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The ubiquitous but mysterious Operating Model

I associate operating model design with slicing fish.

Working on operating model design, feels like dividing one gigantic piece into several digestible ones.

The design process requires respect, skill, caution and attention just like cutting a nice piece of fish – and it needs a sharp knife to “not cut corners” but to “cut the mustard” :)

Recently, a client engaged me to “rework their operating model”. When digging deeper clarifying my specific mandate, I realized that what the client tasked me to achieve was a new set up of the department’s organization – which is one element of an operating model.

When I took my first professional steps, I was tasked to outsource a set of recurring activities to an outside vendor. My manager at the time said: you need to define the operating model !?! What she wanted me to do is define the process of collaboration, the split of tasks and responsibilities between the vendor and our team. Identifying strategic suppliers, defining the mutual relationship is another part of the operating model, but it is not the entire thing.

Over the course of my professional journey, the term operating model has been used synonymously for the organizational model, the people model, organigrams or RACIs… just to name a few. The concept of an operating model – as thought leaders define it – entails much more than just the element of “organization”.

So, what is an operating model?

The answer is a classic: It depends.

It depends which source you rely on or which concept most resonates with your own thinking. Comparing definitions of the operating model by recognized business schools (i.e., IMD, Harvard or Hult International Business School), established academic institutes or renowned consulting firms (like i.e., Deloitte) results in: different answers and varying schools of thought. Each explanation of the operating model comes with a twist or a slightly different angle. Even though in essence they convey a similar message. Recent studies at Hult International Business School allowed me to refresh and deepen my knowledge on operating model design.

In a nutshell: The Operating Model explains and details out how value is delivered to customers. It is the model through which your business operates. It describes the main elements of the operations of an organization. This includes i.e., processes and functions, digital hardware and software, physical infrastructure and equipment, as well as people capabilities and capacity. If the strategy and purpose set the ‘why’ and ‘where’, the business model provides the ‘what’, an operating model is about the ‘how’.

No operating model without a strategy or business model.

There is no operating model without a business strategy. You probably agree to refer to business strategy as the organizational master plan. A plan (developed by management) and implemented to achieve a set of strategic objectives. In other words: the strategy is the long-term route of an organization towards those objectives.

Prerequisites for any business strategy are a sharp and ambitious vision as well as aligned long-term objectives. Both provide direction and orientation on where the business is headed. While a business strategy acts as an overarching strategic framework within an organization, a business plan is more granular, outlining day-to-day activities and work of i.e., a business unit. Effectively, a business plan is one of the tools that helps deliver the business strategy.

We recapitulate: The business strategy and long-term objectives serve as the basis of every operating model. Without clarity on the first two, the operating model is useless. Ideally, a set of principles are derived from strategy to provide guardrails and guidance for the design of the operating model. These design principles essentially help fence the solution. Also, the business and operating model can never be considered in isolation. They go hand in hand.

Business Model as the front end. Operating model as the back end.

The business model is a core part of the business strategy addressing fundamental questions such as:

  1. How do we position ourselves against market competition? What are we going to be famous for? What is our unique selling proposition?

  2. What products or services to we want to offer?

  3. Which customers or customer segments do we want to cater to?

  4. In which geographies do we act or serve?

  5. Which channels do we use to sell?

The Business Model is an abstraction of an individual business reality. That’s why it is unique. It defines how a company generates value. More specifically, it describes what (value proposition) is being delivered to whom (customers). Envision the Business Model as the front end, delivering a certain value proposition to defined customer segments and via defined (sales) channels. In the end, it sums up with which idea a company intends to make money. Yet, the business model very rarely says much about how value will be delivered.

And that is when the operating model comes into play!

In essence, the Operating Model explains and details out how value will be delivered to customers. Imagine it as the back end of the business model canvas.

With the value chain(s) as its’ core, the operating model provides details on different elements needed to deliver value (to different stakeholders).

The nature of the operating model (especially with the help of the operating model canvas) can or should be very visual. It serves as a visual representation of the way our organization works. A full operating model consists of an assortment of maps, charts, tables or drawings which display meaningful connections between i.e., processes, people, partners, IT.

This visualization of the operating model can serve as a tool to steer and structure discussions between decision makers. It helps to expose issues for debate. It helps to take a holistic look at the bigger picture before deciding on or designing details.

POLISM spells it for you

Hult Business School for instance offers the acronym POLISM to capture the main elements of the operating model: Process, Organization, Location, Information, Supplier, Management Systems (compare sources below):

  • Process refers to the value delivery chain which depicts a step-by-step sequence describing the main work of the organization.

  • Organization depicts how the different activities of the value chain and the support functions link together into an organizational structure.

  • Location footprint describes where the work and assets of an organization are located and why.

  • Information entails how cross-functional processes and activities are managed and governed (especially with the help of systems).

  • Suppliers or business partners outline collaborative partnerships and the nature of each relationship.

  • Management systems describe which meetings, KPIs or decision rights are used (and with which frequency) in order to set up objectives, make plans and manage performance.

An operating model can be created for the entire organization, for a single Business Unit, a department or function or a team. Operating model documentation can have different levels of depth which range from one page to several thousands. Regardless of its’ level of detail, the operating model helps to create a common and shared understanding of as well as cross-functional alignment on what is needed in order to execute the business model or in a wider sense the business strategy. And even the highest level of an operating model generates value by creating a basis for fundamental discussion and decision making.

The value chain serves as the primary process underlying the operating as well as the business model

The value chain defines the required key steps to create the value proposition (i.e., products or services). And it answers the question: What am I doing as a company to deliver my value proposition to the customer?

Imagine the value proposition (product) to be a car. Its’ value chain in very simple terms can be described as > buy (parts from different suppliers) > manufacture > market > sell (i.e., via car dealers) > maintain (i.e., repair service).

During my studies at Hult Business School, one major learning was that a simplistic, high level value chain definition is sufficient to design a viable operating model. Starting with a simple but concise 5-7 step value chain provides enough fundament for rounded discussions around the operating model.

The second key take away was: Beware of those steps within your value chain that are mission critical or that your company excels at and consider a competitive advantage. Those superpowers should be highlighted to stand out. These steps are the ones which add the most value and their smooth execution is key. Also, reflect on current problems or issues along the chain. Where exactly do the occur? Issues with your mission critical steps need to be resolved and sorted with top priority. A conscious reflection on superpowers and current obstacles aid prioritization, decision making and resource allocation.

So, what is a “target” operating model?

The term “target operating model” is also a popular one across industries. It theoretically refers to the envisaged end state of what an operating model should look like. Chances are high that once the design or rework of an operating model is completed, reality catches up. This implies that meanwhile context, market or conditions have shifted calling for new adjustments on the latest version. Following that rationale, there is no end in operating model design – it is rather a continuous circle of rework and adjustment.

Main take aways

  1. Definitions of an operating model vary.

  2. An operating model is a representation or blue-print of an organization’s key operations helping to deliver value to the customer. It describes how to deliver on the strategy.

  3. POLISM is a great acronym to remember all elements of an operating model

  4. Creating an operating model without a strategy or business model makes no sense.

  5. Imagine the business model to be the front end and the operating model as the back end.

  6. The value chain(s) serve(s) as the primary process underlying the operating as well as the business model.

  7. Even the highest level of an operating model generates value by creating a common understanding and offering a basis for fundamental discussion and decision making.

  8. Operating model design work is a continuous process with no static end point.

If you are as intrigued and fascinated by operating model design as I am, reach out. I will be happy to continue the discussion and reflection.

Disclaimer: This blog post does not aim to provide an academic and well-rounded essay on operating models. I am rather offering my point of view, sharing learnings whilst differentiating the operating model from other concepts or frameworks.



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