Organizations struggle to know how to successfully execute their business models and value propositions. They often don't know what to do after they've successfully designed, tested, and validated their business models and value propositions.
In a recent post, Great Execution of Bad Ideas Kills Businesses, we discussed the difference between the "search" for the right business model and the "execution" of it. The great body of work produced by the Customer Development and Lean Startup community helps companies to navigate the iterative "search" process. In this post we introduce Jay Galbraith's Star Model as a valuable tool for "executing" your business models and value propositions.
The Star Model
Jay Galbraith's Star Model helps companies holistically create the organization necessary to sustain a company's business models and value propositions over time. It acknowledges the necessity of the organization to adapt over time in response to changes in strategy, in market forces, or in the rest of the external business environment. Thus it treats the formal organization as an ongoing design challenge. We wrote about the model specifically in Business Model Generation (pg. 270-271) and we've found it works particularly well for those in charge of designing and implementing adequate organizational structures.
The Star Model consists of five areas that should be connected and aligned to successfully shape the decisions and behaviors of your organization: Strategy, Structure, Processes, Rewards, and People. The business model is placed in the middle of the star as a "center of gravity" holding the five areas together. Decisions about the business model impact implementation across these five areas.
An organization's strategy is defined by its vision, mission, and values as well as its goals and objectives. Strategy sets out the direction of the organization. It comes first in the Star Model because it establishes useful criteria for making trade-offs and choosing among alternative options in the remaining four elements or organizational design.
Strategy drives the business model. If you want to grow by 20% in new market segments then it should be reflected in your business model in terms of new Customer Segments, Channels, or Key Activities.
An organization's structure determines the type and number of job specialties needed as well as decides the number of departments and people in each department. It dictates the placement and movement of power and authority, and is the basis for forming departments. Organizational structures can be highly centralized or decentralized.
The characteristics of the business model determine the optimal organizational structure for its execution. Ask yourself, "What type of human capital will the model require? What activities will those people need to perform? How should the structure be formed to accommodate those needs?"
Organizational processes are defined by the flow of information and decisions. Those flows can happen vertically or horizontally. Vertical processes deal with allocating funds and talent via budgeting and planning. Horizontal processes are designed around workflow and are carried out through lateral relationships between departments.
Each business model demands different processes. Lean, highly automated processes should be inherent to a low-cost business model. Rigorous quality control processes might be required if your business model involves selling high value machines.
Reward systems align the goals of employees with the goals of the organization. The system must use appropriate incentives to motivate workers to do the right things to fulfill the strategic direction of the organization. The reward system must be congruent with the other design areas to influence strategic direction.
Different business models require different reward systems. If your business model depends heavily on customer satisfaction then your reward system should reflect that commitment. If your model requires a direct sales force to acquire new customers then your reward system should be highly performance oriented.
An organization's human resource policies govern recruitment, promotion, rotation, training and development. Those policies are designed to produce the talent and build the capabilities necessary to execute the strategic direction of the organization. They must be in harmony with the other design areas.
Certain business models call for people with particular skills and mindsets. Some business models rely on entrepreneurial mechanisms for regularly bringing new products and services to market. In such cases human resource policies should be designed to attract and retain proactive, dependable, free-thinkers.
When to Start Designing the Organization
In the Customer Development process, Steve Blank defines a startup as "a temporary organization designed to 'search' for a repeatable and scalable business model". In the search phase the organization is intentionally light-weight and loosely organized to remain flexible while it searches for the appropriate business model. This allows for faster decision making in response to market feedback. Steve further defines a company as "a permanent organization designed to 'execute' a repeatable and scalable business model." You do not begin to design the formal organization until the execution phase, once you have identified a repeatable, scaleable business model. Only then is it appropriate to design a formal organization in an attempt to scale up customer acquisition, increase revenues, and drive efficiencies.
The formal organization must continue to be re-examined over time. It must remain malleable to respond to changes in strategy, in market forces, and in the rest of the external business environment.