An organization is a complex system for delivering value. An operating model breaks this system into components, showing how it works – Operating model Wiki page
A well formulated business operating model is like a bridge between strategy, the ’why’, and operations, the ’how’. It should allow you to focus on delivering the value proposed in your business plan. In short, an operating model breaks down the delivery elements of your business model and helps managers convert strategy into operational decisions.
What is a business operating model?
While there is no common definition of what constitutes an operating model, it is often compared to the blueprints for a building. There are multiple sections which lay out in plain terms the functions by which they serve the overall business goals.
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 in your first year in business will be different to those required in the subsequent 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.
6 key elements in an 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. In short, people aren’t working towards a clear and common goal.
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 an operating model requires you to translate your organisational rationale and goals into concrete objectives – these objectives are then prioritised in your operating model design. They must describe practical targets which people can use to develop the operations to meet business objectives.
To boil it down to a single decision – if you give someone management status, you do it because you have concrete objectives in mind – make sure that person understands your rationale and their function in attaining the key strategic metrics. Before all of this however, you must understand your chosen business model.
Famous examples of effective business models:
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 which makes money by selling products wholesale to third-party distributors. They focus heavily on brand-building and generating awareness through product innovation and modern marketing.
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.
Knowing how these businesses deliver value and generate income makes it easier to suggest how an operating model may be constructed to support the business goals.
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 separate, different delivery chains and 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.
If you’re at this point in the article and realise that all of this is basically impossible without first producing a solid business plan then good news – we’ve created a business plan template and a business plan canvas which you can download for free.
The practical benefits
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 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!