Understanding how a business operates is crucial to its success. An operating model is essentially the blueprint that outlines how a company delivers value to its customers and sustains its operations. Whether you’re a startup looking to establish a solid foundation or an established company aiming to optimise efficiency, a well-defined operating model can make all the difference.
In this post, we'll dive into what an operating model is, share some examples, and highlight the key differences between an operating model and a business strategy.
What is an operating model?
An operating model is a framework that defines how an organisation operates to provide value to its customers, stakeholders, and shareholders. It includes the structure, processes, and systems the organisation uses to implement its strategy and accomplish its goals.
Here are the key components of an operating model:
1. Value proposition
Defines what the business offers its customers, including products, services, and unique selling points that differentiate it from competitors.
2. Core capabilities
The essential skills, competencies, and resources that the business needs to deliver its value proposition effectively. This includes technological expertise, manufacturing capabilities, customer service, and more.
3. Processes
The series of actions or steps taken to achieve a particular goal, including operational processes (e.g., manufacturing, logistics), support processes (e.g., human resources, IT), and management processes (e.g., strategic planning, performance management).
4. Organisational structure
How the business is organised, including roles, responsibilities, and reporting relationships. This can range from hierarchical structures to more flexible, flat organisations.
5. Technology and infrastructure
The tools, systems, and infrastructure that support the business operations. This includes IT systems, machinery, facilities, and other physical or digital assets.
6. Governance and decision-making
The framework for decision-making and ensuring compliance with laws, regulations, and internal policies. This includes defining the roles and responsibilities of executives, boards, and other decision-making bodies.
7. Culture and leadership
The shared values, beliefs, and behaviours that shape how employees work together and interact with stakeholders. Leadership style and practices also play a crucial role in driving the organisational culture.
8. Performance management
The mechanisms for measuring, monitoring, and managing performance to ensure that the business meets its goals, including KPIs and performance reviews.
9. Customer and market engagement
How the business interacts with its customers and markets, including marketing, sales, customer service, and feedback mechanisms.
Operating model examples
1. Product-centric operating model
Example: Apple
Description: Focuses on designing, manufacturing, and selling innovative products. The company's core capabilities include product design, technology integration, and marketing.
2. Service-centric operating model
Example: Accenture
Description: Provides specialised services to clients, focusing on consulting, technology services, and outsourcing. Key capabilities include deep industry expertise and customer relationship management.
3. Platform business operating model
Example: Uber
Description: Connects service providers with customers through a digital platform. Core capabilities include technology development, user experience design, and network management.
4. Subscription-based operating model
Example: Netflix
Description: Offers access to a wide range of content (e.g., movies, TV shows) for a recurring subscription fee. Key capabilities include content acquisition, customer retention strategies, and data analytics.
5. Franchise operating model
Example: McDonald's
Description: Expands the business by allowing independent operators (franchisees) to run individual locations under the company's brand. Core capabilities include brand management, quality control, and franchisee support.
6. Direct-to-consumer (DTC) operating model
Example: Dollar Shave Club
Description: Sells grooming products directly to consumers, bypassing traditional retail channels. Key capabilities include e-commerce management, customer service, and supply chain efficiency.
7. Freemium operating model
Example: Spotify
Description: Offers a basic product or service for free while charging for premium features. Core capabilities include product development, user engagement, and conversion optimisation.
8. Marketplace operating model
Example: Amazon
Description: Operates a digital marketplace where third-party sellers can list and sell products. Key capabilities include logistics, customer service, and platform scalability.
9. Lean manufacturing operating model
Example: Toyota
Description: Focuses on minimising waste and maximising efficiency in the manufacturing process. Core capabilities include process improvement, quality control, and supply chain management.
10. Freight brokerage operating model
Example: DB Schenker
Description: A leading global logistics provider, offering comprehensive supply chain management and logistics services. Key capabilities include freight management and contract logistics.
Difference between an operating model and a business strategy
Operating model
An operating model is a detailed framework that describes how a business is structured and managed to deliver on its strategy. It includes the organisation’s structure, processes, systems, and capabilities that enable the execution of the business strategy. The main focus is on the operational aspects of the business, ensuring that the day-to-day activities align with the strategic objectives.
Business strategy
A business strategy outlines the long-term goals and the plan of action a company intends to follow to achieve these goals. It defines the direction the business will take to create value for customers and gain a competitive advantage in the market. It includes the vision and mission statements, target market identification, value proposition, competitive analysis, and key strategic initiatives. The primary focus is on setting objectives, determining the necessary resources, and planning how to achieve the desired market position.
Relationship between an operating model and business strategy
Alignment
The operating model must align with the business strategy to ensure the effective achievement of strategic objectives. It translates high-level vision into practical, actionable steps and processes.
Execution
While the business strategy defines "what" the business aims to achieve, the operating model defines "how" those aims will be achieved. The operating model provides the structure and mechanisms to execute the strategy.
Adaptation
A well-designed operating model can adapt to changes in strategy, ensuring that the business remains agile and responsive to market changes and new opportunities.
Example: Unilever
Business strategy
Vision: To make sustainable living commonplace.
Goals: To grow the business while reducing environmental impact and increasing positive social impact.
Strategic initiatives:
- Develop and market sustainable products.
- Reduce waste and carbon emissions across the supply chain.
- Enhance social impact through community programmes and partnerships.
Operating model
Organisational structure: A matrix structure that supports global operations while allowing for local market responsiveness.
Core processes:
- R&D: Focus on developing sustainable products and packaging.
- Manufacturing: Implementing eco-efficient production processes.
- Sales and distribution: Leveraging both traditional retail and digital channels to reach consumers.
Support processes: Strong emphasis on supply chain management, human resources for talent development, and financial management.
Governance: Decision-making processes that prioritise sustainability and ethical practices.
Technology and infrastructure: Investments in advanced manufacturing technologies and digital tools for supply chain optimisation.
Culture: A culture of sustainability, innovation, and social responsibility.
Performance management: KPIs focused on sustainability targets, market share growth, customer satisfaction, and social impact metrics.
Relationship
- Alignment: Unilever’s operating model is designed to support its strategic goals of sustainable growth and social impact. The focus on sustainable R&D and eco-efficient manufacturing aligns with the strategy of promoting sustainable living.
- Execution: The operating model enables Unilever to execute its strategy by ensuring that the organisational structure, processes, and systems are all geared towards sustainability and efficiency.
- Adaptation: As Unilever’s strategy evolves (e.g., introducing new sustainability initiatives), the operating model can adapt to support new strategic priorities, ensuring ongoing alignment and effectiveness.
The wrap
An operating model is essential for businesses to provide value to customers and achieve their strategic goals. By carefully considering all the different parts and aligning them with the overall business strategy, companies can establish a strong foundation for steady growth and success. A well-designed operating model ensures that every aspect of the business, from day-to-day operations to long-term planning, works together seamlessly.
Investing time and effort into developing a robust operating model can lead to improved performance, higher customer satisfaction, and increased profitability. It also enables businesses to be proactive rather than reactive, allowing them to anticipate challenges and seize opportunities as they arise.
Ultimately, a well-executed operating model is not just about maintaining the status quo; it's about driving continuous improvement and fostering a culture of excellence that supports long-term success.
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