What is an Operating Model?

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Unpacking the operating model definition

A company can use an operating model to coordinate people, infrastructure, tools, processes, and other operational factors to effectively produce products and services. This allows it to navigate the market, produce surplus value, deal with business challenges , and grow its operations.  

At its core, a company's operating model represents how business components work together in line with the system’s guiding principles. At the highest level, operating models describe how a business functions. 

Two analogies can help explain organizational operating models and their multiple functions. The first is to think of operating models like GPS devices. They’re mechanisms that help you navigate the business terrain and achieve strategic and operational objectives. Once you’ve set your destination, your operating model helps you reach it.  

The other way to think about a business operating model is in terms of the human nervous system. The operating model connects the business together to create something greater than its individual parts. It’s this interplay of different business components that creates value and sustains operations. 

Operating model vs. business model

Although they have some overlaps, an operating model and a business model have two distinct meanings. 

Your business model describes how your business functions in terms of commercial activities. This includes things such as your go-to-market strategy, customer segments, price points, product lines, delivery mechanisms, customer acquisition channels, as well as any other factors regarding your business’s commercial strategy.  

In contrast, your operating model is about fulfilling commercial activities, highlighting the operations sustaining your business. It covers your operational design and day-to-day activities (e.g., execution of work, people management, process management). 

Operating models and strategy execution

Operating models contribute to different aspects of your business, the most prominent being strategy execution. High-level considerations such as mission, vision, and strategy — combined with your operating and business models —come together to inform strategy execution. Strategy execution is the discipline of how you go about achieving your strategy. 

Adding to the GPS and nervous system analogies, your operating model can also be thought of as an engine that drives strategy execution. While laying out the right strategy and commercial considerations is critical, efficiently generating momentum toward your destination is just as important. As such, optimizing your organizational operating model is crucial to effective strategy execution and goal attainment. 

Learn more about the strategy execution gap

close strategy execution gap.png

The components of a business operating model

As we’ll dive into shortly, each business has a unique operating model based on circumstances such as industry, size, and business maturity. There are, however, certain components that all company operating models have in common. These include: 

Guiding principles  

Organizational structure , processes , technology  .

  • People 

At the highest level, an operating model has a set of guiding principles that inform its purpose. These also explain how different components work at an individual level and how they interact to create the whole system.  

Your business operating model’s guiding principles are directly linked to your business’s strategic objectives. For instance, if your company’s goal is to accelerate growth, the guiding principles of your operating model will emphasize rapid production and scalability, as opposed to quality control, for instance.  

Another aspect of guiding principles is governance. This covers topics such as how data and information are leveraged and how decisions are made throughout the organization. For instance, decisions can be made locally, closer to the points of execution, or through the strategic chain of command. Procedures and policies affecting components such as processes and culture are also a part of governance.

Your operating model also covers the layout, setup, and structure of your organization. At the basic level, this includes how your people collaborate across teams, departments, networks, and divisions. 

This can also extend beyond the organization and into your ecosystem, looking at how suppliers and vendors interact with your business’s operations. Your organizational structure also informs the chain of command and how decisions are made, as mentioned earlier. This can also cover collaborations with freelancers and gig workers. 

Your organization’s processes encompass how work is conducted, and draws on other components such as people, technology, and infrastructure. Processes include things such as: 

  • How inputs are transformed into outputs. For instance, how a factory worker uses their expertise to put together parts of a product 
  • The fulfillment of goods and services to customers 
  • Department-specific activities such as marketing campaigns and product launches 
  • The governance of processes through methodologies and playbooks such as agile and design thinking 

The technology you use is also a key part of your business’s operating model. This includes all layers of technology, including: 

  • Machinery: The machines used in the production process like tractors, assembly arms, and other industry-specific machinery 
  • Physical infrastructure: The infrastructure that supports the production and delivery of services (e.g., warehouses, logistic networks, office space) 
  • IT infrastructure: The IT systems, networks, and computers that support the digital processes of your business 
  • Software: The software tools you use to run your business, including software that aids employee collaboration, human resources, logistics, supply chain, and inventory, among others 
  • Data: The data that your company produces or accesses for decision-making and optimization 

People  

How your employees execute work is the people component of your operating model. This covers: 

  • Talent acquisition and retention: Finding and keeping people with the right skills and expertise to do the work 
  • Responsibilities: Deciding which individuals and teams are responsible for which activities and outcomes 
  • Leadership and management: Finding and nurturing leaders to oversee operations, solve problems, and maximize outcomes such as productivity and engagement 

It’s important to point out that people and labor are greatly influenced by technology. Software and machinery have already replaced a significant amount of human work, and advances in co-bots and autonomous systems will perpetuate this trend. 

Culture  

Your company culture encompasses shared beliefs, values, behaviors, identity, modes of working, implicit assumptions, and all the other factors influencing how, what, and why work is conducted. Within your company operating model, culture plays an important role in influencing how your organization functions. 

For example, by declaring and adhering to customer-centric values, your organization’s culture can be optimized to prioritize customer success. This may lead to behaviors such as spending extra time on customer support or having a more enthusiastic approach to solving customers’ problems.

How are company operating models designed?

Alongside business models, an operating model is one of the first things a company must consider. As mentioned earlier, the operating model definition is unique to a specific company, despite their common features. It’s also important to note that operating models are not static. They change based on: 

Industry: Operating models will vary across industries and company types. At the highest level, a manufacturing company will have a fundamentally different operating model compared to a software provider. The former must deal with operating factors relating to inventory and raw materials, whereas the latter is mostly digital. 

Maturity: A company’s strategic objectives, and thus its operating model, will vary depending on the company’s maturity. A mature company may focus on greater operational efficiency, while a scale-up may focus on growth. 

Size: Similar to the company stage, the size of the organization will affect factors such as structure and management. 

Purpose: Each business operating model is optimized for different outcomes. Even among its competitors, a company may change its operating model in order to gain a competitive advantage in a specific outcome. For instance, if there is an opportunity to compete on price by optimizing for economies of scale. 

When thinking about building or updating an operating model, there are a few things you can look at: 

  • Organization maps: Visually depicting how the organization is laid out in terms of teams, departments, divisions, external ecosystems, and all relevant interdependencies  
  • Blueprints: Visualizing how a specific process or function should work 
  • People models: Mapping out the skills, knowledge, bandwidth, and capabilities of individuals and teams 
  • Scorecards: Leveraging systems for performance management and better optimization
  • Decision grids: Creating frameworks that govern how decisions are made across the organization

Organizational operating model examples

With operating models being unique to each company, it’s difficult to describe the ideal operating model. Naturally, the ideal business operating model will differ depending on the perspective and needs of a particular company. But to provide a concrete example, a generalized, conventional operating model will have the following qualities: 

  • A top-down chain of command: Decision-making and approval will be run up and down the organizational hierarchy  
  • Multiple initiatives and priorities: A company using a standard operating model may have multiple strategic objectives. These may not align across the organization and may require separate strategies to be effective  
  • Data and information silos: Data and information are usually confined to individuals, software, and departments 
  • Quarterly and annual reviews: Performance reviews typically happen on a quarterly and annual basis  

In contrast, a Modern Operating Model would have different qualities:  

  • Data-driven focus and accessibility: More focus placed on transparency and data use for effective decision-making and optimization 
  • Decentralized chain of command: Decisions are made closer to the points of execution by the people responsible for doing the work 
  • Alignment through objectives and key results (OKRs): The organization is aligned both vertically and horizontally to achieve critical goals 
  • Continuous progress reviews: Progress reviews happen on an ongoing basis in order to problem solve, gain validation of working in the right direction, and continuously optimize. 

Learn more about the Modern Operating Model

modern operating model diagram

The future of operating models

The world continues to change at an accelerated rate. Business challenges such as effective hybrid work , the fourth industrial revolution, and changing attitudes mean conventional operating models need to be reevaluated. On top of these changes, the strategy execution gap persists. Considering these challenges, a new, Modern Operating Model is taking shape to help companies bridge the strategy execution gap and navigate a fast-changing world.  

Quantive is your bridge between strategy and execution. Founded on the objectives and key results (OKR) methodology, our Strategy Execution solution is where businesses plan successful strategy, focus and align teams to it, and stay on the leading edge of progress.

As your company looks to achieve the best possible results, you need a modern approach to run your business and change your business. The Modern Operating Model brings strategy, teams, and data together to help make decisions faster, optimize operations, and drive better business outcomes.

Whether you’re a large enterprise facing competitive disruption or a small business wanting to lead the innovative charge using the right operating model, Quantive is the right OKR software company to help get you where you want to go.

Ready to achieve the best possible? Start your free trial today.

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Modern operating model manifesto, strategy execution in 4 steps: keys to successful strategy, what is the modern operating model, why use the modern operating model, subscribe for our newsletter.

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A how-to guide for building an effective operating model

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If you’re running a business, you know that there are plenty of different components that make your business work. 

Of course, every business wants to bring value to its customers. In order to deliver that value to your customers, your company needs a strong operating model. An operating model can help you hit your organizational performance goals. 

Especially in today’s climate, everything changes — and changes fast. Many companies are pivoting their direction, veering the steering wheel left to right to avoid roadblocks. Maintaining profitability — while caring for your people and your customers — is radically important. In times when margins for error may be slimmer than before, an agile operating model is a must. 

In order to adapt to the changing economic environment, an operating model can help your organization perform better. Let’s dig into what defines an operating model. We’ll also talk about how to build an effective operating model that’ll help keep your company one step ahead.  

What is an operating model? 

First, let’s define what we mean by operating model. 

What is an operating model?

An operating model is a visual representation of the business model. It’s the way an organization carries out its business model to deliver value to its customers. 

It’s estimated that nearly 70% of well-formulated strategies failed due to poor execution . Beyond that, 61% of executives reported not being prepared for the challenges they faced once put into leadership roles. The result? An estimated 50%–60% of executives fail within the first 18 months of being promoted or hired. It’s a radical shift in responsibilities to become a manager . In those first few months, it’s critical that leaders get the support they need to lead teams well . 

Despite strong business models in your organization, it’s the operating model that brings your business (and profits) to life. 

4 types of operating models 

Let’s dig into the four different types of operating models — and how they may interact with one another. While it might sound like a lot of corporate jargon , there are some key differentiators to what makes up each type of model. 

  • Coordination operating model. Think of coordination as shared access to data. This type of operating model calls for high levels of integration but low standardization. This essentially means that many key parts of the business are integrated with one another. However, each business unit or team has its own way of doing things. 
  • Unification operating model. This is probably the most hands-on type of operating model. The unification operating model runs on a theory that when things are tightly integrated and tightly standardized, companies maximize efficiency. The risk here is that there’s little autonomy or wiggle room for how different business units operate. 
  • Diversification operating model. This type of operating model applies to companies that have very few shared customers, suppliers, or even ways of doing business. Essentially, this model helps companies diversify their products and services to different customers to avoid a central hub to limit control over different business units. 
  • Replication operating model. Another way to think about this operating model is autonomy but with some standardization. This type of operating model makes sure different business units have autonomy over their operations. But first, there’s a standardization of how things are done. 

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How do you build an effective operating model? 

If we really get down to it, an operating model is how your organization runs. If we think about your business model as the strategy, your operating model is the execution. 

So, when it comes to building out an effective operating model, there are a few things to keep in mind. Follow these seven steps to help build an effective operating model for your company. 

1. Reflect on your company culture 

While it might not be the first thing that comes to mind when you think about execution, your company culture can be a guidepost for how you operate. 

How do your key stakeholders interact with one another? What sort of partnerships or connections do you hope to foster within your organization? As a leader, what’s your decision-making philosophy? What type of customer experience do you want to create? 

Take a minute to reflect on your company culture. This might help guide some decisions you make about your operating model. At its heart, your operating model is about people. It’s about helping your people run efficiently to optimize the business process. 

And when you put people at the center of your organization, oftentimes, your profits reflect it. 

2. Identify (or create) your value chain 

Now, let’s get into your strategic plan . As a business leader, you’ve likely put together a roadmap for your value proposition. You’ve probably put together the business model that’ll help guide your target operating model. 

To make sure you’re delivering value to your customers, you need to understand what that value is. Work with your corporate strategy team to ensure you’re measuring the right values, too. Together, you can track the right KPIs, business metrics , and other key components of your business methodology. 

operating-model-woman-leader-at-computer-desk

3. Align with your business strategy

Let’s say that you run a supply chain business that relies on automation to help move your product through different parts of the business. 

Your business hinges on cross-collaboration . You need defined business processes to make sure your products can move from one step to the next. In this type of business, teams working in silos simply wouldn’t work. You know that your strategy demands open access to information and coordination. 

Think about the core of your business strategy. What does it take to get your product delivered to customers? What sort of product lines will your product move through before it hits the market? What about your business strategy needs to align with your operating model?

4. Invest in performance management solutions 

Performance management matters more than you think. Performance management is a set of processes and systems to help employee development . 

Oftentimes, these systems, processes, and lines of communication help focus on strategy. At its heart, performance management is about helping employees reach their peak performance . 

Especially now, it’s important that your employees see growth opportunities. Your operating model is dependent on the people who run it, which means employee retention needs to be top of mind. 

In what ways are you encouraging career development within your company? How are you attracting and retaining top talent ? How are you investing in your employees to reach their full potential? How does talent management weave into your performance management strategy? 

With BetterUp, you can provide individualized support for your employees. If you want to tap into the potential of your workforce, consider how virtual coaching can help. 

5. Think about how your digital transformation strategy fits into the picture 

People help your operating model come to life. But the right technology, especially today, can drastically improve how your people work. 

If you haven’t already, make sure you take a hard look at your digital transformation strategy .

What tools will help your employees do their jobs well? For example, what technology can help streamline workflows? In this future state of work, how do you see technology working within your ecosystem? What initiatives or programs will need new tools or technology to successfully launch? 

6. Develop a strong leadership team 

At the helm of every good operating model is a strong leadership team. But contrary to popular belief, leaders aren’t born leaders . It’s important to invest in your leadership development to make sure you have the right folks to execute your operating model. 

A good starting point is investing in virtual coaching. After four months of leadership training with BetterUp, Members report lower stress, higher purpose, and higher resilience . Employees who are thriving :

  • Lead teams that are 31% more productive
  • Have direct reports who are 78% less likely to leave voluntarily
  • Recover from setbacks 1.2x stronger
  • Are less likely to experience mental illness
  • Are 22% more satisfied with their jobs

What’s the difference between an operating model and a business model? 

This is a good question. The two models work together in a symbiotic relationship of sorts. 

But it’s important to note that a business model and operating model are not the same things. 

A business model is how the company will offer its value proposition to the market. Strategic business model planning outlines products, service management, customer base, and key stakeholders. 

Think of the operating model as how the company will carry out its business model. It’s the execution arm—the pathway the company will take in order to deliver its value proposition. 

operating-model-man-smiling-standing-up-in-conference-room

Build a strong operating model with a mentally fit workforce 

In a world that’s constantly changing , it’s important to make sure your people are at the center of everything you do. 

With the rise of hybrid and remote work , people are working from all geographies. It’s imperative that companies have that competitive advantage to keep ahead of the competition. But it starts with having the strategic foresight and future-mindedness to execute with agility. 

If you’re in an operating model redesign or starting from scratch, BetterUp can help. With access to virtual coaching, you’re investing in your employees’ mental fitness .

We know things are going to continue to change. There’s uncertainty looming ahead, and strategy needs to stay flexible to be able to adapt to what the world has in store for companies. After all, companies can only focus on their own locus of control . It’s important to be pragmatic and optimistic about the future. 

But with a mentally fit workforce, your company can feel prepared for what the future of work holds. In fact, our research found that employees with the best mental health had 56% fewer missed days for health reasons , were 5X more likely to be rated a top performer, and had 25% higher productivity and 34% higher engagement than those struggling with mental health.

Being mentally fit translates into a more resilient workforce. This means that resilient workers are better poised to have more flexible thinking , contribute to more agile teams, and are 20% more innovative. 

Together, we can help you build a resilient, agile workforce prepared for the future. 

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Madeline Miles

Madeline is a writer, communicator, and storyteller who is passionate about using words to help drive positive change. She holds a bachelor's in English Creative Writing and Communication Studies and lives in Denver, Colorado. In her spare time, she's usually somewhere outside (preferably in the mountains) — and enjoys poetry and fiction.

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Why Every Company Needs an Operating Model [+ Steps to Build One]

Martina Bretous

Published: October 05, 2021

If you are running a business, odds are, you’ve already figured out your business model.

Business owner creates operating model to visualize strategic and operational elements of company

It’s usually the first thing entrepreneurs build out, as it’s key to figuring out the value you’re bringing to the market and consumers.

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But what about your people, processes, systems, and technology? Those are all key components of your business that should be outlined in your operational model.

Let’s dive into what an operational model is and how it compares to a business model, plus cover the steps to create one today.

What is an operating model?

An operating model is a visual representation of how a company runs. It includes everything from how the company sources its products to how it structures its business areas and departments. An operating model serves as a blueprint for executing your strategy.

Many people confuse business models with operating models. However, they outline different things and serve different purposes.

A business model outlines how a company captures and offers value through its products/services, value proposition, customer segments, key partners, etc. An operating model, on the other hand, lays out how a company will run in order to deliver that value.

So, in simple terms, a business model looks at the what . An operating model focuses on the how.

Let’s take the example of a fictional lifestyle business called EarthBound. Their business model will describe their sustainable and eco-friendly approach as their value proposition, outline their various product lines, lay out their customer channels through brick-and-mortar and ecommerce stores.

Their operating model will focus on how they source their products, the roles they need within the company, the systems they use in each business area, their data management plan, and more.

Unsure why you should design an operating model? Here are the benefits:

  • It helps you identify the systems and structure necessary to serve your customers in a way that’s in line with your larger strategy.
  • It’s a blueprint for how resources are organized and operated so, that serves as a baseline from which to scale your business.

Operating Model Template

When you build out your operating model, you focus on three key elements: process, people, and technology.

There are two approaches you can take: role-based or process-based.

When you take the role approach, you design your operating model based on hierarchy and the roles within your company. With a process approach, you focus instead on the journey to deliver value to your consumers.

The template you follow will depend on what makes the most sense for your business based on strategy. For instance, say you’re reviewing your operating model because you’re considering restructuring or reallocation of resources. In this case, a process-based approach may work best.

What You Need To Build Your Operating Model Design

You have to start by asking yourself: "How do we manage our resources to effectively run our business and deliver our services as intended while meeting our goals?"

As you start to think about that, focus on each area outline here.

1. Strategy

To build your operating model, you first need to be clear on your strategy.

This is because your strategy and core priorities will inform your operating model. Once you define it, the next step is creating a set of design principles.

Bain & Company , a global management consulting firm, suggests drafting a list of around seven statements that outline what your company must do to execute your strategy. This will serve as an anchor as you build out your model.

Anyone on your leadership team should be able to state these concisely and clearly using simple language. Here are a few examples:

  • Standardize the customer experience across all regions.
  • Reduce siloes and align the organization on key company priorities.
  • Transition to digital-first approach.

2. Systems and processes.

For any company to run smoothly, they need systems and processes.

When creating or reviewing an operating model, you need to fully understand the inner workings of every business area.

What business systems are in place in X department? What hardware and software do they rely on?

As you think about these questions, make sure you consider both internal and external tools that your organization relies on.

This means knowing what every department needs to succeed in its roles. For instance, EarthBound’s finance department handles activities like invoicing, accounting, payroll, and billing. Going deeper, this means they may use software like Quickbooks .

The marketing team is likely responsible for lead generation and brand awareness through content, social media, paid advertisement, and more. As a result, they rely on tools like Casted to achieve their goals.

Once you know the systems and processes, you can figure out how it fits into your strategy and what changes can or should be made.

3. Organizational Structure

Over the years, new methodologies have been introduced that invite business leaders to revisit their organizational structure and make changes to their operational model.

One big shift in recent years has been how companies tackle projects. In the past, companies followed the waterfall methodology, which organized projects in linear, sequential phases. Today, many companies prefer the agile methodology, which is iterative and offers more flexibility.

Each framework is unique and comes with its own advantages and limitations. As such, it’s important for a business to know what direction they want to head in as they develop their operational model.

4. Talent Management

You can’t have a successful company without talent.

As you develop your operating model, one important question to answer is, " What do your teams look like? " and " What does success look like in every role?"

In this phase, you’ll want to understand the key roles and responsibilities needed to run the business and how those roles will evolve over X period of time.

Furthermore, you should also have a clear culture code that outlines the norms and behaviors you expect from your team and the values you celebrate.

These elements seep into other areas of your business and as a result, are incredibly important when working on your model.

5. Technology

As we’ve seen in recent months, the world is constantly changing.

More teams are remote than ever before and companies are investing in virtual tools like video conferencing and messaging. With this shift comes a need to have the technology to support growing global teams.

Beyond that, there is also the business technology needed to keep everyone in sync. Too often, companies suffer from siloes and have difficulty creating cross-functional teams. By understanding how you envision your team operating, you can seek out software that meets those needs.

Building your operating model is essential in maintaining the health of your company. Whether you’re just now creating one or revisiting an old one, doing so will help you better understand how to execute your strategy.

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business operating model meaning

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

business operating model meaning

Investopedia / Laura Porter

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

  • A business model is a company's core strategy for profitably doing business.
  • Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
  • There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
  • The two levers of a business model are pricing and costs.
  • When evaluating a business model as an investor, consider whether the product being offered matches a true need in the market.

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

  • Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
  • Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
  • Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
  • Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
  • Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
  • Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
  • Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

  • Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
  • Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
  • More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Annual Report 2023 ."

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business operating model meaning

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What is an operating model?

Andrew Campbell

Business language is full of jargon.   Even worse, much of the jargon means different things to different people.    And the place where these problems loom largest is around strategy and how it should be executed.

business operating model meaning

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The word strategy itself has many meanings.   The phrase strategic plan has even more interpretations.   Then there are words like goals, objectives, scorecards and targets that are used in many different ways.   The phrase “business model” has resonance, but no two managers or consultants use the same definition.   The phrases “operating model” and “target operating model” are no different.

So lets to start with a definition.

 “An operating model is a visualisation (i.e. model or collection of models, maps, tables and charts) that explains how the organisation operates so as to deliver value to its customers or beneficiaries.”

In its simplest form, an operating model is a value delivery chain: a sequence of steps that describe the main work of the organisation.  Lets take this article as an example.  You, the reader, are the beneficiary to whom this article is intended to deliver value.  If you are reading this article through the PEX website or newsletter the value chain is shown in figure 1

business operating model meaning

Of course, as the author of this article, I am directly involved only in the steps coloured in grey, which includes a part role in step 4 (editing) and in step 7 (social media marketing).  The same is true for other organisations involved in this chain: PEX engages in part of the chain, and social media sites in another part.

So the operating model of an organisation covers those parts of the value delivery chain that the organisation engages in as well as how the organisation interacts with the other participants.

The phrase “value delivery chain” comes from the strategy guru Michael Porter, and figure 2 reproduces his visual representation of the concept [i] .  As you can see, he focuses not just on the steps in the production process that convert “inputs” into “outputs” for “customers”, but also on supporting functions and activities such as financial management, information technology and human resources. Any organisation of more than a handful of people is likely to have specialists focusing on these supporting functions in addition to the operating people who are creating and delivering the value. The distinguishing feature of these supporting functions is that they support all of the delivery functions rather than being one of the steps in the deliver chain.

fig 2 512

So building on Porter’s thoughts, a full operating model will address all the work that needs to be done: the support functions as well as the value chain steps.   But a full operating model will do more than lay out the work to be done.  It will address:

  • Organisation model: how the activities in the value chain and the support functions link together into an organisation structure.
  • Cross-structure governance: how processes and activities that cut across the structure of the organisation are managed and governed (particularly information links)
  • Decision rights: how the most important decisions in the organisation are taken
  • Management rhythm: what meetings and with what frequency are used to set objectives, make plans and manage performance
  • People model: the types of people that the organisation wants to attract, how these people will be paid and incentivised, what they will be held accountable for and the values that should guide their behaviour.
  • Business partners: which organisations are partners rather than transactional suppliers and what sort of partnership relationship is required with each.
  • Location footprint: where the work and assets are located and why

An operating model converts all these topics into models, maps and charts that help communicate how the organisation works:

  • a map of the value delivery chains, showing the organisation’s involvement in each step – most organisations have more than one value delivery chain
  • an organisation chart in the form of an organisation model
  • a table laying out the type of people, incentives, accountabilities and culture
  • a table showing the cut-across processes and information needs and who “owns” these processes
  • a grid of the major decisions and the role of each senior manager in the structure with regard to each decision
  • a matrix explaining what is insourced and outsourced and which external suppliers are business partners
  • a map of the locations explaining the role of and assets at each location
  • a timetable showing the rhythm of management meetings used to run the organisation

I use the word POLIST to help me remember the different aspects of an operating model that need to be addressed.  “P” for the process steps that make up the value delivery chains.   “O” for the organisation model that is needed to connect the processes and the support functions, for the people model and for the decision grid laying out how major decisions get made. “L” for locations and the assets that exist at these locations. “I” for information and other cross-organisation or cross-location links.  “S” for suppliers and business partners.  “T” for a timetable showing the rhythm of management meetings used to run the organisation.

In plain English, an operating model should display the work that needs to be done in the organisation (P), the type of people and culture needed to do this work, how these people are connected together in an organisation structure, how important decisions are made (O), where the people and assets are located (L), how the people work together across the structure and locations (I), what other organisations are needed to support the work (S) and how the people are managed through regular planning, budgeting and performance review meetings (T).

Figure 3 – The Operating Model Canvas – is a single framework for displaying all of these different parts of an operating model.    The Canvas has limited capacity; so only the highest-level thoughts can be included.   For more detail, separate charts and models are needed for each section of the Canvas.  Figure 4 is an example of some of the high-level post-it-notes that you might place on the Canvas if you were summarizing the operating model of McKinsey & Co the global strategy consulting firm.

Figure 3 – The Operating Model Canvas

fig 3 512

Figure 4 – Operating Model Canvas for McKinsey

Fig 4 512

Source: Authors experience

Andrew Campbell is a Director of Ashridge Business School and runs a 3-day executive course titled Designing Operating Models www.ashridge.org.uk/dom .   Andrew has written more than ten books on strategy and organisation.  He blogs on operating models at www.ashridgeonoperatingmodels.com

[i] Porter, M.E. (1985) Competitive Advantage , Free Press, New York, 1985.

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Operating Models

business operating model meaning

We help for-purpose organisations with strategies for financial strength and better outcomes.

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An operating model is what it says on the tin – it’s the model through which your business operates. This includes your processes and functions, digital hardware and software, physical infrastructure and equipment, and people capabilities and capacity.

This makes an operating model vital to an organisation’s success. When it comes to not-for-profits and other for-purpose entities, an operating model is key to effectively making positive change in the world.

In this article, we provide more detail on the components of an operating model as well as practical guidance around how you can review and enhance your operating model.

What is an operating model?

What makes an operating model effective, operating model examples, reviewing your existing operating model, designing a new operating model, operating model templates, tools and techniques, concluding remarks, references and resources, comments and feedback.

If strategy sets the ‘why’ and ‘where’ and business model provides the ‘what’, an operating model is about the ‘how’. An organisation’s operating model addresses how it structures its people, functions, activities and infrastructure to deliver on its business model and strategy. In essence, it’s the nuts and bolts; from the teams and reporting lines required, to the processes deployed from start to end.

The most important element of any operating model is in recognising the interaction between people, process and infrastructure. Designing an operating model is about:

  • Capturing and communicating the people structures, skills and capacity you require to support the delivery of the organisation’s value creation processes.
  • Understanding what infrastructure, e.g. office space and computers, is needed to support the people, their roles and the processes they carry out.
  • Evolving and adapting processes to support the structure and teams created, and further enabling process implementation through available technology and working space

In essence, the above factors all influence and support each other.

The people ‘bucket’ of any operating model encapsulates the structure, capabilities, capacity and culture required to support organisational business model and direction.

business operating model meaning

The roles, team structures, reporting lines. Often referred to as the ‘organisational design’ of any business.

business operating model meaning

Capabilities

The skills and experience required across the workforce to meet the requirements of different roles and deliver on activities of the organisation.

business operating model meaning

The volume and number of people required to support organisational activity. This includes the mix and make up of workforce from FTE mix to days worked.

business operating model meaning

The values, behaviours and principles that drive the organisation’s practice and actions.

The infrastructure ‘bucket’ covers all of the physical and non-physical assets needed to support the organisations. This is the office space, chairs and tearoom, through to Xero and HR systems required. It covers a broad spectrum, and many organisations tend to focus on the operational infrastructure, i.e. the technology needed to support day-to-day activities of staff.

business operating model meaning

The provision of physical space required to support staff activities from back-office operations to client-facing environments

business operating model meaning

This includes all of the software required to support activity from email to zoom to CRMs. This complexity can vary greatly based on the nature of the organisation.

business operating model meaning

The physical tools from computers to equipment needed to deliver activities.

business operating model meaning

Facilities and equipment

Any other bricks-and-mortar or equipment required for delivering a product or service, e.g. workshop space; client screenings and appointments rooms; medical equipment, etc.

A robust and effective operating model is based on any organisation being clear on the value it is trying to create, for whom, and the outcomes it is trying to drive. The old adage of ‘structure follows strategy’ is as relevant today as it has ever been.

The operating model is very much about how any organisation delivers on its promises. It considers the talent you need, how you fit it together, what it does and what it needs to succeed.

Some key considerations in any successful operating model include:

  • The ability to deliver value: Does the operating model optimise the skills and resources you have to reach your target stakeholders and meet need? The governance to make clear and good decisions: An effective operating model is one where decisions can be made quickly and effectively. Your people understand the process and have strong understanding of the rationale and impact.
  • Defined roles: For many, roles and responsibilities are opaque when looking across an organisation. A strong operating model has clarity of individuals’ scope and the interactions and relationships needed to support organisational outcomes.
  • Understanding existing capability and future needs: The operating model highlights the skills needed, the areas of development and increasing demand to inform the future development and evolution of the organisation.
  • Infrastructure as an enabler: All too often operating models work focusses on the need for new infrastructure solutions, such as software. These should be enablers to the organisation driven by a strong understanding of activities and capabilities and capacity of the organisation.

A primary focus in operating model design is often the relationship between people and process. It is important for any organisation to create dynamic and connected teams and roles.

To support this thinking there are some useful structure models that can help inform and provoke discussion during the process of organisational design (i.e. people structure). Some examples outlined below:

business operating model meaning

In addition to how reporting lines mix, there is also a need to consider the hierarchy of the organisation. This relates to how decision-making is informed and shaped.

business operating model meaning

Coordinated

business operating model meaning

Centralised

business operating model meaning

Whilst structure follows strategy, not all strategic change warrants a rethink of your operating model. This is only necessary when something disrupts your current strategy and/or business model in a way that impacts how your organisation creates and delivers value. This may include disruptions such as:

  • Changes in the external environment that impact customer behaviour or your organisation’s operating context (think political, economic, technological, etc.) and that necessitate a strategic shift
  • Digital disruption that affects how your customers behave, their expectations, or how they access products and services in your market
  • Environmental and/or social disruptions that affect staff working patterns, modes and physical locations (think Covid-19).

Review your “as is” operating model

Start by reviewing your operating model in the current context, and with strategy delivery in mind. Some questions to ask of yourself and others in your organisation include:

  • What are the key principles that currently underpin our operating model? This links back to your strategy. For example, a mental health service might have a principle that says, we take a personalised view of each person’s mental health needs. This might inform an operating model based around delivering one-on-one, personalised support sessions in-person with a dedicated team on-site.
  • How well does our current operating model coordinate people, processes and infrastructure to deliver value that resonates with our clients or customers? This also links to your strategy and business model design.
  • Do we currently serve all addressable markets and customers with our current operating model? Are we constrained by the current model in terms of scaling and/or rethinking our products and markets mix?
  • Does our current operating model support sustainable growth and/or impact? For example, if you’re looking to scale up delivery, does the current model enable you to do this in a cost-effective, financially sustainable way? Does the current model enable you to access new or diversified income streams? Does your organisational structure allow capacity to develop critical strategic relationships?

If your “as is” review unearths issues with your current operating model, you may decide to redesign your operating model so that it is fit-for-purpose in the context of responding to strategic disruptions.

When rethinking your operating model design, you may find it helpful to answer the following questions in the context of what is “to be” in the future and how this might inform changes to your operating model:

  • What are the strategic shifts needed to respond to changes in the external environment, and what are the new operating principles that cascade from a new strategic direction? Returning to our mental health organisation as an example, the updated principle underpinning value delivery might be we take a holistic, integrated approach to people’s mental health. This may mean operating in ways that enable partnerships for a wrap-around model of care, or expanding digital access to self-service information, for example.
  • Which aspects of the current operating model are no longer fit-for-purpose and how should a new model address any gaps in terms of how your people, processes and systems intersect to create and deliver value?
  • Do we need to branch into new markets to scale and/or grow? Or perhaps we need to deliver new services or products to our existing market to better meet needs? How will this impact the way we operate and what needs to change?
  • How might a new operating model better ensure our sustainability? Do we need to look at heavier investment in certain areas of the model, e.g. infrastructure or digital technology? Do we need to rethink how and where we deploy staff? Should we shift towards virtual delivery models? Do we need to build our capabilities in new areas to remain relevant?

It is also important to consider your organisation’s level of maturity when considering changes to your operating model. For example, you will need to review your current capabilities, processes and infrastructure to determine how much change is reasonable and possible in the context of the strategic shift you are looking to make, and your organisation’s capacity for change whilst ensuring continuity of operations. It is also important to remember that your organisation is a collective of people, and that managing change well means being transparent and communicative to alleviate anxieties throughout the process.

Involving key stakeholders at staff, executive and board level in strategy and operating model discussions is also key to successfully navigating change. It goes without saying that it is essential to consult people who manage your day-to-day operations before making changes to your operating model.

Operating model design and development is based on understanding direction (i.e. strategy); being clear on what exists today (if it exists at all); and the opportunities to improve and/or deliver to our goals. It is about engaging with leaders and staff that understand, listening and constructively challenging direction and learning based on experience of others and practice happening elsewhere in the organisation’s sector.

Operating model canvas

The operating model canvas is a visual way to map out the people, processes and infrastructure required to operationalise your business model. In essence, it is a tool for organisational design that focuses on mechanisms for creating and delivering value to an end user, consumer or beneficiary. You may find this tool helpful as a simple way to visualise and build your operations model step by step in relation to value delivery The operating model canvas considers six perspectives illustrated below.

business operating model meaning

Process mapping

In essence, a process map is a visual illustration that shows the actions of a process in a clear step by step process. The key elements of any process map include the inputs, outputs, steps and decisions in any process. The key to good process visualisation and communication is to ensure that there is consistency of layout and symbols so that it can be followed across different processes within the organisation.

A key element of any process map is the level of detail. Whilst different levels of definition exist and there is no right or wrong answer, Spark tends to approach it as follows:

  • Level 1 : Shows the process at its highest level. It is typically five to seven steps and is useful to get an understanding of the big picture.
  • Level 2 : Shows the process in more detail with focus on the functional activities undertaken and relationships between stakeholders and their work.
  • Level 3 : Shows the transactional level of the process with a focus on the “how”. This is the detailed step by step breakdown of each process.

SIPOC is an acronym for Suppliers, Inputs, Process, Outputs and Customer . It is a valuable tool to discuss and visualise an organisation’s processes at a high-level and the relationships between them.

  • S upplier – A provider of an input or product necessary to undertake the process i.e. manufacturer.
  • I nput – The actual product, service or decision being fed into the process to enable it to happen
  • P rocess – Normally 3 to 7 high-level steps required to complete the process.
  • O utput – The end product, service or decision from the process.
  • C ustomer – Those who are impacted or recipient of the output i.e. consumer.

business operating model meaning

Guide: https://www.fool.com/the-blueprint/sipoc/

The RACI framework is a useful tool when managing change projects. It is a transparent, simple way to articulate who the stakeholders are in a project and what their role is. The chart is a matrix of activities or project deliverables, and stakeholders. Each deliverable has assigned stakeholders who are involved in the process in some way. The roles are as follows:

  • R esponsible
  • A ccountable

business operating model meaning

Image source: https://www.smartsheet.com/comprehensive-project-management-guide-everything-raci

Swimlanes are a great way to map processes as part of your operating model review. Swimlane diagrams are a visual way to articulate a process and show how different stakeholders or teams are involved at various stages. You may find it helpful to produce an “as is” set of swim lane diagrams during your operating model review phase, and then overlay to identify the “to be” process improvements.

business operating model meaning

Image source: https://www.lucidchart.com/pages/tutorial/swimlane-diagram

Optimising your operating model is a journey, and something that your organisation should constantly keep top-of-mind as a way to remain relevant and sustainable. Whether your organisation is for-purpose or for-profit, your operating principles should always align with a customer-focused strategic plan. Although it is not always appropriate or necessary to redesign your operating model, continuous tweaks and optimisation should be considered essential to remaining relevant and agile in an ever-changing environment.

With this in mind, perhaps the most important aspect of reviewing and redesigning your operating model is bringing both internal and external stakeholders along on that journey. Your organisation should regularly seek to understand external needs and compare them with feedback from your staff and board to ensure strategic and operational alignment. Your organisation should also consider its level of maturity with regard to where it makes sense to invest for maximum return within strategic timeframes. It is not always necessary or possible to make drastic changes to your operating model all at once, and this is a conversation that should take place between executive and board teams to determine what is feasible and what will create the most impact for your stakeholders and end users.

We have written blogs and articles on operating models, including:

  • Rethinking your operating model – defining the enablers here
  • Rethinking your operating model – understanding influencers here
  • How to right-size your organisation to build back better here

Some other useful guides and articles to help you review and develop your operating model are:

  • A guide to successful operating model transformation here
  • Building an operating model here
  • How to design a winning company here
  • Five lessons for implementing an operating model here
  • Guide to process mapping – https://sixsigmastudyguide.com/process-mapping/

business operating model meaning

What is an Operating Model to you?

Business, IT and Management press is full of terms like “digital transformation”, “new ways of working”, “change your operating model”, “adapt” and, “new normal” but there is little on what that means in real terms or how to address these issues in a practical manner. This seems to be left to very expensive consulting organisations with lots of MBA’s, who have a habit of sweeping in, trying to change everything and then walking (running) away, leaving you with a large hole in your pocket.

What is an operating model?

So, what really is an operating model, and you currently have one whether you like it or not, and why is it important? Let’s start with what is an operating model so we are all on the same page. Wikipedia’s definition is as follows: “Operating model is both an abstract or visual representation (model) of how an organisation delivers value to its customers or beneficiaries as well as how an organisation actually runs itself.” Deloitte describe it as “the configuration of the organisation to deliver its strategy”. Strategy& view the operating model as “determining behaviour, workflow and process design, IT decisions, and investment decisions, aligned to the business objectives”.

My view is that the operating model determines how, using people, process and technology, the business delivers value described by the strategy. This means it turns the ‘what’ into the ‘how’. Thus, it is also the key pre-requisite that there is a well structured, considered and actionable strategy for the business in order to define the operating model. If your current operating model is unclear or disorganised then it is highly likely that the strategy is also unclear.

So, let’s start off with a simple example – a coffee shop. A local coffee shop orders most of its supplies from an e-commerce supply company and schedules deliveries on Monday and Friday mornings. The company hires local part time workers and offers several food dishes that require little skill to prepare. The company has no marketing functions and relies on word of mouth. The owner is friendly and easily establishes rapport with customers. https://simplicable.com/new/operating-model

This example represents how the coffee shop delivers value (coffee, food, atmosphere) to the customer. It is how the business runs.

Why is understanding the operating model important?

The understanding of how the business runs and the path to the value it generates is key to being able to make your organisation successful. So you may be thinking that’s all fine at the top level of the organisation, but how does that apply to me?

Well, this view of the operating model – how the business runs and delivers value, can be applied at multiple levels of the organisation. Each part of the organisation down to a certain level (I am not saying every level of the organisation) can benefit from understanding and optimising its operating model. This means IT has an operating model, IT Development has an operating model, IT Service Delivery has an operating model. There are likely to be a few others in the IT sphere but not many.

The impact of understanding the operating model goes all the way back to 1962 when Alfred Chandler, a business historian at Harvard Business School, wrote a seminal book “Strategy and Structure: Chapters in the History of the Industrial Enterprise” where he developed the theory and proof that a managerial organisation develops in response to the organisation’s business strategy.

So, if your operating model is unclear or seems mis-aligned to the business purpose, what is the problem? Generally it is that the strategy and mission of your part of the organisation is also unclear and/or not communicated well. Fix this and start organising around your strategy and define and extend your operating model and your strategy will come to fruition.

What does the operating model give you?

You now have your strategy sorted which leads and guides the operating model. You have your operating model up and running that is aligned to and delivering on the strategy. But, what does it really give you in practical terms, what are the benefits?

The benefits of having an engineered and defined operating model to me are as follows:

  • Provides you with a breadth of view of the ongoing steady state of the business
  • Strategy tends to be more abstract whereas the operating model is rooted in delivering value and identifying the systems, processes and structure to deliver the value in line with the strategy
  • Is easier to communicate to a wide audience and gives a sense of share purpose
  • Provides the basis for defining more detailed work and process products
  • Should deliver improved performance and reduced cost
  • Be designed to be able to adapt – think digital transformation impacts
  • Identifies the capabilities that are core and those that are-non-core in aiding investment choices

There are likely others that you could think of, but these are a good starting point and help with executive acceptance as the benefits can be directly tied to business performance and not, in IT’s case, technology changes.

Operating model vs Business model

We need to clear up any confusion between an operating model and a business model. Probably the best way to do this is to show one of the ways to start out creating your business model and operating model using the popular business model canvas and operating model canvas

business operating model meaning

As you can see once the two are together they are quite different. The Business Model is about the stakeholders, the value proposition to customers, the cost and revenue streams. Whereas, the operating model is about the delivery of the value through defining the value chains and how the organisation supports those value chains. Both are required and as an IT person you need to understand each for your organisation as a whole and also the IT specific versions function.

So now you have an introduction to the operating model, the value that it brings to many levels of the organisation and the importance in understanding your operating model and getting it right. You understand the basic differences between an operating model and a business model So what’s next? This article has not touched on how do you get an operating model (despite the fact you already have a default one) by this I mean how do you deliberately build or change an operating model rather than leave it to fate or have it evolve organically.

How you take on developing an operating model will be the subject of the next article along with a light exploration of some standard operating models that exist today such as IT4IT from The Open Group www.opengroup.org and eTOM (now known as Business Process Framework) from TM Forum www.tmforum.org . I will also introduce a couple of tools to help develop your operating model. Hope you can bare the suspense!

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The next-generation operating model for the digital world

Companies know where they want to go. They want to be more agile, quicker to react, and more effective. They want to deliver great customer experiences, take advantage of new technologies to cut costs, improve quality and transparency, and build value.

The problem is that while most companies are trying to get better, the results tend to fall short: one-off initiatives in separate units that don’t have a big enterprise-wide impact; adoption of the improvement method of the day, which almost invariably yields disappointing results; and programs that provide temporary gains but aren’t sustainable.

Stay current on your favorite topics

We have found that for companies to build value and provide compelling customer experiences at lower cost, they need to commit to a next-generation operating model. This operating model is a new way of running the organization that combines digital technologies and operations capabilities in an integrated, well-sequenced way to achieve step-change improvements in revenue, customer experience, and cost.

A simple way to visualize this operating model is to think of it as having two parts, each requiring companies to adopt major changes in the way they work:

  • The first part involves a shift from running uncoordinated efforts within siloes to launching an integrated operational-improvement program organized around customer journeys (the set of interactions a customer has with a company when making a purchase or receiving services) as well as the internal journeys (end-to-end processes inside the company). Examples of customer journeys include a homeowner filing an insurance claim, a cable-TV subscriber signing up for a premium channel, or a shopper looking to buy a gift online. Examples of internal-process journeys include Order-to-Cash or Record-to-Report.
  • The second part is a shift from using individual technologies, operations capabilities, and approaches in a piecemeal manner inside siloes to applying them to journeys in combination and in the right sequence to achieve compound impact.

Let’s look at each element of the model and the necessary shifts in more detail:

Shift #1: From running uncoordinated efforts within siloes to launching an integrated operational-improvement program organized around journeys

Many organizations have multiple independent initiatives underway to improve performance, usually housed within separate organizational groups (e.g. front and back office). This can make it easier to deliver incremental gains within individual units, but the overall impact is most often underwhelming and hard to sustain. Tangible benefits to customers—in the form of faster turnaround or better service—can get lost due to hand-offs between units. These become black holes in the process, often involving multiple back-and-forth steps and long lag times. As a result, it’s common to see individual functions reporting that they’ve achieved notable operational improvements, but customer satisfaction and overall costs remain unchanged.

Would you like to learn more about our Digital McKinsey Practice ?

Instead of working on separate initiatives inside organizational units, companies have to think holistically about how their operations can contribute to delivering a distinctive customer experience. The best way to do this is to focus on customer journeys and the internal processes that support them. These naturally cut across organizational siloes—for example, you need marketing, operations, credit, and IT to support a customer opening a bank account. Journeys—both customer-facing and end-to-end internal processes—are therefore the preferred organizing principle.

Transitioning to the next-generation operating model starts with classifying and mapping key journeys. At a bank, for example, customer-facing journeys can typically be divided into seven categories: signing up for a new account; setting up the account and getting it running; adding a new product or account; using the account; receiving and managing statements; making changes to accounts; and resolving problems. Journeys can vary by product/service line and customer segment. In our experience, targeting about 15–20 top journeys can unlock the most value in the shortest possible time.

We often find that companies fall into the trap of simply trying to improve existing processes. Instead, they should focus on entirely reimagining the customer experience, which often reveals opportunities to simplify and streamline journeys and processes that unlock massive value. Concepts from behavioral economics can inform the redesign process in ingenious ways. Examples include astute use of default settings on forms, limiting choice to keep customers from feeling overwhelmed, and paying special attention to the final touchpoint in a series, since that’s the one that will be remembered the most.

In 2014, a major European bank announced a multiyear plan to revamp its operating model to improve customer satisfaction and reduce overall costs by up to 35 percent. The bank targeted the ten most important journeys, including the mortgage process, onboarding of new business and personal customers, and retirement planning. Eighteen months in, operating costs are lower, the number of online customers is up nearly 20 percent, and the number using its mobile app has risen more than 50 percent. (For more on reinventing customer journeys, see “Putting customer experience at the heart of next-generation operating models,” forthcoming on McKinsey.com.)

Shift #2: From applying individual approaches or capabilities in a piecemeal manner to adopting multiple levers in sequence to achieve compound impact

Organizations typically use five key capabilities or approaches (we’ll call them “levers” from now on) to improve operations that underlie journeys (Exhibit 1):

  • Digitization is the process of using tools and technology to improve journeys. Digital tools have the capacity to transform customer-facing journeys in powerful ways, often by creating the potential for self-service. Digital can also reshape time-consuming transactional and manual tasks that are part of internal journeys, especially when multiple systems are involved. 1 1. “ The case for digital reinvention ,” McKinsey Quarterly , January 2017.
  • Advanced analytics is the autonomous processing of data using sophisticated tools to discover insights and make recommendations. It provides intelligence to improve decision making and can especially enhance journeys where nonlinear thinking is required. For example, insurers with the right data and capabilities in place are massively accelerating processes in areas such as smart claims triage, fraud management, and pricing.
  • Intelligent process automation (IPA) is an emerging set of new technologies that combines fundamental process redesign with robotic process automation and machine learning. IPA can replace human effort in processes that involve aggregating data from multiple systems or taking a piece of information from a written document and entering it as a standardized data input. There are also automation approaches that can take on higher-level tasks. Examples include smart workflows (to track the status of the end-to-end process in real time, manage handoffs between different groups, and provide statistical data on bottlenecks), machine learning (to make predictions on their own based on inputs and provide insights on recognized patterns), and cognitive agents (technologies that combine machine learning and natural-language generation to build a virtual workforce capable of executing more sophisticated tasks). To learn more about this, see “Intelligent Process Automation: The engine at the core of the next generation operating model.”
  • Business process outsourcing (BPO) uses resources outside of the main business to complete specific tasks or functions. It often uses labor arbitrage to improve cost efficiency. This approach typically works best for processes that are manual, are not primarily customer facing, and do not influence or reflect key strategic choices or value propositions. The most common example is back-office processing of documents and correspondence.
  • Lean process redesign helps companies streamline processes, eliminate waste, and foster a culture of continuous improvement. This versatile methodology applies well to short-cycle as well as long-cycle processes, transactional as well as judgment-based processes, client-facing as well as internal processes.

Guidelines for implementing these levers

In considering which levers to use and how to apply them, it’s important to think in a holistic way, keeping the entire journey in mind. Three design guidelines are crucial:

1. Organizations need to ensure that each lever is used to maximum effect. Many companies believe they’re applying the capabilities to the fullest, but they’re actually not getting as much out of them as they could. Some companies, for example, apply a few predictive models and think they’re really pushing the envelope with analytics—but in fact, they’re only capturing a small fraction of the potential value. This often breeds a false complacency, insulating the organizations from the learnings that would otherwise drive them to higher performance because it is “already under way” or “has been tried”. Having something already under way is a truism: everyone has something under way in these kinds of domains, but it is the companies that press to the limit that reap the rewards. Executives need to be vigilant, challenge their people, and resist the easy answer.

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Speed and scale: Unlocking digital value in customer journeys

In the case of analytics, for example, maxing out the potential requires using sophisticated modeling techniques and data sources in a concerted, cross-functional effort, while also ensuring that front-line employees then execute in a top-flight way on the insights generated by the models.

2. Implementing each lever in the right sequence. There is no universal recipe on sequencing these levers because so many variables are involved, such as an organization’s legacy state and the existing interconnections between customer-facing and internal processes. However, the best results come when the levers can build on each other. That means, in practice, figuring out which one depends on the successful implementation of another.

Systematic analysis is necessary to guide decision making. Some institutions have started by outlining an in-house versus outsource strategy rooted in a fundamental question: “What is core to our value proposition?” Key considerations include whether the activities involved are strategic or confer competitive advantage or whether sensitive data or regulatory constraints are present.

The next step is to use a structured set of questions to evaluate how much opportunity there is to apply each of the remaining levers and then to estimate the potential impact of each lever on costs and customer experience. This exercise results in each lever being assigned an overall score to help develop a preliminary point of view on which sequence to use in implementing the levers.

There’s also a need to vet the envisioned sequences in the context of the overall enterprise. For example, even if the optimal sequence for a particular customer journey may be “IPA then lean then digital,” if the company’s strategic aspiration is to become “digital first,” it may make more sense to digitize processes first.

This systematic approach allows executives to consider various sequencing scenarios, evaluate the implications of each, and make decisions that benefit the entire business.

3. Finally, the levers should interact with each other to provide a multiplier effect. For example, one bank only saw significant impact from its lean and digitization efforts in the mortgage application journey after both efforts were working in tandem. A lean initiative for branch offices included a new scorecard that measured customer adoption of online banking, forums for associates to problem solve how to overcome roadblocks to adoption, and scripts they could use with customers to encourage them to begin mortgage applications online. This, in turn, drove up usage of online banking solutions. Software developers were then able to incorporate feedback from branch associates, which made future digital releases easier to use for customers. This in turn drove increased adoption of digital banking, thereby reducing the number of transactions done in branches.

Some companies have developed end-to-end journey “heat maps” that provide a company-wide perspective on the potential impact and scale of opportunity of each lever on each journey (Exhibit 2). These maps include estimates for each journey of how much costs can be reduced (measured in terms of both head count and financial metrics) and how much the customer experience can be improved.

Companies find heat maps a valuable way to engage the leadership team in strategic discussions about which approaches and capabilities to use and how to prioritize them.

Case example: The ‘first notice of loss’ journey in insurance

In insurance, a key journey is when a customer files a claim, known in the industry as first notice of loss (FNOL). FNOL is particularly challenging for insurers because they must balance multiple objectives at the same time: providing a user-friendly experience (for example, by offering web or mobile interfaces that enable self-service), managing expectations in real time through alerts or updates, and creating an emotional connection with customers who are going through a potentially traumatic situation—all while collecting the most accurate information possible and keeping costs in line.

Many companies have relied on Lean to improve FNOL call-center performance. One leading North American insurer, however, discovered it could unlock even more value by sequencing the buildout of three additional capabilities, based on the progress it had already made with Lean:

Digitization. This company improved response times by using digital technologies to access third-party data sources and connect with mobile devices. With these new tools, the insurer can now track claimant locations and automatically dispatch emergency services. Customers can also upload pictures of damages, and both file and track claims online. The insurer also allows some customers to complete the entire claims process without a single interaction with a company representative.

Advanced analytics. Digitization of the FNOL journey provided the insurer with more and better data faster, which in turn allowed its analytics initiative to be more effective. Now able to apply the latest modeling capabilities to better data, the company is using advanced analytics to improve decision making in the FNOL journey. For example, intelligent triage is used to close simple claims more quickly, and smart segmentation identifies claims likely to be total losses and those liable to require the special investigative unit (SIU) far earlier than before. Analytics are even being used to predict future staffing needs and inform scheduling and hiring, thereby allowing both complex and simple claims to be handled more efficiently.

Intelligent process automation (IPA). Once digital and analytics were in place, IPA was implemented. Automation tools were deployed to take over manual and time-consuming tasks formerly done by customer-service agents, such as looking up policy numbers or data from driving records. In addition to reducing costs, IPA sped up the process and reduced errors. IPA came last because the streamlining achieved by digitization and more effective use of analytics had eliminated some manual processes, so the IPA effort could focus only on those that remained.

By combining four levers—lean plus digital, analytics and IPA—this insurer drove a significant uplift in customer satisfaction while at the same time improving efficiency by 40 percent. (For more approaches to improving claims, see “Next-generation claims operating model: From evolution to revolution,” forthcoming on McKinsey.com.) 2 2. Chief Claims Officer Roundtable, McKinsey, 2017.

Bringing it all together: Avoid creating new silos by thinking holistically

Senior leaders have a crucial role in making this all happen. They must first convince their peers that the next-generation operating model can break through organizational inertia and trigger step-change improvements. With broad buy-in, the CEO or senior executive should align the business on a few key journeys to tackle first. These can serve as beacons to demonstrate the model’s potential. After that comes evaluation of the company’s capabilities to determine which levers can be implemented using internal resources and which will require bringing in resources from outside. Finally, there is the work of actually implementing the model. (For more on the last topic, see “How to build out your next-generation operating model,” forthcoming on McKinsey.com.)

Transformation cannot be a siloed effort. The full impact of the next-generation operating model comes from combining operational-improvement efforts around customer-facing and internal journeys with the integrated use of approaches and capabilities.

Albert Bollard is an associate partner in McKinsey’s New York office; Elixabete Larrea is an associate partner in the Boston office; Alex Singla is a senior partner in the Chicago office, and Rohit Sood is a partner in the Toronto office.

The authors would like to thank Sanjay Kaniyar, Swapnil Prabha, and Deniz Cultu for their gracious support and expertise in creating this article.

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What is a Business Operating Model?

A business operating model is a representation of the characteristics a company will follow when completing the various tasks and activities related to its business. These models often consist of several different components, particularly in large or publicly held companies. Business owners and managers may design a workflow chart to present this information in a graphic or pictorial reference for training purposes. Operating models can include strategic plans, relationship development and internal guidelines or standards.

A strategic business operating model outlines the necessary tasks and activities companies need to follow in order to accomplish goals and objectives. Most businesses develop and use strategies so they have a plan for advancing their mission. The increasing use of business technology has altered how companies use a business operating model. Integrating the data from multiple business locations helps business owners and managers make decisions regarding operations or new business opportunities. Additionally, an operating model allows companies to create repeatable processes so they can avoid reinventing the wheel for each business opportunity.

A strategic business operating model ultimately helps companies to accomplish their goals.

Business relationships occur between companies and other entities such as: consumers, government agencies, other businesses, and special interest groups. A business operating model dictates how a company will handle both positive and negative situations in regard to its business relationships. These model may link with the policies, procedures, and responsibilities found in the company’s corporate governance . Business owners, board members, directors, and managers create these models to ensure the company does not exacerbate negative situations or cause panic by engaging in relationships detrimental to the company.

Business relationships occur between companies and other entities.

Guidelines or standards are placed in a business operating model for quality controls purposes, among other things. Companies must ensure that each good or service meets specific standards and that employee productivity or performance meets certain expectations. The business operating model can also provide more information or clarification on the company’s mission, helping managers reinforce the values and behavior found most acceptable by the company. Large companies with multiple divisions may need these models to promote a working environment where each employee acts as a team member and understands that her role is to provide higher financial returns for the company.

Business operating software may help business owners set goals and track the progress of those goals.

Companies may use business operation models as individual components in their overall corporate or business-level strategies. These strategies are overarching processes that help companies create effective and efficient operations while adding the most economic value to the company coffers. Implementing individual modules can also help companies eliminate unnecessary tasks or activities that result in wasted economic resources, such as raw materials or labor.

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A strategic business operating model ultimately helps companies to accomplish their goals.

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  1. What are Business Operating Models?

    At its core, a company's operating model represents how business components work together in line with the system's guiding principles. At the highest level, operating models describe how a business functions. Two analogies can help explain organizational operating models and their multiple functions.

  2. What Is an Operating Model? (And What To Include in One)

    An operating model is a visualization of how a company plans to execute its strategy. It uses elements such as charts, graphics, tables and maps to show how the organization operates and the value it brings to customers and stakeholders.

  3. Operating model

    An operating model is both an abstract and visual representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organization actually runs itself. Definition There are different ways of defining the elements that make up an operating model.

  4. How to Build an Operating Model That Works (And Delivers)

    An operating model is a visual representation of the business model. It's the way an organization carries out its business model to deliver value to its customers. It's estimated that nearly 70% of well-formulated strategies failed due to poor execution.

  5. What is an operating model?

    An operating model is a visual representation of how an organization delivers value to its internal and external customers. Operating models are created to help employees visualize and understand the role each part of an organization plays in meeting the needs of other components.

  6. PDF Operating models

    An operating model translates strategic intent into operational capabilities. It serves as the foundation for execution and provides a clear guide for enterprise leadership team, line managers and operational teams. How do we do things?

  7. Definition of Operating Model

    An operating model brings the business model to life; it executes the business model. An information and technology (I&T) operating model represents how an organization orchestrates its I&T capabilities to achieve its strategic objectives.

  8. PDF FEATURE

    Our definition of an operating model is simple but comprehensive: An operating model represents how value is created by an organization—and ... business-unit strategy and varying business mod-els. The operating model is the anchor for the enterprise and is critical to the strategy's effective-ness and longevity. And understanding how your

  9. Why Every Company Needs an Operating Model [+ Steps to Build One]

    An operating model is a visual representation of how a company runs. It includes everything from how the company sources its products to how it structures its business areas and departments. An operating model serves as a blueprint for executing your strategy. Many people confuse business models with operating models.

  10. What is a Business Model with Types and Examples

    Thomas Brock Fact checked by Yarilet Perez Investopedia / Laura Porter What Is a Business Model? The term business model refers to a company's plan for making a profit. It identifies the...

  11. What is an operating model?

    "An operating model is a visualisation (i.e. model or collection of models, maps, tables and charts) that explains how the organisation operates so as to deliver value to its customers or beneficiaries." In its simplest form, an operating model is a value delivery chain: a sequence of steps that describe the main work of the organisation.

  12. Design Principles for a Robust Operating Model

    Defining what matters most Design principles specify strategic requirements that the operating model must support. They also pinpoint aspects of the current organization that could hinder the future strategy and therefore must change, as well as organizational strengths that should be preserved (see Figure 1).

  13. PDF What is an operating model?

    the target operating model. By developing a bespoke/customized operating model for the target business, companies can articulate the business's capabilities and value. This, in turn, allows buyers to visualize (and quantify) the potential of the future state and how it fits into their strategy.

  14. Agility to action: The agile operating model

    On a fundamental level, an agile transformation is a cultural transformation. The operationalization of such a model, where the interdependence among teams must be managed to deliver value to customers, requires multiple mindset shifts. Three are of critical importance: empowerment, end-to-end ownership, and a service mindset in enabling teams.

  15. Operating Model Design for Nonprofits

    The operating model canvas is a visual way to map out the people, processes and infrastructure required to operationalise your business model. In essence, it is a tool for organisational design that focuses on mechanisms for creating and delivering value to an end user, consumer or beneficiary.

  16. Operating Models: where to start and how to build one.

    Here is my 30 second guide to building your operating model: Understand and define the capabilities required to deliver the value chains including supporting capabilities. Understand and define the processes that make up the capabilities. Organise the resources and location to support the people doing the work.

  17. Learning from an agile operating model

    For instance, the business model of a European machine-building company has significantly shifted during the pandemic, with customers increasingly focusing on digital solutions. ... A critical success factor for scaling an agile operating model is that the whole organization, agile or nonagile, is optimizing for the same objectives and spinning ...

  18. Target Operating Model: The Ultimate Guide

    A Target Operating Model (TOM) serves as a strategic framework that defines how an organization will execute its vision and mission, thereby meeting its business objectives. It outlines how various elements like processes, technology, governance, and people should interconnect and interact to deliver value.

  19. Operating model transformations: Not all elements are created equal

    Operating model transformations: Not all elements are created equal. Our research finds three elements—governance, culture, and workforce planning—have an outsized impact on organizational efficacy. Dinora Fitzgerald Dobru. Partners with clients to enable business strategies and drive sustainable change through talent management ...

  20. Operating Model, what is it and why is it important?

    The Business Model is about the stakeholders, the value proposition to customers, the cost and revenue streams. Whereas, the operating model is about the delivery of the value through defining the value chains and how the organisation supports those value chains. Both are required and as an IT person you need to understand each for your ...

  21. The next-generation operating model for the digital world

    This operating model is a new way of running the organization that combines digital technologies and operations capabilities in an integrated, well-sequenced way to achieve step-change improvements in revenue, customer experience, and cost. A simple way to visualize this operating model is to think of it as having two parts, each requiring ...

  22. What is a Business Operating Model?

    A business operating model is a representation of the characteristics a company will follow when completing the various tasks and activities related to its business. These models often consist of several different components, particularly in large or publicly held companies.