What is an Operating Model?

A company can use an operating model to coordinate peopleinfrastructuretoolsprocessesand other operational planning factors to effectively produce products and services. This allows it to navigate the marketproduce surplus valuedeal with business challengesand grow its operations.  

At its corea company's operating model represents how business components work together in line with the system’s guiding principles. At the highest leveloperating 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 destinationyour 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. 

Although they have some overlapsan 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 strategycustomer segmentsprice pointsproduct linesdelivery mechanismscustomer acquisition channelsas well as any other factors regarding your business’s commercial strategy.  

In contrastyour operating model is about fulfilling commercial activitieshighlighting the operations sustaining your business. It covers your operational design and day-to-day activities (e.g.execution of workpeople managementprocess management). 

Operating models contribute to different aspects of your businessthe most prominent being strategy execution. High-level considerations such as missionvisionand 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 analogiesyour operating model can also be thought of as an engine that drives strategy execution. While laying out the right strategy and commercial considerations is criticalefficiently generating momentum toward your destination is just as important. As suchoptimizing your organizational operating model is crucial to effective strategy execution and goal attainment. 

Learn more about the strategy execution gap

As we’ll dive into shortlyeach business has a unique operating model based on circumstances such as industrysizeand business maturity. There arehowevercertain components that all company operating models have in common. These include: 

1. Guiding principles  
2. Organizational structure 
3. Processes 
4. Technology  
5. People 
6. Culture

Guiding principles  

At the highest levelan 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 instanceif your company’s goal is to accelerate growththe guiding principles of your operating model will emphasize rapid production and scalabilityas opposed to quality controlfor 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 instancedecisions can be made locallycloser to the points of executionor through the strategic chain of command. Procedures and policies affecting components such as processes and culture are also a part of governance.

Organizational structure 

Your operating model also covers the layoutsetupand structure of your organization. At the basic levelthis includes how your people collaborate across teamsdepartmentsnetworksand divisions. 

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

Processes 

Your organization’s processes encompass how work is conductedand draws on other components such as peopletechnologyand infrastructure. Processes include things such as: 

• How inputs are transformed into outputs. For instancehow 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 

Technology  

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

• Machinery: The machines used in the production process like tractorsassembly armsand other industry-specific machinery 
• Physical infrastructure: The infrastructure that supports the production and delivery of services (e.g.warehouseslogistic networksoffice space) 
• IT infrastructure: The IT systemsnetworksand computers that support the digital processes of your business 
• Software: The software tools you use to run your businessincluding software that aids employee collaborationhuman resourceslogisticssupply chainand inventoryamong 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 operationssolve problemsand 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 workand advances in co-bots and autonomous systems will perpetuate this trend. 

Culture  

Your company culture encompasses shared beliefsvaluesbehaviorsidentitymodes of workingimplicit assumptionsand all the other factors influencing howwhatand why work is conducted. Within your company operating modelculture plays an important role in influencing how your organization functions. 

For exampleby declaring and adhering to customer-centric valuesyour 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.

Alongside business modelsan operating model is one of the first things a company must consider. As mentioned earlierthe operating model definition is unique to a specific companydespite 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 levela 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 materialswhereas the latter is mostly digital. 

Maturity: A company’s strategic objectivesand thus its operating modelwill vary depending on the company’s maturity. A mature company may focus on greater operational efficiencywhile a scale-up may focus on growth. 

Size: Similar to the company stagethe 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 competitorsa company may change its operating model in order to gain a competitive advantage in a specific outcome. For instanceif there is an opportunity to compete on price by optimizing for economies of scale. 

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

• Organization maps: Visually depicting how the organization is laid out in terms of teamsdepartmentsdivisionsexternal ecosystemsand all relevant interdependencies  
• Blueprints: Visualizing how a specific process or function should work 
• People models: Mapping out the skillsknowledgebandwidthand 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

With operating models being unique to each companyit’s difficult to describe the ideal operating model. Naturallythe ideal business operating model will differ depending on the perspective and needs of a particular company. But to provide a concrete examplea generalizedconventional 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 individualssoftwareand departments 
• Quarterly and annual reviews: Performance reviews typically happen on a quarterly and annual basis  

In contrasta 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 solvegain validation of working in the right directionand continuously optimize. 

Learn more about the Modern Operating Model

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

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