Direct Energy
eFunds Corporation
EMC Corporation
Guardian Life Insurance Company
of America
ING Groep N.V.
Intel Corporation
International Finance Corporation
Merrill Lynch & Co., Inc.
MetLife
Mohegan Sun
Motorola, Inc.
Nomura Research Institute, Ltd.
Pasco County, Florida
PepsiAmericas, Inc.
Pfizer, Inc.
PFPC, Inc.
Raytheon Company
State Street Corporation
TD Banknorth
Telenor ASA
Trinity Health
TRW Automotive, Inc.
United Nations DESA
US Federal Aviation Administration