A well formulated business operating model is the bridge between the strategy, the ‘why’, and the operations, the ‘how’, and can ensure that there are no roadblocks in the application of your business plan. Furthermore, a business operating model is important because it helps managers convert strategy into operational decisions.
CEOs and leaders can often define their vision in an aspirational way, but middle managers and employees may struggle to understand how to implement the strategy. Confusion about how to move forward begins when processes appear to be disconnected in the broader organisational context.
Whether an existing multi-national or a two-person start-up, the business operating model is how a company creates value for itself through the delivery of products or services to its customers or beneficiaries. By creating a helicopter view of operations, it can facilitate management decisions about the essential elements in an operational set-up and focus on the metrics that matter.
What is a business operating model?
The business plan, with its outline of company strategy and expected financial performance, can be thought of as the scaffolding around which your business can be built. While there is no common definition of what constitutes an operating model, it is often compared to the blueprint for a building—albeit a little more dynamic and adaptable.
For more information on writing your own business plan, have a look at our article and free business plan template.
Typically created by a business architecture practitioner, along with other members of the strategy team, including strategic planners, business executives and business analysts, the business operating model is developed in such a way to create a visual representation that ensures change is managed in an orderly manner.
The conditions and strategies put in place for your first year will be different to those required in the following years, underlining the need for flexibility and adaptability in the model. Technological developments and new ways of working can be influential on the type of model you adopt.
The creation of value can be applied at several levels in a company, ranging from IT and Human Resources to Marketing and Production, which is why having your operating model aligned and delivering on the strategy is important.
The key elements of any business operating model
According to the management consulting firm Bain & Company, developing an operating model requires six key elements:
• A superstructure encompassing your primary business units and how the profit and loss statement (P&L) maps to them.
• Accountability principles for where and how decisions are made and executed.
• Governance forums and management cadence that enable priority cross-group processes and interfaces to support strategic and operational decisions.
• Talent requirements to make the operating model work.
• Key strategic metrics that align the top team and the broader organisation around clear strategic objectives and priorities.
• Behavioural expectations that establish how to work together, as well as acknowledging a company’s unique cultural heritage and what needs to change to make the team work more effectively in the future.
How to develop an operating model for your business
Despite high hopes and optimistic expectations, many corporate strategies often fail in their effectiveness due to a lack of clarity. Business architects may describe this as a “disconnect” between the business strategy and the day-to-day operation.
Other problems that can lead to faltering operating models include:
- financial pressure reducing the ability to make informed investment decisions
- a loss in momentum after the initial wave of implementation
the redeployment of talent as other priorities arise
Linking strategy with the operating model necessitates the translation of your organisational rationale and goals into concrete objectives, and then prioritising them in your operating model design. They must describe practical targets that people can use to start thinking about ‘what’ and ‘how’ to develop the operation to meet your objectives.
A hundred years ago, business operating models were limited in variety, usually to just bricks-and-mortar, but the choice in the 21st century is extensive and ever-growing.
Some of the choices include:
- direct sales
- value-added resellers
- online content
Here are some examples of business models used by some of the world’s most successful firms:
McDonald’s has developed a successful vertically integrated franchise business model through which all its restaurants are operated by the company or by franchisees, which includes foreign affiliate markets under license agreements.
Nike operates a mass market business model that targets its products at any consumer who is interested in athletic footwear or clothing, showing no differentiation between consumers.
Tesla’s business model uses direct sales to market its automobiles, unlike other car manufacturers who sell through franchised dealerships. The model also includes servicing and charging its electric vehicles.
Twitter, like many social media firms, uses the advertisement business model and earns revenue through promoted posts and stories, while offering a free service to its user base. It also makes money through its data licensing.
Uber’s platform business model connects drivers and customers through an interface with gamification elements. They earn revenue by collecting fees from the app’s gross bookings.
How to start designing an operating model
When designing an operating model, business architects recommend starting with the creation of a ‘value-chain map’, which shows the separat, different delivery chains or how they should be linked together.
The next important step is developing an ‘organisation model’ that illustrates how you structure different value chains, as well as including support functions, such as IT, HR and Finance.
Once these core diagrams are in place, you will need to consider producing additional maps and charts that typically include:
- a supplier matrix
- people models
- decision grids
- an IT blueprint and location maps
There are several tools available that can help you design your business model, such as the popular Operating Model Canvas, which employs Processes, Organisation, Location, Information, Supply Chain and Management System.
Other commonly used planning models are the Strategy & Operating Model Blueprint, the Bain Operating Model and the MIT CISR Operating Model Types.
The practical benefits of a business model
long-term benefits of a business operating model
Running a business offers no shortage of challenges, which is why a robust business operating model is vital.
The practical benefits of a well-defined business operating model include:
- delivering improved performance and reduced cost
- communicating a shared purpose to a wider audience
- increased capability to adapt and transform
- giving substance to an abstract strategy through systems, processes and structure
- aiding investment choices
- presenting an overview of the state of the business
- offering a foundation for defining detailed work and process products
Taking the time to prepare a well-formulated business operating model can help with risk management, thereby avoiding or preparing for problems and navigating smoothly through those first few turbulent years as a start-up or early stages of a new in-house project.
Finally, a strong business model offers many long-term benefits, ranging from better integration, improved business performance, the ability to grow and scale more quickly, and increased understanding around organisational coordination and decision making.
Once you have put the effort into comprehensively finalising your business operating model, you can be confident that you are on the path to success. Good luck and please get in touch if we can help you along the way!