Operating Model

The operating model is a visual representation and mapping of the processes and how the organization delivers value and, therefore, how it executes its business model. Therefore, the operating model is how the whole organization is structured around the value chain to build a viable business model.

Element	Description	Analysis	Implications	Benefits	Challenges	Use Cases	Examples
Definition	An Operating Model defines how an organization’s resources, processes, and activities are structured and organized to deliver its products or services effectively.	Evaluating the clarity and completeness of the Operating Model definition, ensuring it aligns with the organization’s goals.	A well-defined Operating Model provides a clear framework for how the organization operates and achieves its objectives.	Clarity in organizational structure and processes.	Lack of a clear or comprehensive Operating Model.	Organizational planning, strategic alignment.	A retail company defining how it manages inventory, sales, and customer service.
Structure	The Structure of an Operating Model outlines the organization’s hierarchy, reporting lines, roles, responsibilities, and divisions or departments. It defines how people are organized within the organization.	Analyzing the effectiveness of the organizational structure in supporting the organization’s goals and objectives.	The structure should align with the organization’s strategy and ensure clear lines of responsibility and accountability.	Efficient communication, clear roles, and responsibilities.	Misalignment of structure with strategy or goals.	Organizational charts, reporting lines.	A tech startup defining its management hierarchy and team structure.
Processes	Processes within an Operating Model encompass the workflows, procedures, and methods that guide how work is done within the organization. It includes everything from customer interactions to production processes.	Assessing the efficiency and effectiveness of key processes in achieving organizational objectives.	Well-defined and optimized processes enable the organization to operate smoothly, reduce waste, and improve productivity.	Streamlined operations and improved efficiency.	Inefficient or outdated processes that hinder performance.	Process mapping, workflow optimization.	A manufacturing company defining its production processes for efficiency and quality control.
Technology	Technology in an Operating Model refers to the systems, tools, and technologies used to support and enable the organization’s processes and activities. It includes software, hardware, and IT infrastructure.	Evaluating the alignment of technology with organizational needs and objectives, as well as its capacity to support operations effectively.	Technology should be chosen and implemented strategically to enhance productivity, enable innovation, and achieve competitive advantage.	Improved automation, innovation, and efficiency.	Technological gaps or issues that disrupt operations.	IT strategy, system integration.	A financial institution defining its technology infrastructure to support online banking services.
Culture	Culture is an essential component of an Operating Model, representing the shared values, norms, behaviors, and beliefs within the organization. It influences how people work and interact.	Analyzing the organization’s culture and its alignment with the Operating Model and strategic goals.	A strong, aligned culture can boost employee engagement, collaboration, and innovation, while a misaligned culture can hinder performance.	Enhanced employee morale, collaboration, and alignment.	Cultural resistance or misalignment with the Operating Model.	Cultural assessments, values alignment.	A tech company fostering a culture of innovation to support its agile Operating Model.
Governance	Governance in an Operating Model involves the rules, policies, and decision-making processes that guide how the organization is managed and controlled. It defines who has authority and accountability.	Assessing the effectiveness of governance structures and processes in ensuring transparency, compliance, and effective decision-making.	Strong governance structures promote accountability, reduce risk, and support ethical behavior and compliance with regulations.	Enhanced transparency, accountability, and risk management.	Weak or ineffective governance that leads to conflicts or regulatory issues.	Board structures, compliance frameworks.	A nonprofit organization defining its governance policies to align with its mission and values.

Table of Contents

Porter’s Value Chain

Porter, for instance, helps visualize the value chain and how the whole organization is structured around it.

Organizational Structure

The organizational structure also determines how the company can deliver value.

Distribution Channels

Also, the distribution side, so how sales and marketing are organized to produce value is critical.

Perhaps, an organization selling an enterprise solution will structure its distribution around a qualified salesforce.

A company selling a consumer-facing product will structure its organization more toward marketing instead.

distribution-channels — A distribution channel is the set of steps it takes for a product to get in the hands of the key customer or consumer. Distribution channels can be direct or indirect. Distribution can also be physical or digital, depending on the kind of business and industry.

Marketing Mix

The various marketing channels the company will use to build its brand, and sell its product will also determine the way the operating model delivers value.

Financial Structure

And accordingly the financial model will also determine how the company acquires the financial resources for the operating model, and therefore build a viable business model.

Operating Model and Its Components:

Operating Model: Visualization of processes for delivering value and executing the business model.
Porter’s Value Chain: Collection of processes a company performs to create value, linked to competitive advantage.
Organizational Structure: Shapes business model based on criteria, enables information flow, decision-making, and alignment.
Distribution Channels: Steps for a product to reach the customer, can be direct/indirect, physical/digital.
Marketing Mix: Multi-faceted approach to marketing, traditionally the four Ps (price, product, promotion, place), expanded with additional elements.
Financial Structure: How corporations finance assets, including debt and equity, considering cost structure, profitability, and cash flow generation.

Case Studies

Operating Model Examples:

Tech Startup: An agile tech startup with cross-functional teams including developers, designers, and product managers working collaboratively to create and launch software applications.
Manufacturing Company: A traditional manufacturing company employing assembly line processes to produce consumer electronics, with a focus on efficiency and quality control.
Healthcare System: A healthcare system with integrated medical services, involving hospitals, clinics, and support staff, to provide comprehensive patient care.

Porter’s Value Chain Examples:

Automobile Manufacturer: An automobile manufacturer’s value chain encompasses design, manufacturing, marketing, and after-sales service to deliver cars to customers.
Online Retailer: An e-commerce business involves processes such as product sourcing, warehousing, online marketing, and last-mile delivery as part of its value chain.
Software Development Company: A software development company’s value chain includes stages like requirement analysis, coding, testing, and deployment to create software solutions.

Organizational Structure Examples:

Functional Structure: An organization structured by functions, like marketing, finance, and operations, with clear hierarchies for decision-making.
Matrix Structure: A matrix organization where employees report to both functional managers and project managers, common in consulting firms.
Divisional Structure: A company with divisions organized by products, services, or geographic regions, each with its own management team.

Distribution Channels Examples:

Beverage Company: A beverage company uses a distribution channel that includes wholesalers, retailers, and direct-to-consumer sales through their website.
Book Publisher: A book publisher distributes books through bookstores, online retailers, and digital platforms like Kindle.
Pharmaceutical Manufacturer: A pharmaceutical company uses a complex distribution channel involving wholesalers, pharmacies, hospitals, and direct sales to healthcare providers.

Marketing Mix Examples:

Fast-Food Chain: A fast-food chain’s marketing mix includes pricing strategies, menu innovation, TV advertisements, and convenient store locations.
Luxury Fashion Brand: A luxury fashion brand’s marketing mix focuses on exclusivity, high prices, runway shows, and influencer partnerships.
Tech Gadgets: A tech gadgets company’s marketing mix emphasizes product features, online promotions, customer reviews, and global retail presence.

Financial Structure Examples:

Tech Startup: A tech startup secures funding through venture capital (equity) and uses it to cover development costs, analyzing cash flow and profitability as it grows.
Real Estate Developer: A real estate developer finances projects through bank loans (debt) and income generated from property rentals (equity), focusing on cost management.
Biotech Company: A biotech firm utilizes a mix of research grants (equity) and partnerships (debt) to fund research and development, focusing on long-term profitability.

Alternative Frameworks

Framework	Description	Key Features
Business Model Canvas	A visual tool used to describe, analyze, and design business models, which includes key elements such as customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.	– Provides a holistic view of the business model, outlining how an organization creates, delivers, and captures value. – Facilitates strategic planning and innovation by identifying opportunities for optimization and differentiation.
Value Chain Analysis	Analyzes the sequence of activities or processes involved in creating and delivering value to customers, identifying opportunities for cost reduction, process improvement, and value creation along the supply chain.	– Maps out the primary and support activities involved in delivering products or services to customers. – Identifies areas of competitive advantage and opportunities for value creation and optimization.
Lean Operations	A management philosophy and methodology focused on maximizing customer value while minimizing waste, which involves principles such as continuous improvement, respect for people, value stream mapping, and just-in-time production.	– Emphasizes the elimination of non-value-added activities and the optimization of processes to improve efficiency and quality. – Promotes a culture of continuous learning, experimentation, and problem-solving.
Agile Methodology	A project management approach that emphasizes iterative development, flexibility, and collaboration, which involves breaking projects into small, manageable tasks or iterations, and adapting plans based on feedback and changing requirements.	– Enables organizations to respond quickly to changing market conditions and customer needs. – Promotes cross-functional collaboration, transparency, and customer-centricity in project execution.
Capability Model	Defines the core capabilities or competencies that an organization needs to achieve its strategic objectives, outlining the skills, resources, processes, and technologies required to deliver value to stakeholders.	– Identifies the key strengths and weaknesses of an organization’s internal capabilities. – Guides resource allocation, talent development, and strategic decision-making based on core competencies and areas for improvement.
Organizational Design	Specifies the structure, roles, responsibilities, and reporting relationships within an organization, aligning its resources and processes with its strategic objectives and external environment.	– Defines the division of labor, hierarchy, and coordination mechanisms needed to support strategic goals. – Balances centralized control with decentralized decision-making to optimize performance and agility.
Total Quality Management (TQM)	A management approach focused on continuous improvement, customer satisfaction, and employee involvement, which involves principles such as customer focus, process improvement, data-driven decision-making, and employee empowerment.	– Promotes a culture of quality, excellence, and innovation across all levels of the organization. – Drives performance improvement and customer loyalty through systematic problem-solving and quality assurance practices.