ELEMENT 3: BUSINESS PROCESSES
ELEMENT 3: BUSINESS PROCESSES
Categories of Business Processes
Considerable controversy revolves around the number of processes appropriate to a given organiza- tion. The difficulty derives from the fact that processes are almost infinitely divisible; the activities involved in taking and fulfilling a customer order, for example, can be viewed as one process or hundreds. Process identification is key to making process definitions and determining their implica- tions. If the objective is incremental improvement, working with many narrowly defined processes is sufficient because the risk of failure is relatively low, particularly if those responsible for improving a process are also responsible for managing and executing it. But when the objective is radical process change, a process must be defined as broadly as possible.
Before we explain the major business process categories, the following definitions may be useful:
• A business process is a logical, related, sequential—connected—set of activities that takes an input from a supplier, adds value to it, and produces an output to a customer.
• A key business process is a process that usually involves more than one function within the organizational structure, and its operation has a significant impact on the way the organization functions.
• A subprocess is a portion of a major process that accomplishes a specific objective in support of that major process.
• Activities are work elements that go on within a process or subprocess. They may be performed by one person or a team of people.
• Tasks are individual elements and / or subsets of an activity. Normally, tasks relate to how an individual performs a specific assignment.
For purposes of understanding the business and documenting the business model, it is useful to organize the business processes into categories:
1. Strategic management processes: those processes that develop the value proposition of the enterprise and define the business objectives
2. Core business processes: those processes that develop, produce, sell, and distribute products and services (i.e., the value chain)
3. Resource management processes: those processes that support and provide appropriate re- sources to the value-creating processes of the enterprise
Most enterprises can define their business in terms of 10–15 key processes: one to three strategic management processes, 5–7 core business processes, and 3–5 resource management processes. Figure 7 is an illustrative example of process definitions in the industrial products industry.
Identifying and selecting processes for the business model is an important prerequisite to under- standing the enterprise and its competitive strengths and weaknesses. Without some focus on critical processes, an organization’s energies, resources, and time will not be focused appropriately. The appendix to this chapter provides a list of key generic business processes and their related subpro- cesses that should be useful as a guide in identifying and selecting processes in any organization.
Strategic Management Processes
Strategic management is the name given to the most important, difficult, and encompassing challenge that confronts any private or public organization. The conflict between the demands of the present and the requirements of the future lies at the heart of strategic management. Change is the central concern and focus of strategic management: change in the environment, change inside the enterprise, and change in how the enterprise links strategy and structure. Strategic management is the process of identifying opportunities to achieve tangible and sustainable success in the marketplace and un- derstanding the risks that threaten achievement of that success. Figure 8 shows one view of the major components of a strategic management process.
Information technology (IT) has introduced new challenges and opportunities for business. Busi- nesses are forced to adopt IT strategies that provide for connectivity to everyone in the business network—stakeholders, suppliers, customers, alliance partners, and others—and react strategically and operationally in real time. The external forces affecting business are changing so rapidly that organizational structures must be designed so they can respond quickly to changes in the business environment. In addition, IT investments must be leveraged by the adoption of open systems and standards that allow rapid changes in those systems that support the execution of key business pro- cesses.
In the ‘‘Enterprise Business Model’’ block in Figure 9:
• ‘‘Knowledge Networks’’ means capturing and managing knowledge as a strategic asset.
• ‘‘Process Excellence’’ means designing and managing processes to achieve competitive advan- tage.
• ‘‘Core Competencies’’ means focusing on those things that the enterprise does best and using alliance partners to supplement those skills.
In particular, strategy involves continuously reconceiving the business and the role that business can play in the marketplace. The new business model is a real-time structure that can change continually and adapt more quickly and better than the competition.
The traditional approach to strategy development relied upon a set of powerful analytic tools that allowed executives to make fact-based decisions about strategic alternatives. The goal of such analysis was to discuss and test alternative scenarios to find the most likely outcome and create a strategy based on it. This approach served companies well in relatively stable business environments; however, fact-based decisions in the rapidly changing New Economy will be largely replaced by imagination and vision.
Rapidly changing business environments with ever-increasing uncertainty require new approaches to strategy development and deployment. While traditional approaches are at best marginally helpful and at worst very dangerous, misjudging uncertainty can lead to strategies that do not identify the business opportunities and business risks. However, making systematically sound strategic decisions will continue to be important in the future. Even in the most uncertain environments, executives can generally identify a range of potential scenarios. The key will be to design business models that can
respond quickly as economic realities change. Understanding competitive environments, external forces, and the levels of uncertainty in the marketplace will lead to more informed and confident strategic decisions. The design and development of a real-time business model can provide an in- valuable tool to support the strategic management process.
Core Business Processes
Core business processes develop, produce, sell, and distribute an entity’s products and services; they are the entity’s value chain. These processes do not follow traditional organizational or functional lines, but reflect the grouping of related business activities.
The management of core business processes is about execution of the enterprise’s value propo- sition. Significant changes are taking place in the New Economy that will have profound impacts on core business processes and the way they are managed in the future.
IT is driving the transformation of core business processes by creating a new competitive dynamic that rewards institutional agility. Business processes will no longer be viewed within the boundaries of the organization. Multiple partners will be involved in key activities of many organizations’ key business processes.
Historically, the fundamental disposition of core business processes is to prepackage and shrink- wrap as much product as possible, take advantage of economies of scale, and then persuasively offer these products. Service is viewed as a way of enhancing the attractiveness of products. The New Economy enterprise, on the other hand, will design core processes that concentrate on assembling modular elements into a customized response to a specific customer’s specific request.
The evolution of extranets and content standards alters the bases of competitive advantage by increasing the quality of information and its access. These technologies diminish the value of estab- lished business processes and relationships because most buyers can easily find suppliers— worldwide—who offer the best product. Higher-quality information will allow companies to improve business processes by supplementing internal capabilities with the needed skills and technologies from others—worldwide.
The opportunities to radically change traditional business processes and take advantage of network externalities, multiple strategic and alliance partners, and the richness and reach of information cannot be overstated. Using business process excellence to obtain competitive advantage will be more im- portant than ever before. Deconstructing value / supply chains for the purpose of exploiting market opportunities and reducing transaction costs will be the norm for most successful businesses in the New Economy.
The ultimate challenge posed by deconstructing value chains will be to the traditional hierarchical organization, with its static business processes. Core business process improvement will be both challenging and exciting as opportunities are unleashed to create value in new ways. Outsourcing will flourish as organizations design core processes that emphasize their strengths and supplement them with the outstanding capabilities of other firms that can add significant value to their products and services.
Resource Management Processes
Resource management processes are the processes by which organizations allocate resources and monitor their use. They provide appropriate resources to support the other business processes. Re- source management processes can be placed into three basic categories: information, people, and capital. They are focused on serving the needs of internal customers, principally those in the enter- prise’s core business processes who are externally focused on serving customers outside the orga- nization. Without appropriate resources—information, people, and capital—the core processes cannot offer the value customers need and will cease to provide an effective source of competitive advantage.
Process Analysis Components
Figure 10 displays a framework for process analysis. The process analysis components in this frame- work are discussed in this section.
Process Objectives
Processes are established to serve specific customer needs. The customers may be internal, such as another process, or external to the enterprise. The process objectives define what value will be supplied to the customer. One can look at them as the whole purpose for which the organization has put together this set of resources and activities. Process objectives need to be specific, measurable, attainable, and realistic and to have a sense of time. Business process objectives may differ signifi- cantly between enterprises within an industry or industry segment, being shaped by the organization’s strategic objectives and related critical success factors. For example, the business objectives for the ‘‘materials procurement process’’ in a consumer products company might be as follows:
• Effectively manage supplier relationships to ensure the highest quality materials at the lowest cost.
• Provide accurate, real-time production information to suppliers to minimize inventory levels.
Inputs
The inputs to a process represent the elements, materials, resources, or information needed to com- plete the activities in the process. Examples of inputs for the aforementioned materials procurement process could be the following:
• Material requirements, supply requisitions, negotiated prices;
• Material specifications, bills of material, capital authorizations
• Supply base, production reports, lead times
Activities
Almost everything that we do or are involved in is a process. Some processes are highly complex, involving thousands of people, and some are very simple, requiring only seconds of time. Therefore, a process hierarchy is necessary to understand processes and their key activities. From a macro view, processes are the key activities required to manage and / or run an organization. Any key business process—a strategic management process, a core business process, or a resource management pro- cess—can be subdivided into subprocesses that are logically related and contribute to the objectives of the key business process. For example, Figure 11 provides an example of the subprocess com- ponents of a new product planning process for a consulting firm.
Every key business process or subprocess is made up of a number of activities. As the name implies, activities are the actions required to produce a particular result. Furthermore, each activity is made up of a number of tasks that are performed by an individual or by small teams. Taken together, tasks form a microview of the process.
Outputs
Outputs represent the end result of a process; they are the products, deliverables, information, or resources that are produced.
Supporting Systems
Supporting systems include the hardware, software, information, and communications capabilities that the organization requires to fulfill its mission and achieve its business objectives.
Risks That Threaten Objectives
Business risk is the threat that an event or action will adversely affect an entity’s ability to achieve its business objectives and execute its strategies successfully. A business risk is always related to one or more business objectives and can be described as the antithesis of those objectives.
Business risks can be categorized as:
• External: strategic risks that threaten an enterprise’s marketplace objectives and are mitigated by an effective strategic management process
• Internal: process risks that threaten an enterprise’s ability to execute its strategy effectively and are mitigated by effective process controls
Figure 12 shows examples of generic risks that could affect the achievement of core process objectives. Similarly, Figure 13 provides examples of generic risks that could affect the achievement of resource management process objectives.
Controls Linked to Risks
A new business risk control paradigm is changing the way organizations manage their business risks. Over the years, businesses have used a variety of practices to control risk. In many organizations, however, control is a misunderstood and misapplied concept. Control all too often means inflexible and unimaginative budgets, seemingly endless management reporting requirements, and an overbur- dening and often irrelevant stream of information up and down the corporate hierarchy. The new control paradigm is illustrated in Figure 14.
Fast-moving markets, flattening corporate hierarchies, and the need for an expanding scope of authority at the local level are making salient the costs of misunderstanding and misapplying control. In response, managers are rethinking fundamental definitions of control and how business risks should be identified and mitigated.
Empowerment will increasingly blur lines of authority, and increasingly flat organizations will provide fewer opportunities for segregation of duties. Traditional notions of control (such as segre- gation of duties and functions, proper authorization for expenditures, controlled access to assets, and proper recording of transactions) that define the procedural checks and balances that safeguard assets
and assure integrity of data must be recognized as only one aspect of the contemporary organization’s control structure.
Other components of the control structure include diagnostic control systems, belief systems, boundary systems, and incentives. Diagnostic control systems, for example, recognize that empow- erment requires a change in what is controlled. Consistently, empowered individuals are being asked to take risks and there must be commensurate rewards for the risk taking and achievement of superior performance. Such rewards, which can be either monetary or nonmonetary, are made on the basis of tangible performance consistent with the organization’s mission.
The evolving organizational controls structure consists of strategic controls, management controls, and business process controls. A brief description of these elements follows:
• Strategic controls are designed to assess continuously the effect of changes in environment risks on the business, formulate business risk control strategies, and align the organization with those strategies.
• Management controls drive business risk assessment and control throughout the organization.
• Process controls are designed to assess continuously the risk that business processes do not achieve what they were designed to achieve. Embedded in process risk is information processing / technology risk, which arises when the information technologies used in the process are not operating as intended or are compromising the availability, security, integrity, relevance, and credibility of information produced.
Figure 15 provides examples of these types of controls.
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