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A how-to guide for building an effective operating model

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If you’re running a business, you know that there are plenty of different components that make your business work. 

Of course, every business wants to bring value to its customers. In order to deliver that value to your customers, your company needs a strong operating model. An operating model can help you hit your organizational performance goals. 

Especially in today’s climate, everything changes — and changes fast. Many companies are pivoting their direction, veering the steering wheel left to right to avoid roadblocks. Maintaining profitability — while caring for your people and your customers — is radically important. In times when margins for error may be slimmer than before, an agile operating model is a must. 

In order to adapt to the changing economic environment, an operating model can help your organization perform better. Let’s dig into what defines an operating model. We’ll also talk about how to build an effective operating model that’ll help keep your company one step ahead.  

What is an operating model? 

First, let’s define what we mean by operating model. 

What is an operating model?

An operating model is a visual representation of the business model. It’s the way an organization carries out its business model to deliver value to its customers. 

It’s estimated that nearly 70% of well-formulated strategies failed due to poor execution . Beyond that, 61% of executives reported not being prepared for the challenges they faced once put into leadership roles. The result? An estimated 50%–60% of executives fail within the first 18 months of being promoted or hired. It’s a radical shift in responsibilities to become a manager . In those first few months, it’s critical that leaders get the support they need to lead teams well . 

Despite strong business models in your organization, it’s the operating model that brings your business (and profits) to life. 

4 types of operating models 

Let’s dig into the four different types of operating models — and how they may interact with one another. While it might sound like a lot of corporate jargon , there are some key differentiators to what makes up each type of model. 

• Coordination operating model. Think of coordination as shared access to data. This type of operating model calls for high levels of integration but low standardization. This essentially means that many key parts of the business are integrated with one another. However, each business unit or team has its own way of doing things. 
• Unification operating model. This is probably the most hands-on type of operating model. The unification operating model runs on a theory that when things are tightly integrated and tightly standardized, companies maximize efficiency. The risk here is that there’s little autonomy or wiggle room for how different business units operate. 
• Diversification operating model. This type of operating model applies to companies that have very few shared customers, suppliers, or even ways of doing business. Essentially, this model helps companies diversify their products and services to different customers to avoid a central hub to limit control over different business units. 
• Replication operating model. Another way to think about this operating model is autonomy but with some standardization. This type of operating model makes sure different business units have autonomy over their operations. But first, there’s a standardization of how things are done. 

How do you build an effective operating model? 

If we really get down to it, an operating model is how your organization runs. If we think about your business model as the strategy, your operating model is the execution. 

So, when it comes to building out an effective operating model, there are a few things to keep in mind. Follow these seven steps to help build an effective operating model for your company. 

1. Reflect on your company culture 

While it might not be the first thing that comes to mind when you think about execution, your company culture can be a guidepost for how you operate. 

How do your key stakeholders interact with one another? What sort of partnerships or connections do you hope to foster within your organization? As a leader, what’s your decision-making philosophy? What type of customer experience do you want to create? 

Take a minute to reflect on your company culture. This might help guide some decisions you make about your operating model. At its heart, your operating model is about people. It’s about helping your people run efficiently to optimize the business process. 

And when you put people at the center of your organization, oftentimes, your profits reflect it. 

2. Identify (or create) your value chain 

Now, let’s get into your strategic plan . As a business leader, you’ve likely put together a roadmap for your value proposition. You’ve probably put together the business model that’ll help guide your target operating model. 

To make sure you’re delivering value to your customers, you need to understand what that value is. Work with your corporate strategy team to ensure you’re measuring the right values, too. Together, you can track the right KPIs, business metrics , and other key components of your business methodology. 

3. Align with your business strategy

Let’s say that you run a supply chain business that relies on automation to help move your product through different parts of the business. 

Your business hinges on cross-collaboration . You need defined business processes to make sure your products can move from one step to the next. In this type of business, teams working in silos simply wouldn’t work. You know that your strategy demands open access to information and coordination. 

Think about the core of your business strategy. What does it take to get your product delivered to customers? What sort of product lines will your product move through before it hits the market? What about your business strategy needs to align with your operating model?

4. Invest in performance management solutions 

Performance management matters more than you think. Performance management is a set of processes and systems to help employee development . 

Oftentimes, these systems, processes, and lines of communication help focus on strategy. At its heart, performance management is about helping employees reach their peak performance . 

Especially now, it’s important that your employees see growth opportunities. Your operating model is dependent on the people who run it, which means employee retention needs to be top of mind. 

In what ways are you encouraging career development within your company? How are you attracting and retaining top talent ? How are you investing in your employees to reach their full potential? How does talent management weave into your performance management strategy? 

With BetterUp, you can provide individualized support for your employees. If you want to tap into the potential of your workforce, consider how virtual coaching can help. 

5. Think about how your digital transformation strategy fits into the picture 

People help your operating model come to life. But the right technology, especially today, can drastically improve how your people work. 

If you haven’t already, make sure you take a hard look at your digital transformation strategy .

What tools will help your employees do their jobs well? For example, what technology can help streamline workflows? In this future state of work, how do you see technology working within your ecosystem? What initiatives or programs will need new tools or technology to successfully launch? 

6. Develop a strong leadership team 

At the helm of every good operating model is a strong leadership team. But contrary to popular belief, leaders aren’t born leaders . It’s important to invest in your leadership development to make sure you have the right folks to execute your operating model. 

A good starting point is investing in virtual coaching. After four months of leadership training with BetterUp, Members report lower stress, higher purpose, and higher resilience . Employees who are thriving :

• Lead teams that are 31% more productive
• Have direct reports who are 78% less likely to leave voluntarily
• Recover from setbacks 1.2x stronger
• Are less likely to experience mental illness
• Are 22% more satisfied with their jobs

What’s the difference between an operating model and a business model? 

This is a good question. The two models work together in a symbiotic relationship of sorts. 

But it’s important to note that a business model and operating model are not the same things. 

A business model is how the company will offer its value proposition to the market. Strategic business model planning outlines products, service management, customer base, and key stakeholders. 

Think of the operating model as how the company will carry out its business model. It’s the execution arm—the pathway the company will take in order to deliver its value proposition. 

Build a strong operating model with a mentally fit workforce 

In a world that’s constantly changing , it’s important to make sure your people are at the center of everything you do. 

With the rise of hybrid and remote work , people are working from all geographies. It’s imperative that companies have that competitive advantage to keep ahead of the competition. But it starts with having the strategic foresight and future-mindedness to execute with agility. 

If you’re in an operating model redesign or starting from scratch, BetterUp can help. With access to virtual coaching, you’re investing in your employees’ mental fitness .

We know things are going to continue to change. There’s uncertainty looming ahead, and strategy needs to stay flexible to be able to adapt to what the world has in store for companies. After all, companies can only focus on their own locus of control . It’s important to be pragmatic and optimistic about the future. 

But with a mentally fit workforce, your company can feel prepared for what the future of work holds. In fact, our research found that employees with the best mental health had 56% fewer missed days for health reasons , were 5X more likely to be rated a top performer, and had 25% higher productivity and 34% higher engagement than those struggling with mental health.

Being mentally fit translates into a more resilient workforce. This means that resilient workers are better poised to have more flexible thinking , contribute to more agile teams, and are 20% more innovative. 

Together, we can help you build a resilient, agile workforce prepared for the future. 

Madeline Miles

Madeline is a writer, communicator, and storyteller who is passionate about using words to help drive positive change. She holds a bachelor's in English Creative Writing and Communication Studies and lives in Denver, Colorado. In her spare time, she's usually somewhere outside (preferably in the mountains) — and enjoys poetry and fiction.

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A Complete Guide to Operating Models: Strategies & Real-World Examples

Explore the fundamentals of operating models in our detailed guide. See how strategic alignment, process efficiency & innovative structures drive success

Dive into the world of operating models , the fundamental architecture of business operations. In this comprehensive blog, we explore the essence of operating models and their pivotal role in shaping organizational success. Understand the intricate components—from strategy alignment to technological infrastructure—and their collective impact on efficiency, innovation, and competitive advantage. Learn about different types of operating models like centralized, decentralized, and networked, and discover how they drive business strategy, enhance customer experience, manage costs, and foster adaptability in a dynamic market. This guide is a must-read for business leaders seeking to align their organization's structure and processes with strategic goals for long-term growth and resilience.

Operating Models: The Foundation of Organizational Success

Operating models are the heart and soul of any organization. They are the invisible architecture that dictates how a company operates, from its day-to-day processes to its long-term strategic decisions. In today's dynamic and competitive business landscape, understanding operating models is essential for companies to thrive. In this blog post, we will delve deep into the concept of operating models, exploring what they are, why they matter, and how they impact business success.

Chapter 1: Defining Operating Models

Before we dive into the intricacies of operating models, let's start with a clear definition. An operating model can be thought of as a blueprint that outlines how an organization delivers value to its customers, manages its resources, and achieves its strategic goals. It encompasses the organization's structure, processes, technologies, and people, all working together to create a coherent and efficient system.

1.1 Components of an Operating Model

To understand operating models better, let's break down their key components:

• Strategy: The operating model should align with the organization's overarching strategy. It defines how the company will achieve its strategic objectives through its operational activities.
• Structure: This component outlines the organization's hierarchy, reporting lines, and departments. It answers questions like, "Who reports to whom?" and "How are responsibilities distributed?"
• Processes: Operating models specify the core processes and workflows that drive the business. These processes can include everything from product development to sales and customer support.
• Technology: Modern businesses rely heavily on technology. The operating model dictates the technology infrastructure and systems needed to support the organization's operations effectively.
• People: The operating model also addresses the workforce. It defines the skills and competencies required for employees, as well as their roles and responsibilities.
• Culture: Culture is a critical but often overlooked aspect of an operating model. It sets the tone for how employees interact with each other and with customers, shaping the organization's identity.

Tools like Agentnoon's operating model software can help you design your perfect operating model

Operating models can vary widely depending on the industry, business size, and strategic goals. Some common types of operating models include:

• Centralized Operating Model: In this model, decision-making and control are concentrated at the top of the organization. It is often used in hierarchical organizations where efficiency and consistency are paramount.
• Decentralized Operating Model: Decentralized models delegate decision-making authority to different business units or departments. This approach can foster innovation and agility but may lead to inconsistencies.
• Hub-and-Spoke Operating Model: This model combines elements of both centralized and decentralized approaches. A central hub oversees key functions, while spokes (business units or departments) have some autonomy.
• Networked Operating Model: In a networked model, organizations collaborate with external partners, suppliers, and customers to deliver value. It is prevalent in industries like technology and logistics.

Chapter 2: The Importance of Operating Models

Now that we have a better understanding of what operating models are, let's explore why they are so crucial for business success.

2.1 Alignment with Strategy

One of the primary roles of an operating model is to ensure that an organization's operations align with its strategic objectives. Without a well-defined operating model, a company may find itself pursuing conflicting goals or struggling to execute its strategy effectively. Alignment between strategy and operations is critical for sustainable growth and competitiveness.

2.2 Efficiency and Effectiveness

Efficiency and effectiveness are at the core of operating models . An optimized operating model streamlines processes, reduces waste, and enhances resource allocation. This, in turn, can lead to cost savings, improved customer satisfaction, and a competitive edge in the marketplace.

2.3 Scalability

As businesses grow, they must be able to scale their operations efficiently. A robust operating model allows for scalability by providing a framework for adding resources, expanding into new markets, or launching new products or services without causing operational disruptions.

2.4 Risk Management

Operating models also play a critical role in risk management. By defining clear processes and controls, organizations can identify and mitigate risks effectively. This is particularly important in industries where compliance and regulatory requirements are stringent.

2.5 Innovation and Adaptability

In today's fast-paced business environment, the ability to innovate and adapt is essential. An agile operating model can facilitate innovation by encouraging experimentation and learning from failures. It also allows organizations to pivot quickly in response to changing market conditions.

Chapter 3: The Impact of Operating Models on Business Success

Now that we understand the importance of operating models, let's explore how they can directly influence an organization's success.

3.1 Customer Experience

A well-designed operating model can significantly impact the customer experience. It ensures that processes are customer-centric, leading to smoother interactions, quicker problem resolution, and higher customer satisfaction. In an age where customer loyalty can make or break a business, this is a critical factor.

3.2 Cost Management

Efficient operating models help control costs. By optimizing processes and resource allocation, organizations can reduce unnecessary expenses and allocate resources where they are most needed. This not only improves profitability but also provides the flexibility to invest in growth initiatives.

3.3 Competitive Advantage

In many industries, the operating model can become a source of competitive advantage. Companies that can execute their strategies more effectively and efficiently than their competitors often gain a significant edge. For example, Amazon's operating model, with its focus on logistics and customer-centricity, has been a key driver of its success.

3.4 Adaptability to Change

Business landscapes are constantly evolving, and organizations must be able to adapt. Operating models that are designed with flexibility and agility in mind can respond more effectively to disruptions, whether they are caused by technological advancements, market shifts, or unforeseen crisis.

3.5 Employee Engagement and Productivity

Operating models also impact employees. Clear roles and responsibilities, efficient processes, and a positive organizational culture can boost employee engagement and productivity. Engaged employees are more likely to contribute their best efforts and stay with the company longer.

Chapter 4: Developing and Evolving Operating Models

Now that we appreciate the significance of operating models, let's explore how organizations can develop, refine, and adapt their operating models to meet their evolving needs.

4.1 Assessing the Current State

The first step in developing or improving an operating model is to assess the current state. This involves examining existing processes, structures, technologies, and culture. It's essential to identify strengths, weaknesses, and areas for improvement.

4.2 Defining the Desired Future State

Once the current state is understood, organizations should define their desired future state. This involves setting clear goals and objectives for the operating model, taking into account the organization's strategic priorities.

4.3 Skill Gap Analysis

With the current and future states defined, a gap analysis can help identify the discrepancies between them. This analysis highlights the specific areas that need to be addressed to bridge the gap and achieve the desired state

4.4 Design and Implementation

The design phase involves creating a blueprint for the new operating model. This may include restructuring the organization, redesigning processes, selecting and implementing new technologies, and addressing cultural changes.

4.5 Continuous Improvement

Operating models are not static; they should be continuously reviewed and improved. Regular assessments and feedback loops can help organizations adapt to changing circumstances and stay competitive.

Chapter 5: Case Studies: Real-World Examples of Operating Models

To illustrate the practical implications of operating models, let's examine a few real-world case studies.

5.1 Apple Inc.

Apple's operating model is a prime example of alignment with strategy. The company's focus on innovation, premium quality, and seamless user experiences is deeply embedded in its operating model. From product design to supply chain management, Apple's operations support its strategic vision.

5.2 Walmart

Walmart's operating model is renowned for its efficiency and cost-effectiveness. The company's supply chain and inventory management systems are meticulously designed to minimize costs while maintaining product availability. Walmart's operating model has played a pivotal role in its status as a retail giant.

Airbnb's operating model is a testament to its platform-based networked approach. By connecting hosts and travelers through its platform, Airbnb has revolutionized the hospitality industry. Its operating model is built around trust, user-generated content, and technology-driven matchmaking.

Operating models are the backbone of business success. They define how organizations deliver value, manage resources, and align their operations with their strategic objectives. Understanding the components, importance, and impact of operating models is essential for leaders and decision-makers in today's ever-changing business landscape. By developing and evolving their operating models effectively, organizations can position themselves for sustainable growth, innovation, and competitiveness in the long term.

Get in touch with us to learn more about how Agentnoon can help with designing efficient operating models !

Shayan Amin

Growth @ Agentnoon

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Why Every Company Needs an Operating Model [+ Steps to Build One]

Published: October 05, 2021

If you are running a business, odds are, you’ve already figured out your business model.

It’s usually the first thing entrepreneurs build out, as it’s key to figuring out the value you’re bringing to the market and consumers.

But what about your people, processes, systems, and technology? Those are all key components of your business that should be outlined in your operational model.

Let’s dive into what an operational model is and how it compares to a business model, plus cover the steps to create one today.

What is an operating model?

An operating model is a visual representation of how a company runs. It includes everything from how the company sources its products to how it structures its business areas and departments. An operating model serves as a blueprint for executing your strategy.

Many people confuse business models with operating models. However, they outline different things and serve different purposes.

A business model outlines how a company captures and offers value through its products/services, value proposition, customer segments, key partners, etc. An operating model, on the other hand, lays out how a company will run in order to deliver that value.

So, in simple terms, a business model looks at the what . An operating model focuses on the how.

Let’s take the example of a fictional lifestyle business called EarthBound. Their business model will describe their sustainable and eco-friendly approach as their value proposition, outline their various product lines, lay out their customer channels through brick-and-mortar and ecommerce stores.

Their operating model will focus on how they source their products, the roles they need within the company, the systems they use in each business area, their data management plan, and more.

Unsure why you should design an operating model? Here are the benefits:

• It helps you identify the systems and structure necessary to serve your customers in a way that’s in line with your larger strategy.
• It’s a blueprint for how resources are organized and operated so, that serves as a baseline from which to scale your business.

Operating Model Template

When you build out your operating model, you focus on three key elements: process, people, and technology.

There are two approaches you can take: role-based or process-based.

When you take the role approach, you design your operating model based on hierarchy and the roles within your company. With a process approach, you focus instead on the journey to deliver value to your consumers.

The template you follow will depend on what makes the most sense for your business based on strategy. For instance, say you’re reviewing your operating model because you’re considering restructuring or reallocation of resources. In this case, a process-based approach may work best.

What You Need To Build Your Operating Model Design

You have to start by asking yourself: "How do we manage our resources to effectively run our business and deliver our services as intended while meeting our goals?"

As you start to think about that, focus on each area outline here.

1. Strategy

To build your operating model, you first need to be clear on your strategy.

This is because your strategy and core priorities will inform your operating model. Once you define it, the next step is creating a set of design principles.

Bain & Company , a global management consulting firm, suggests drafting a list of around seven statements that outline what your company must do to execute your strategy. This will serve as an anchor as you build out your model.

Anyone on your leadership team should be able to state these concisely and clearly using simple language. Here are a few examples:

• Standardize the customer experience across all regions.
• Reduce siloes and align the organization on key company priorities.
• Transition to digital-first approach.

2. Systems and processes.

For any company to run smoothly, they need systems and processes.

When creating or reviewing an operating model, you need to fully understand the inner workings of every business area.

What business systems are in place in X department? What hardware and software do they rely on?

As you think about these questions, make sure you consider both internal and external tools that your organization relies on.

This means knowing what every department needs to succeed in its roles. For instance, EarthBound’s finance department handles activities like invoicing, accounting, payroll, and billing. Going deeper, this means they may use software like Quickbooks .

The marketing team is likely responsible for lead generation and brand awareness through content, social media, paid advertisement, and more. As a result, they rely on tools like Casted to achieve their goals.

Once you know the systems and processes, you can figure out how it fits into your strategy and what changes can or should be made.

3. Organizational Structure

Over the years, new methodologies have been introduced that invite business leaders to revisit their organizational structure and make changes to their operational model.

One big shift in recent years has been how companies tackle projects. In the past, companies followed the waterfall methodology, which organized projects in linear, sequential phases. Today, many companies prefer the agile methodology, which is iterative and offers more flexibility.

Each framework is unique and comes with its own advantages and limitations. As such, it’s important for a business to know what direction they want to head in as they develop their operational model.

4. Talent Management

You can’t have a successful company without talent.

As you develop your operating model, one important question to answer is, " What do your teams look like? " and " What does success look like in every role?"

In this phase, you’ll want to understand the key roles and responsibilities needed to run the business and how those roles will evolve over X period of time.

Furthermore, you should also have a clear culture code that outlines the norms and behaviors you expect from your team and the values you celebrate.

These elements seep into other areas of your business and as a result, are incredibly important when working on your model.

5. Technology

As we’ve seen in recent months, the world is constantly changing.

More teams are remote than ever before and companies are investing in virtual tools like video conferencing and messaging. With this shift comes a need to have the technology to support growing global teams.

Beyond that, there is also the business technology needed to keep everyone in sync. Too often, companies suffer from siloes and have difficulty creating cross-functional teams. By understanding how you envision your team operating, you can seek out software that meets those needs.

Building your operating model is essential in maintaining the health of your company. Whether you’re just now creating one or revisiting an old one, doing so will help you better understand how to execute your strategy.

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What is the Modern Operating Model?

Why the modern operating model is necessary.

An operating model drives value creation and strategy execution across an organization. It represents the guiding principles of operations: how different parts of a business should work together to deliver value to customers and stakeholders. It also encompasses how an organization functions to meet core business objectives such as efficiency, growth, and adaptability. Organization structure, culture, processes, technology and decision-making procedures are key parts of an operating model.  

In the modern era, several factors impact how we think about conventional operating models: 

• The lingering strategy execution gap  
• A fast-changing world across all dimensions of life  
• The fourth industrial revolution, the wealth of data and its application 

Considering these factors, an updated, modern operating model is needed to solve the lingering strategy execution gap and unlock the opportunities of an evolving world. In this article, we’re going to outline what the Modern Operating Model looks like. For detailed information on the context, challenges solved, and the opportunities of the Modern Operating Model, we will be releasing a second part to this article.

The Modern Operating Model overview

There are five core components that make up the Modern Operating Model, each with different parts within. 

 1) Define the destination 

Your mission, cultural values, vision , and strategy work together to act as a north star for your organization. This sets the destination and goals that your organization needs to align towards. 

2) Change the business 

Strategic objectives, OKRs , and planning the work quantify and make reaching your destination a tangible proposition. They create alignment, structure, and focus to maximize efficiency, speed, and productive power toward your goals. 

3) Run the business  

Observability of KPI’s through a connected technology stack in addition to OKR reporting gives you powerful insights into what’s happening inside the business, in addition to progress toward goals.  

4) Do the work 

With the organization aligned, the plan is executed through daily work. Proper alignment through organization architecture, culture, and a clear line of sight between strategy and execution empowers your employees to do their best work. 

5) Assess & adapt  

Through continuous monitoring, data-driven decisions are made to incrementally optimize, navigate threats, and seize opportunities. Strong top-down alignment liberates your organization to adapt quickly and move as one. 

Although there’s a chronological logic to the Modern Operating Model, all components of the Modern Operating Model work together in a feedback loop and need to be engaged simultaneously as an ongoing discipline. Let’s now dive into the different components of the Modern Operating Model and their corresponding parts in more detail. 

Component 1: Defining the destination

Correctly defining the destination impacts alignment. At the highest level, defining your destination is about where you want to go, why you want to go there, what needs to be done, and how you will do it. If there’s a disconnect between how your team sees the bigger picture, conflict, erosion of trust, and misaligned execution may emerge.  

Defining the destination can be broken down into three core parts: 

Mission and cultural values , vision , strategy .

Mission and cultural values play a role in alignment as everyone in your organization needs to approach their work from the same perspective. Otherwise, there will be a disconnect at the execution layer of the organization. For instance, having a common philosophy that prioritizes customer satisfaction over short term revenue will lead to different behaviors and decisions from your team.  

Mission and cultural values also affect engagement, especially in the context of a new generation of workers. Generation Z and Millennial workers aspire to work at organizations that have a greater purpose and more conscious culture. Failure to align your mission and culture with these changing attitudes means you may reduce employee engagement — another key part of effective strategy execution. As these generations value company loyalty less, you may also risk losing key personnel which leads to other execution challenges. 

Like with mission and cultural values, your vision is important for alignment. Your whole team needs to see the future in the same way to maximize engagement and work in synchronization. Vision also has an impact on priorities and strategic focus. A clear idea of your destination means you can make better decisions about the relevant work that needs to be done, take advantage of the right opportunities, and importantly, not become side tracked along the way. 

Learn the key differences and similarities of mission vs. vision

Your strategy is the first tangible link between defining your destination and generating the momentum to get there. Your strategy represents why, what, and how your company will navigate at the highest level and informs how you set strategic objectives and OKRs, which play key roles in the next component of the Modern Operating Model.  

Component 2: Changing the business

The next component of the model is changing and aligning the business. Changing the business is about deciding on the initiatives and goals you want to focus on to reach your destination. Good organizational alignment is about getting the whole organization in sync and moving in the same direction. 

Proper organizational alignment improves strategy execution through: 

• Greater efficiency: working on the right things means less waste in the form of time and resources 
• Higher engagement: having a clear line of sight between strategic objectives and daily execution means employees can see how their work impacts the organization
• Prioritization and focus: alignment means the whole team focuses on the objectives and activities that are mission critical

Alignment plays an important role in organizational adaptability. If there are any big changes or shocks to the business, your organization needs to be able to move together as one unit. If parts of your organization are misaligned, they may lag behind if your destination changes which can lead to operational roadblocks. In addition, the megatrends of remote and flexible work mean getting alignment right has become more difficult due to a more distributed, asynchronous, and multi-cultural workforce.  

Alignment starts with clear top-down communication about the destination and what needs to be done to get there. This is achieved through setting strategic objectives and OKRs, in addition to careful planning of how your team will execute the work. 

Strategic objectives and OKRs  

The first part of aligning the business is setting and communicating strategic objectives and OKRs. In many cases, the communication of strategy can get lost as it filters through the multiple layers of the organization. This is made worse due to strategy being more abstract and high-level, with language that may not be easily understood by the execution layer of the organization.  

Strategy without objectives is meaningless — it needs to be clarified, quantified, and plotted against a timeline. This is what strategic objectives enable — they break down your strategy into tangible goals that can be easily communicated and worked toward as a team.  

With strategic objectives set and communicated, your organization can then set OKRs ( objectives and key results ). These break down your strategic objectives even further by quantifying the specific outcomes different parts of the organization need to achieve. These also need to be communicated across the organization to ensure alignment. Where strategic objectives work on a yearly or multi-year timeline, tactical OKRs function on a quarterly or yearly basis.  

Strategic objectives and OKRs impact strategy execution by: 

• Plotting ambitious yet achievable goals to stretch the team’s capabilities while preserving morale. 
• Creating vertical alignment so everybody is working toward strategic objectives. 
• Enabling horizontal alignment so interdependencies between departments can be mapped out, increasing collaboration. 
• Boosting efficiency, engagement, prioritization, and focus through bottom-up involvement in goal setting. 
• Creating an outcome focused organization as opposed to activity which doesn’t generate results. 

Learn more about the benefits of OKRs for businesses

Planning the work 

With strategic objectives and OKRs set and communicated, planning the governance and execution of work is next. 

A few things to consider during this phase are: 

• Culture design: Your operational culture must be transparent, continuously learning, and braced for constant transformation. This enables effective use of the OKR method and continuous adaptations. At the leadership level, there must be a shift from control and compliance to trust and transparency. 
• Organization architecture: Your organization structure needs to be adaptable to account for asynchronous, remote, and flexible ways of working.  
• Policies and procedures: Decision making should be made at the edge of the network — closer to the source of data and point of execution, as opposed to centrally. In the modern era, there’s no longer time to go up and down the chain of command to make decisions. Greater communication and transparency efforts need to be pushed to eliminate information silos and shadow organizations.  
• Playbooks and processes: Mapping out the strategies and tactics of the work to be done. 
• People: Deciding who will be doing what.  
• Tools: Choosing the right software tools to enable work. With the Modern Operating Model, special emphasis is placed on connecting all your data sources for better observability and assessment.  
• Resource allocation: Setting budgets appropriately to meet different OKRs.  
• Programs and initiatives: Organizing work at a high level in conjunction with strategic objectives and OKRs.  
• Approaches to work: Deciding on how work will be carried out with task management, workflows, projects, sprints, etc.  

Effective work planning increases the efficiency of your strategy execution. Conducting work in the right manner means time and resources are saved through error reduction, in addition to faster and better work outputs.  

Component 3: Running the business

As work is conducted, there needs to be continuous monitoring of both data and information. In a Modern Operating Model, monitoring incorporates and goes beyond traditional management check-ins and annual and quarterly performance reviews. KPIs are gathered from all parts of the business in addition to the application of the OKR method. Working in conjunction, OKRs and KPIs create a more powerful picture of what’s happening in the business and how it affects progress toward strategic goals.  

As part of the internal monitoring aspect of The Modern Operating Model, KPIs are pulled from a connected technology stack to provide business observability . With the right tools, you can sync your KPIs to continuously update alongside your OKRs, in addition to gaining insight about potential risks and opportunities. To add to this, OKRs provide quantitative data in the form of key results and confidence assessments toward meeting objectives. They also provide qualitative information in the form of weekly OKR reviews and quarterly retrospectives.  

Learn more about OKR reviews and retrospectives

External monitoring is also a necessary part of the Modern Operating Model. This involves constant surveillance of your business environment to identify changes, threats, and opportunities. This could be in the form of understanding megatrends such as the next wave digitization or keeping tabs on startups that could potentially disrupt your space. 

Together, internal and external monitoring are used to compress learning feedback loops and boost business observability, which can then be used to make more accurate decisions about changes and adaptations to your strategy execution. 

Component 4: Doing the work

The next component of the model is doing the work. At the surface level, this involves the basics of completing tasks, inputs, transformations, and outputs. But under the Modern Operating Model, the essence of how the work is done is different. 

When applied correctly, the ideal state of work should look like this: 

• Fully engaged employees who expend discretionary effort to improve their craft and solve problems. 
• Collaboration and communication between teams to work toward common objectives. 
• Continuous learning and feedback based on regular OKR reviews and KPI observability. 
• Greater ownership and accountability of work through transparency. 
• Decisions made locally in a data-driven way. 
• Greater focus on outcomes, as opposed to tasks and activities.  
• More experimentation and embracing failure. 
• Recognition and reward based on merit and adherence to company values.  

Although this ideal state of work doesn’t happen overnight, the components of the Modern Operating Model are designed to optimize your strategy execution over time, bringing this ideal closer to reality over time. 

Learn about the intersection between OKRs and agile methodologies

Component 5: Assessing and adapting

With the right data and information through business monitoring, assessments can be made to adapt strategy execution to help you stay the course. The process of assessing and adapting involves looking at the data and information you have collected, extracting the insights and narrative, and turning them into knowledge which can be used for decision making.  

At the macro level, the purpose of this component is to help you navigate the threats and opportunities of a fast-changing world. This means you may need to make changes to your destination and how to get there at a strategic level. In addition to the points mentioned above, these could include navigating changing economic, political and social conditions, adapting to innovation, and ESG (environment, social, and governance) concerns.  

At the micro level, you want to assess and adjust your strategy execution for: 

• Overall effectiveness: Optimizing the different components of the Modern Operating Model such as how work is done. 
• Progress towards OKRs: Looking at key results metrics for each objective and uncovering the reasons for possible underperformance. Deciding whether the OKRs set are still relevant in terms of achievability and being critical to current strategic objectives. 
• Internal warning signs: Gaining insight and foresight, as opposed to hindsight, about operational problems through AI and KPI data. This could be technical issues such as servers going down or business challenges such as a high churn rate among a customer demographic.  
• Internal opportunities: Spotting patterns and trends to map out new opportunities. For instance, looking at customer support data to identify unmet or emerging customer needs. 

As adaptability is central to the Modern Operating Model, you will continuously adjust different components of your strategy execution based on the data and information you collect. You may only need to make small changes to a work tactic, for instance, or realize there is one threat or opportunity you need to focus on. But as time progresses and the business environment changes, you may need to adjust at the strategic level. Full adaptiveness of strategy execution at both the macro and micro level is the promise of the modern operating model. 

Why use the Modern Operating Model?

Optimizing your strategy execution is relevant to every company regardless of size, stage, or industry. Working together, all components of the Modern Operating Model boost alignment, focus, adaptability, and efficiency in your strategy execution. 

Through adopting the Modern Operating Model, you can better navigate the threats and opportunities of a fast-changing world, in addition to achieving your strategic goals faster. To learn more about the broader context, challenges solved, and opportunities of using the Modern Operating Model, we will be releasing a second part to this article.

Quantive empowers modern organizations to turn their ambitions into reality through strategic agility. It's where strategy, teams, and data come together to drive effective decision-making, streamline execution, and maximize performance.  

As your company navigates today’s competitive landscape, you need an Always-On Strategy to continuously bridge the gap between current and desired business outcomes. Quantive brings together the technology, expertise, and passion to transform your strategy from a static plan to a feedback-driven engine for growth.  

Whether you’re a visionary start-up, a mid-market business looking to conquer, or a large enterprise facing disruption, Quantive keeps you ahead — every step of the way. For more information, visit www.quantive.com . 

Additional resources

Modern operating model manifesto, why use the modern operating model, how top companies are closing the strategy execution gap, 7 best practices for strategy execution, subscribe for our newsletter.

30 second guide to building an Operating Model

• An operating model describes how the business is run. It describes how the business deliver value and enacts its strategy.
• Organisational structure
• Some technology
• Define your operating model design principles
• Define your operating model operating principles
• Understand and document the value chain(s)
• Understand and define the capabilities required to deliver the value chains including supporting capabilities
• Understand and define the processes that make up the capabilities
• Organisation and roles and skills of the people
• Organise the resources and location to support the people doing the work
• Identify the information and systems to support the capabilities and processes
• Define the management systems supporting the planning and performance tracking of the work

• ITIL – the well-known service framework model about identifying, running and maintaining services. To my mind it is less on the build and more about the run, but the concepts have applicability outside of IT
• COBIT – Control Objectives for Information and Related Technology
• eTOM – Telco based operating model that can be adapted for IT
• IT4IT – OpenGroup IT operating model
• BIAN – Banking Industry Architecture Network
• IAA – Insurance Application Architecture (IBM)
• IFW – Information Framework (banking framework from IBM) – this has been adapted to a number of industries and has IT specific sections

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Top 7 Business Operating Model Templates with Examples and Samples

Deepika Dhaka

With change as a constant companion of business, companies constantly adjust their course to navigate obstacles while ensuring profitability. Caring for their employees and businesses is another prime concern.  In these times, where the margin for error in operations is thinner than ever, having an agile operational framework is crucial.

A business operating model is a blueprint or framework that outlines how a company operates, including its core processes, structure, capabilities, and technology. It provides a clear and organized structure for how parts of the business work together to achieve goals and deliver customer value.

If you are a business owner struggling to create an effective operating model for your business, we have a solution for you — Business Operating Model Templates

Business Operating Model Templates to Provide Structured Framework

Business operating model templates offer a structured framework to benefit organizations.  They bring clarity and alignment to an organization's processes and responsibilities, fostering efficiency and consistency while reducing redundancy. Templates are also crucial in risk management, scalability planning, and team communication. They are invaluable during onboarding and training, aiding change management efforts and supporting data-driven decision-making. These help ensure compliance with regulations and industry standards, enable benchmarking against best practices, and promote a culture of continuous improvement. 

Explore these Top 10 Target Operating Model Templates to Envision Business Growth. These templates function as a bridge that fills the gap between your running operations and your vision for growth and transformation.  

The best part about SlideTeams Templates is that the 100% customizable nature of the templates gives you the flexibility to edit your presentations. The content-ready slides give you the much-needed structure. 

Let’s begin exploring these templates one-by-one!

Template 1: Business Operating Model Risk Management Framework

Introducing a comprehensive business operating model integrated with a robust risk management framework. This PPT Template framework encompasses elements such as capital enhancement, control and quantification measures, transparent communication practices, and a clearly defined model risk appetite. It serves as a  roadmap to enhance process efficiency, align organizational goals, and mitigate risks. Each component is detailed, and the template lists specific tasks and activities needed for successful implementation. Download this template and streamline your risk management processes today.

Download this template

Template 2: Business Operating and Capability Model Template 

This PPT Slide represents the operating model in five levels: Value chain, Sales, CRM, Segmentation of Clients, and Opportunity. It showcases how these five levels or components fit within the organization's operating model. It helps stakeholders understand the interplay between these components and how they contribute to business growth. This layout also includes tasks and activities associated with each of these levels. Get it now!  

Template 3: Cross-Functional Business Process Operating Model

This powerful PPT Slide is designed to help you integrate and streamline processes across departments and functions, fostering collaboration and efficiency. Gain a competitive edge by aligning your operations with strategic objectives. It covers layers like business environment, customer’s needs, core, and supplier’s processes. Download now!

Template 4: Onsite Offshore Operational Business Model

Introducing this comprehensive PPT Slide that equips you with an onsite and offshore operational business model. This innovative solution empowers your business to strategically blend onsite and offshore resources for optimal efficiency and cost-effectiveness. It includes the four-stage process: Planning, transition, Blended Support, and offshore. Manage your operations, maximize productivity, and stay ahead of the competition while maintaining a robust global presence. Download it today!

Template 5: Key Element of Business Management Operating Model

This PPT slide provides a comprehensive overview of the essential elements of an operating model, ensuring you can optimize your business functions. It encompasses critical aspects such as business model, strategy, target operating model, foundation, regulators, customers, and the financial market. In addition, this consolidated structure includes vital business insights like culture, business vision, and values. Download this valuable resource today for your convenience.

Template 6: Multilevel Business Operations Maturity Model Template

This PPT Template provides a structured framework to assess and enhance your organization's maturity across operational dimensions. Whether you aim to optimize processes, improve efficiency, or align with industry best practices, this template has you covered. The focused levels it covers, such as fragmented, sub-scaled, scaled, integrated, and strategic, add to its utility. Streamline your path to success – get started with our template today.

Download the template

Template 7: Business-Focused Cloud Operating Model

Unlock the potential of cloud technology for your business with our focused cloud operating model template. This cutting-edge solution tailors cloud strategies to your business needs, ensuring seamless integration, scalability, and cost-effectiveness. Streamline operations, enhance agility, and boost innovation while maintaining a strong focus on achieving your business goals. Embrace the future with this innovative slide. Download it today!

Structure your Business

The business operating model templates we've explored in this blog are tools to guide your organization toward greater efficiency, alignment, and strategic achievement. You can leverage these templates to  streamline your processes, enhance collaboration, and adapt to changing market conditions with confidence.

At SlideTeam, we are committed to empowering businesses like yours with the resources needed to excel. To access our collection of feature-packed operating model templates and take your organization to the next level, download them today. 

FAQs on Business Operating Model

What is an operating model in business.

An operating model in business is the structural framework that defines how an organization delivers its products or services, manages its processes, allocates resources, and interacts with stakeholders to achieve its strategic objectives. It provides a blueprint for how components of the organization work together to create value and execute business strategy .

What are the 5 components of the operating model?

The five key components of an operating model in business are

• Processes: Defining specific activities, workflows, and interactions required to deliver products or services efficiently.
• Organization Structure: Establishing the hierarchical structure, roles, responsibilities, and decision-making processes within the organization.
• Information Systems and Technology: Addressing the technology infrastructure, software, hardware, and data management systems necessary to support operations.
• People and Culture: Focusing on the workforce, including recruitment, training, and the organization's values and culture.
• Governance and Management: Establishing rules, policies, and procedures for decision-making, risk management, and compliance.

What are the levels of the operating model?

Operating models can be categorized into levels to align with the organization's strategic objectives and structure. The three common levels of operating models are

• Enterprise-Level Operating Model: Concerned with overarching strategies, governance, and resource allocation. 
• Business Unit/Division-Level Operating Model: Focuses on specific business units or divisions within the organization, tailoring the model to their unique needs.
• Functional-Level Operating Model: Deals with the detailed processes and capabilities of specific functions or departments within a business unit or division.

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How To Design A Target Operating Model (TOM) That Delivers

By   Julie Choo

Published: March 2, 2017

Last Update: September 2, 2023

TOPICS:   Capabilities , Gameplans & Roadmaps , Operating Model , Transformation

The concept of a Target Operating Model (TOM) encapsulates a strategic blueprint for an organization’s future operations, outlining the desired “how, where, and when” of its functioning. It serves as a bridge between strategic intent and operational execution, encompassing processes, data, people, and systems orchestrated to achieve overarching goals. A TOM guides transformative efforts by aligning capabilities with strategic vision, ensuring resilience and adaptability in the face of evolving market dynamics and internal shifts. As AI (artificial intelligence) continues to advance, the evolution of digital operating models and digital transformation agility will be pivotal in navigating the near future, enabling organizations to harness AI’s potential for enhanced efficiency and innovation.

Having worked with businesses using TOMs all around the world and having run so many, I’ve seen all possible outcomes. Some have succeeded in delivering very beneficial outcomes for their organizations. Some have failed to deliver anything. There can be many reasons for this; they couldn’t raise the budget, couldn’t get off the ground, they couldn’t get the buy-in needed from stakeholders, or they were based on the wrong motivations and outcomes to begin with. With this background in mind, I thought I’d explain and highlight:

What is the Operating Model?

What is a target operating model (tom).

• Different Types of Target Operating Models
• How an organization can really reap the benefits of a successful business transformation program, or project, that is designed to deliver a TOM?

AND I will also provide examples of why and how a strong TOM with business agility , is how a business will be able to pivot and reinvent its services in times of uncertainty and instability, such as the economic crisis caused by the COVID-19 pandemic.

The Operating Model mustn’t be confused with the Business Model, even though this is often the case in many organizations.

The Business Model delves into an organization’s customers and product offerings (or value chain propositions) and how to effectively commercialize the business. Its focus is on how to bring about profit through revenue streams from product offerings, while looking at some of the activities and resources that are required to deliver the product offerings, and service customers. The ‘Business Model Canvas’ by Alexander Osterwalder and Yves Pigneur is a great tool. It helps organizations big and small to evaluate if they have the right business model and pivot (if needed), especially when conditions change in the ecosystem surrounding the enterprise. At a high level, and with a 10,000 foot view from management, it describes WHAT an enterprise must do and WHAT it must change.

The Operating Model, on the other hand, is a lot less sexy because it is responsible for the HOW, WHERE and WHEN. It is part of the execution lifecycle of THE STRATEGY JOURNEY Framework , while the Business Model is part of design. Success comes from both the design of the best strategies and then the execution of these strategies to the right degree. So a business model without an Operating Model is lost, and unlikely to succeed in delivering the value that it promises to a business enterprise and its customers.

The Operating Model is HOW a business functions, including what capabilities – the processes, data, people and systems it has to keep itself running – which need to be applied at the right time (WHEN) and in the right place, in different locations (WHERE).

I like to use the car analogy to describe the Operating Model as the engine of an organization. In 2016, the fastest Formula One (F1) car, the Mercedes Silver Arrow, driven by Lewis Hamilton (arguably the fastest driver), did not win because of engine and reliability problems. Instead the World Championship was won by his teammate Nico Rosberg, who had a better functioning engine that was able to last the distance of a whole season.

Nico benefited from a slightly better operating model that year, and that’s what led to his overall win. Nico had the processes, data, systems and the people (including himself) – the complete capability package – to win that World Championship. The mechanical failures that Lewis suffered, mostly not through fault of his own, were a result of failures somewhere within his operating model, that year (since he went on to win more championships in the following years). At the time, it was clear Lewis also had some organizational problems within his management team, and we do not know what other issues lay behind the Mercedes garage or in Lewis’ own mind. Put simply, he lost because his operating model package was inferior to Nico’s. And in this subsequent years, he has learned from his experiences, improved and delivered even better results.

An Agile Operating Model, that is an Operating Model with business agility also provides the means for a business to pivot from disruption especially in times of economic crisis.

Because the Operating Model is comprised of all the business activities that make a business run, and keep it running, it is what will get your business through tough times as it gets disrupted both from our fast changing digital economy, as technologies involving robots and AI begin to replace what people do, and from economic crisis caused by shutdowns or lockdowns from a health pandemic like COVID-19.

An Operating Model focus on capabilities that allow it to ‘pivot’ its Business Models to change how it operates quickly, is what makes it agile, or to operate with business agility . This can make all the difference, as we have seen how Business Models can become disrupted, very quickly, and overnight in some cases.

Learn the 5 step process to build business agility your Target Operating Model including success story examples from our article on ‘How to shape your Business and Career with THE STRATEGY JOURNEY Framework’ .

The Target Operating Model (TOM) is a future state version of the Operating Model at a point in time.

A TOM doesn’t exist yet, and to achieve it, the Operating Model itself must change, requiring a large transformation effort in the form of a program of change. However, change itself isn’t good, unless it is for the right reason(s). So, what are these reason(s)?

If the point of the Operating Model is to execute how the Business Model needs to function, then as part of any transformational change program moving towards this new TOM, it would need to be aligned to changes required in the overall strategy of the business. This would cover any changes to the goals and objectives within its overall Mission and Vision, to its business model, and the new or increased value that the organization is set to deliver from the changes.

This is why I have described the whole strategy lifecycle as a journey, with the 5 stages of THE STRATEGY JOURNEY and the 5 models of THE STRATEGY JOURNEY Framework . A business enterprise is a living entity, that is constantly changing on its journey.

The TOM is simply a viewpoint of what that enterprise wants to change into, as it covers what all 5 models will look like at a time in the future.

Different Types of Target Operating Models (TOMs)

That future state TOM varies depending on what industry an enterprise is in, the level of innovation, and what needs to be achieved. This would be the outcomes that are sought through the strategies of that particular enterprise.

TOMs in Larger Organizations

Corporate strategy for Target Operating Models (TOMs) involves a meticulous evaluation of the current operating model’s effectiveness, employing key performance indicators (KPIs) to gauge its performance. This assessment, often facilitated by tools like the Operating Model Canvas, helps organizations identify areas for improvement and optimization. By aligning the TOM with strategic objectives, companies can ensure operational excellence and agility, positioning themselves for sustainable growth and success in a dynamic business landscape.

Within established organizations, the pace of change and innovation is often sluggish. These companies typically allocate 3-5 years for strategic transformation, especially when reevaluating specific business lines and models. Occasionally, Target Operating Model (TOM) adjustments occur within 1-2 years, driven by short-term cost-cutting goals rather than comprehensive TOM initiatives focused on long-term value.

However, when cost reduction is the primary objective, TOM projects can inadvertently trigger to their management system and organizational shifts leading layoffs, offshoring, remote service strategies and changes to adapting more stringent policies. Yet, implementing these changes without considering the need for fundamental Business Model shifts or the implications for the ‘ Value Model ‘ risks achieving only short-term balance sheet adjustments. The ‘ Value Model ‘ signifies the value perceived by customers and stakeholders, both within departments and externally. Presently, evolving customer behaviors shape their own Value Models, driving service preferences and interactions with providers.

Amazon exemplifies value-centricity by meticulously analyzing customer behaviors and leveraging a sophisticated technology infrastructure through services like AWS and Alexa Voice. Ignoring strategic groundwork in favor of quick solutions can result in misalignment, missing out on holistic benefits and potentially yielding long-term complications. This reinforces the importance of a well-structured strategy and game plan in transformation efforts, paving the way for enduring success.

There is a full case study of HOW the Amazon ecosystem works around its Alexa Voice Service in THE STRATEGY JOURNEY book .

TOMs in Government Organizations

In government organizations that are looking at societal changes, the TOM can be a 25 year plan. This is the case with Singapore, who have a Vision that they want to achieve for 2050, and who has invested heavily to build its TOM .

In contrast, the UK faced uncertainty in 2020 regarding Brexit’s TOM implementation and repercussions even 4 years post the ‘leave’ vote. The COVID-19 pandemic redirected the UK’s attention, leading to a chaotic transition post-Brexit. In such scenarios, agile TOMs prove invaluable, offering scalability through their flexible framework.

For instance, an agile TOM would have been apt for managing the societal shift caused by COVID-19, enabling rapid adjustments to healthcare and public service operations in response to evolving circumstances. We can further expand on value of using agile TOMs in this situation where COVID was a new virus which had uncertain elements to what it could have evolved into justifying the need to use an agile approach to adapt to this situation.

Responses to the pandemic showcase strengths and weaknesses in Operating Models, evident in countries like New Zealand, South Korea, Taiwan, and Germany. Notably, the UK’s COVID vaccination effort demonstrates the National Health Service’s (NHS) operating model strength, vaccinating over 20 million citizens by February. While the vaccination program succeeded, testing and tracking services remain weak, revealing an operating model deficiency.

The evidence is in the data as illustrated below in the UK daily summary taken from 6th March 2022

The big multi-billion dollar question is: The challenge is whether the UK can replicate its vaccination program success across diverse sectors and services during economic recovery. Victory in one service model doesn’t guarantee triumph in all, as complexities differ. Updates will be shared through the year, presenting case studies of service models worldwide for insights and awareness.

I’ll be posting updates during the year including new case study examples of ‘Service Operating Models’ from the UK and across the world, in this blog and via our social media feeds (on Instagram , Linkedin and Twitter ) so subscribe to stay updated.

Start-up TOMs

In the high-stakes environment of startups, the focus on survival often limits future planning to a mere 1 to 18 months. Rapid and unpredictable changes seem to discourage the establishment of a comprehensive Target Operating Model (TOM). However, securing investor funding demands a TOM that maps the startup’s strategic journey, aligning Mission and Vision with exit goals. The five models within THE STRATEGY JOURNEY Framework , encompassing the TOM, are essential components of a Business Plan, instilling investor confidence and support.

Essentially, a startup requires a TOM to steer its efforts. Without it, valuable resources—time and money—are squandered on misguided pursuits, hindering progress. A versatile TOM, adaptable to the volatile startup ecosystem, should be structured in short, logical phases spanning a few months, summing up to 18 months.

Consider Google’s early days from 1998 to 2003, contrasting with Yahoo’s dominance. Google’s strategic focus on perfecting its Operating Model empowered exponential scaling, ultimately outpacing Yahoo, which grappled with unsustainable investments, neglecting security. Similarly, Netflix’s success against Blockbuster’s downfall exemplifies how distinct Value Models shaped their Operating Models, steering one towards prosperity and the other towards ruin.

For deeper insights into these scenarios, explore our article delving into the divergent paths of Google and Yahoo, as well as  the downfall of Blockbuster vs Netflix , and how their choices regarding Value Models influenced the success or deterioration of their businesses.

TOMs in High-Performance Sports & Gaming Organizations

Formula One (F1) serves as an innovation hub due to its rapid changes. Regulations shift frequently, prompting architects like Adrian Newey and engineers to design new cars and engines annually. Tracks’ variations necessitate diverse setups for optimal race speed. Changing weather conditions can affect car balance mid-race, demanding adaptable strategies. In F1, a Target Operating Model (TOM), if present, endures about a year, adapting continually due to its agile nature.

In sports, such as football, TOMs align with yearly seasons or multi-year cycles like the Olympics or World Cup. Athlete injuries may affect performance, highlighting the need for flexible, agile Operating Models. France’s 2018 World Cup triumph was propelled by a data-driven strategy hinged on Target Operating Models (TOMs). Their streamlined approach optimized player positioning, ball distribution, and cohesive teamwork, all orchestrated within a TOM framework. . This method facilitated quick adjustments, enhancing their adaptability to their opponents and ultimately leading to their championship victory.

During the COVID-19 lockdown situation, sports organizations and management companies are hit hard of course even if some of them might have big cash reserves, but customers are turning to the gaming industry, to fulfill their need for sports entertainment from home.

The gaming industry gained traction as a substitute for live sports entertainment. In F1, teams transitioned online, hosting Virtual Grand Prix events to sustain fan engagement and driver activity, anticipating revived demand post-crisis. The gaming sector flourished during the pandemic, with companies like ESPORT witnessing surges in signups .

Target Operating Models (TOMs) That Deliver

A TOM will deliver whatever you ask it to do, and we have highlighted what are the 4 priority capabilities to build , so it comes down to ‘what is the game plan ?’ The most important step to developing a good TOM is to ensure it is being formulated for the right outcomes, based on the right context or problems, and to deliver the best possible services. The problems and outcomes need to clearly state, both what the root causes and the goals are, and how, when and where they will occur and be achieved. If the mission, goals and objectives are compromised to begin with, and not properly aligned to the strategy of your organization, then naturally, the output of the TOM will reap the benefits as well as consequences of that compromise. In Big Data the saying goes: Rubbish in, Rubbish out.

When the TOM is designed to deliver in phases, with a good flexible roadmap that sets out the gameplay in steps, and is aligned across all THE STRATEGY JOURNEY stages, with the 5 strategy journey models: Mission Model, Business Model, Value Model, Operating Model (the existing one), and Transformation Model in sync to deliver the right outcomes, with a plan to execute those phases, in the right place at the right time, while having the business agility to cater to unforeseen changes, such as those caused by disruption including health pandemics, then an enterprise is in the position to successfully navigate its journey to deliver the outcomes in the TOM and the benefits sought.

This is how a business or enterprise of any shape or size can utilize TOMs to manage its transformation journey , comprising its transformation programs, to give it the best possible chances of fighting, overcoming and even thriving from disruption, such as the digital transformation of AI .

SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and PESTLE (Political, Economic, Social, Technological, Legal, Environmental) analysis are powerful tools for comprehensively assessing a company’s macro and micro business model.

About the author

Julie Choo is lead author of THE STRATEGY JOURNEY book and the founder of STRATABILITY ACADEMY. She speaks regularly at numerous tech, careers and entrepreneur events globally. Julie continues to consult at large Fortune 500 companies, Global Banks and tech start-ups. As a lover of all things strategic, she is a keen Formula One fan who named her dog, Kimi (after Raikkonnen), and follows football - favourite club changes based on where she calls home.

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How Companies Make Money

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What Is a Business Model?

Understanding business models, evaluating successful business models, how to create a business model.

• Business Model FAQs

The Bottom Line

Learn to understand a company's profit-making plan

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

The term business model refers to a company's plan for making a profit . It identifies the products or services the business plans to sell, its identified target market , and any anticipated expenses . Business models are important for both new and established businesses. They help new, developing companies attract investment, recruit talent, and motivate management and staff.

Established businesses should regularly update their business model or they'll fail to anticipate trends and challenges ahead. Business models also help investors evaluate companies that interest them and employees understand the future of a company they may aspire to join.

Key Takeaways

• A business model is a company's core strategy for profitably doing business.
• Models generally include information like products or services the business plans to sell, target markets, and any anticipated expenses.
• There are dozens of types of business models including retailers, manufacturers, fee-for-service, or freemium providers.
• The two levers of a business model are pricing and costs.
• When evaluating a business model as an investor, consider whether the product being offered matches a true need in the market.

Investopedia / Laura Porter

A business model is a high-level plan for profitably operating a business in a specific marketplace. A primary component of the business model is the value proposition . This is a description of the goods or services that a company offers and why they are desirable to customers or clients, ideally stated in a way that differentiates the product or service from its competitors.

A new enterprise's business model should also cover projected startup costs and financing sources, the target customer base for the business, marketing strategy , a review of the competition, and projections of revenues and expenses. The plan may also define opportunities in which the business can partner with other established companies. For example, the business model for an advertising business may identify benefits from an arrangement for referrals to and from a printing company.

Successful businesses have business models that allow them to fulfill client needs at a competitive price and a sustainable cost. Over time, many businesses revise their business models from time to time to reflect changing business environments and market demands .

When evaluating a company as a possible investment, the investor should find out exactly how it makes its money. This means looking through the company's business model. Admittedly, the business model may not tell you everything about a company's prospects. But the investor who understands the business model can make better sense of the financial data.

A common mistake many companies make when they create their business models is to underestimate the costs of funding the business until it becomes profitable. Counting costs to the introduction of a product is not enough. A company has to keep the business running until its revenues exceed its expenses.

One way analysts and investors evaluate the success of a business model is by looking at the company's gross profit . Gross profit is a company's total revenue minus the cost of goods sold (COGS). Comparing a company's gross profit to that of its main competitor or its industry sheds light on the efficiency and effectiveness of its business model. Gross profit alone can be misleading, however. Analysts also want to see cash flow or net income . That is gross profit minus operating expenses and is an indication of just how much real profit the business is generating.

The two primary levers of a company's business model are pricing and costs. A company can raise prices, and it can find inventory at reduced costs. Both actions increase gross profit. Many analysts consider gross profit to be more important in evaluating a business plan. A good gross profit suggests a sound business plan. If expenses are out of control, the management team could be at fault, and the problems are correctable. As this suggests, many analysts believe that companies that run on the best business models can run themselves.

When evaluating a company as a possible investment, find out exactly how it makes its money (not just what it sells but how it sells it). That's the company's business model.

Types of Business Models

There are as many types of business models as there are types of business. For instance, direct sales, franchising , advertising-based, and brick-and-mortar stores are all examples of traditional business models. There are hybrid models as well, such as businesses that combine internet retail with brick-and-mortar stores or with sporting organizations like the NBA .

Below are some common types of business models; note that the examples given may fall into multiple categories.

One of the more common business models most people interact with regularly is the retailer model. A retailer is the last entity along a supply chain. They often buy finished goods from manufacturers or distributors and interface directly with customers.

Example: Costco Wholesale

Manufacturer

A manufacturer is responsible for sourcing raw materials and producing finished products by leveraging internal labor, machinery, and equipment. A manufacturer may make custom goods or highly replicated, mass produced products. A manufacturer can also sell goods to distributors, retailers, or directly to customers.

Example: Ford Motor Company

Fee-for-Service

Instead of selling products, fee-for-service business models are centered around labor and providing services. A fee-for-service business model may charge by an hourly rate or a fixed cost for a specific agreement. Fee-for-service companies are often specialized, offering insight that may not be common knowledge or may require specific training.

Example: DLA Piper LLP

Subscription

Subscription-based business models strive to attract clients in the hopes of luring them into long-time, loyal patrons. This is done by offering a product that requires ongoing payment, usually in return for a fixed duration of benefit. Though largely offered by digital companies for access to software, subscription business models are also popular for physical goods such as monthly reoccurring agriculture/produce subscription box deliveries.

Example: Spotify

Freemium business models attract customers by introducing them to basic, limited-scope products. Then, with the client using their service, the company attempts to convert them to a more premium, advance product that requires payment. Although a customer may theoretically stay on freemium forever, a company tries to show the benefit of what becoming an upgraded member can hold.

Example: LinkedIn/LinkedIn Premium

Some companies can reside within multiple business model types at the same time for the same product. For example, Spotify (a subscription-based model) also offers a free version and a premium version.

If a company is concerned about the cost of attracting a single customer, it may attempt to bundle products to sell multiple goods to a single client. Bundling capitalizes on existing customers by attempting to sell them different products. This can be incentivized by offering pricing discounts for buying multiple products.

Example: AT&T

Marketplace

Marketplaces are somewhat straight-forward: in exchange for hosting a platform for business to be conducted, the marketplace receives compensation. Although transactions could occur without a marketplace, this business model attempts to make transacting easier, safer, and faster.

Example: eBay

Affiliate business models are based on marketing and the broad reach of a specific entity or person's platform. Companies pay an entity to promote a good, and that entity often receives compensation in exchange for their promotion. That compensation may be a fixed payment, a percentage of sales derived from their promotion, or both.

Example: social media influencers such as Lele Pons, Zach King, or Chiara Ferragni.

Razor Blade

Aptly named after the product that invented the model, this business model aims to sell a durable product below cost to then generate high-margin sales of a disposable component of that product. Also referred to as the "razor and blade model", razor blade companies may give away expensive blade handles with the premise that consumers need to continually buy razor blades in the long run.

Example: HP (printers and ink)

"Tying" is an illegal razor blade model strategy that requires the purchase of an unrelated good prior to being able to buy a different (and often required) good. For example, imagine Gillette released a line of lotion and required all customers to buy three bottles before they were allowed to purchase disposable razor blades.

Reverse Razor Blade

Instead of relying on high-margin companion products, a reverse razor blade business model tries to sell a high-margin product upfront. Then, to use the product, low or free companion products are provided. This model aims to promote that upfront sale, as further use of the product is not highly profitable.

Example: Apple (iPhones + applications)

The franchise business model leverages existing business plans to expand and reproduce a company at a different location. Often food, hardware, or fitness companies, franchisers work with incoming franchisees to finance the business, promote the new location, and oversee operations. In return, the franchisor receives a percentage of earnings from the franchisee.

Example: Domino's Pizza

Pay-As-You-Go

Instead of charging a fixed fee, some companies may implement a pay-as-you-go business model where the amount charged depends on how much of the product or service was used. The company may charge a fixed fee for offering the service in addition to an amount that changes each month based on what was consumed.

Example: Utility companies

A brokerage business model connects buyers and sellers without directly selling a good themselves. Brokerage companies often receive a percentage of the amount paid when a deal is finalized. Most common in real estate, brokers are also prominent in construction/development or freight.

Example: ReMax

There is no "one size fits all" when making a business model. Different professionals may suggest taking different steps when creating a business and planning your business model. Here are some broad steps one can take to create their plan:

• Identify your audience. Most business model plans will start with either defining the problem or identifying your audience and target market . A strong business model will understand who you are trying to target so you can craft your product, messaging, and approach to connecting with that audience.
• Define the problem. In addition to understanding your audience, you must know what problem you are trying to solve. A hardware company sells products for home repairs. A restaurant feeds the community. Without a problem or a need, your business may struggle to find its footing if there isn't a demand for your services or products.
• Understand your offerings. With your audience and problem in mind, consider what you are able to offer. What products are you interested in selling, and how does your expertise match that product? In this stage of the business model, the product is tweaked to adapt to what the market needs and what you're able to provide.
• Document your needs. With your product selected, consider the hurdles your company will face. This includes product-specific challenges as well as operational difficulties. Make sure to document each of these needs to assess whether you are ready to launch in the future.
• Find key partners. Most businesses will leverage other partners in driving company success. For example, a wedding planner may forge relationships with venues, caterers, florists, and tailors to enhance their offering. For manufacturers, consider who will provide your materials and how critical your relationship with that provider will be.
• Set monetization solutions. Until now, we haven't talked about how your company will make money. A business model isn't complete until it identifies how it will make money. This includes selecting the strategy or strategies above in determining your business model type. This might have been a type you had in mind but after reviewing your clients needs, a different type might now make more sense.
• Test your model. When your full plan is in place, perform test surveys or soft launches. Ask how people would feel paying your prices for your services. Offer discounts to new customers in exchange for reviews and feedback. You can always adjust your business model, but you should always consider leveraging direct feedback from the market when doing so.

Instead of reinventing the wheel, consider what competing companies are doing and how you can position yourself in the market. You may be able to easily spot gaps in the business model of others.

Criticism of Business Models

Joan Magretta, the former editor of the Harvard Business Review, suggests there are two critical factors in sizing up business models. When business models don't work, she states, it's because the story doesn't make sense and/or the numbers just don't add up to profits. The airline industry is a good place to look to find a business model that stopped making sense. It includes companies that have suffered heavy losses and even bankruptcy .

For years, major carriers such as American Airlines, Delta, and Continental built their businesses around a hub-and-spoke structure , in which all flights were routed through a handful of major airports. By ensuring that most seats were filled most of the time, the business model produced big profits.

However, a competing business model arose that made the strength of the major carriers a burden. Carriers like Southwest and JetBlue shuttled planes between smaller airports at a lower cost. They avoided some of the operational inefficiencies of the hub-and-spoke model while forcing labor costs down. That allowed them to cut prices, increasing demand for short flights between cities.

As these newer competitors drew more customers away, the old carriers were left to support their large, extended networks with fewer passengers. The problem became even worse when traffic fell sharply following the September 11 terrorist attacks in 2001 . To fill seats, these airlines had to offer more discounts at even deeper levels. The hub-and-spoke business model no longer made sense.

Example of Business Models

Consider the vast portfolio of Microsoft. Over the past several decades, the company has expanded its product line across digital services, software, gaming, and more. Various business models, all within Microsoft, include but are not limited to:

• Productivity and Business Processes: Microsoft offers subscriptions to Office products and LinkedIn. These subscriptions may be based off product usage (i.e. the amount of data being uploaded to SharePoint).
• Intelligent Cloud: Microsoft offers server products and cloud services for a subscription. This also provide services and consulting.
• More Personal Computing: Microsoft sells physically manufactured products such as Surface, PC components, and Xbox hardware. Residual Xbox sales include content, services, subscriptions, royalties, and advertising revenue.

A business model is a strategic plan of how a company will make money. The model describes the way a business will take its product, offer it to the market, and drive sales. A business model determines what products make sense for a company to sell, how it wants to promote its products, what type of people it should try to cater to, and what revenue streams it may expect.

What Is an Example of a Business Model?

Best Buy, Target, and Walmart are some of the largest examples of retail companies. These companies acquire goods from manufacturers or distributors to sell directly to the public. Retailers interface with their clients and sell goods, though retails may or may not make the actual goods they sell.

What Are the Main Types of Business Models?

Retailers and manufacturers are among the primary types of business models. Manufacturers product their own goods and may or may not sell them directly to the public. Meanwhile, retails buy goods to later resell to the public.

How Do I Build a Business Model?

There are many steps to building a business model, and there is no single consistent process among business experts. In general, a business model should identify your customers, understand the problem you are trying to solve, select a business model type to determine how your clients will buy your product, and determine the ways your company will make money. It is also important to periodically review your business model; once you've launched, feel free to evaluate your plan and adjust your target audience, product line, or pricing as needed.

A company isn't just an entity that sells goods. It's an ecosystem that must have a plan in plan on who to sell to, what to sell, what to charge, and what value it is creating. A business model describes what an organization does to systematically create long-term value for its customers. After building a business model, a company should have stronger direction on how it wants to operate and what its financial future appears to be.

Harvard Business Review. " Why Business Models Matter ."

Bureau of Transportation Statistics. " Airline Travel Since 9/11 ."

Microsoft. " Annual Report 2023 ."

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Target Operating Model: Definition, Design, and Example

A Target Operating Model (TOM) describes the desired state of an organization’s operational capabilities and functions. It provides a vision for the future state of a business, explaining how the company needs to operate to deliver its strategy and achieve its business goals efficiently.

Creating a TOM is part of strategic planning and is typically carried out by senior management. It is a tool that helps align the organization’s strategy, business model, and operational capabilities. It can also serve as a roadmap for implementing organizational change and transformation. A TOM’s specific content and focus can vary greatly depending on the organization’s specific needs and context.

The Target Operating Model typically includes the following elements:

Organizational structure.

The organizational structure is critical to a Target Operating Model (TOM). It provides a detailed depiction of the company’s future design regarding its structure, roles, responsibilities, and reporting relationships. The organizational structure aligns with the strategic objectives and ensures that the organization achieves its goals efficiently and effectively.

Here’s a more detailed breakdown of what the organizational structure component might include in a TOM:

• Hierarchical Structure:  This includes details about the structure of the organization, including how many layers of management there will be (e.g., flat vs. hierarchical), which departments or teams will exist, and how they will interact.
• Roles and Responsibilities:  Each role within the organization needs to be clearly defined. This includes both the responsibilities that each role carries and the skills and qualifications required to fulfill these roles. These should align with the strategic objectives of the organization.
• Reporting Relationships:  Clear reporting relationships should be defined, detailing who reports to whom. This can include the creation of an organizational chart to represent these relationships visually.
• Decision-making Processes:  The decision-making process within the organization should be clear. This includes identifying who has decision-making authority and how decisions are communicated within the organization.
• Communication Channels:  Clear communication is critical to the smooth functioning of any organization. The TOM should therefore define formal and informal communication channels, such as meetings, reporting lines, emails, and collaboration tools.
• Collaboration Mechanisms:  How different teams and departments collaborate to achieve organizational goals should also be defined. This could be through cross-functional teams, project teams, or regular inter-departmental meetings.
• Geographic Distribution:  If the company has multiple locations, the TOM should describe how roles and responsibilities are distributed across different geographical locations. This also includes how remote and on-site workers collaborate.

Designing the organizational structure in the TOM is not a one-size-fits-all process. It needs to consider the unique context of the organization, its culture, strategic objectives, and the market environment. Also, while designing the TOM, one should consider the impact of any proposed changes on employees and plan for effective change management and communication strategies to ensure a smooth transition.

Processes and Operations

The Processes and Operations element of a Target Operating Model (TOM) focuses on how an organization will deliver its products or services to achieve its strategic objectives. It outlines how work gets done, the flow of activities, and how these activities will be transformed in the future state to enhance efficiency, effectiveness, and customer satisfaction.

Here’s a more detailed breakdown of what the Processes and Operations component might include in a TOM:

• Core Processes:  These are the primary activities that an organization performs to deliver value to its customers. They could include product development, marketing and sales, manufacturing, service delivery, and customer support. The TOM should describe how these processes will be designed or transformed to meet strategic objectives.
• Supporting Processes:  These activities support the core processes, such as human resources, IT, finance, procurement, and administrative functions. The TOM should outline how these supporting processes will be optimized to enhance the efficiency of core processes.
• Process Flow:  This involves mapping out the flow of activities, showing how tasks move from one stage to the next, and identifying potential bottlenecks or inefficiencies. The TOM should outline how process flow will be improved in the future state.
• Process Standardization:  The TOM should indicate where processes will be standardized to reduce variability, increase efficiency, and ensure consistent output quality.
• Technology Integration:  The TOM should describe how technology will be integrated into processes to automate tasks, reduce errors, and increase efficiency. This could involve using enterprise resource planning (ERP) systems, customer relationship management (CRM) systems, or artificial intelligence and machine learning tools.
• Performance Measurement:  The TOM should define how process performance will be measured, including key performance indicators (KPIs), benchmarks, and targets. This can help monitor process efficiency and effectiveness, identify areas for improvement, and track progress toward strategic objectives.
• Continuous Improvement:  The TOM should include mechanisms for continuously improving processes based on performance data, customer feedback, and innovations in the market or industry.

When designing Processes and Operations in the TOM, it’s important to involve people directly involved in these processes, as they have firsthand knowledge of the tasks, challenges, and opportunities for improvement. In addition, the design should be customer-centric, focusing on improving the customer experience and delivering value to the customer.

Technology and Infrastructure

The Technology and Infrastructure component of a Target Operating Model (TOM) refers to the technological resources and assets that an organization plans to use to achieve its strategic objectives. This includes hardware, software, networks, data centers, and other technological infrastructure.

Here’s a more detailed breakdown of what the Technology and Infrastructure component might include in a TOM:

• Systems and Applications:  This includes the various software systems and applications the organization plans to use. This could range from customer relationship management (CRM) systems, enterprise resource planning (ERP) systems, human resources systems, financial systems, data analysis tools, and more. The TOM should outline how these systems support the organization’s processes and operations.
• Data Management:  Data is a critical resource for modern organizations. The TOM should outline how data will be collected, stored, managed, and used to support decision-making and create value. This includes considerations around data quality, integration, privacy, and security.
• Infrastructure:  This covers the physical and virtual resources that support the operation and use of the organization’s systems and applications. This includes servers, networks, data centers, cloud services, and other infrastructure elements.
• Cybersecurity:  As organizations become more dependent on technology, protecting against cyber threats becomes increasingly important. The TOM should outline how the organization will protect its technology and data assets, including firewalls, encryption, intrusion detection systems, and other cybersecurity measures.
• Technology Governance:  The TOM should outline how technology resources will be governed, including decision-making processes around technology investments, technology standards, technology lifecycle management, and the roles and responsibilities of different stakeholders in managing technology resources.
• Integration:  The TOM should also outline how different systems and applications will be integrated for seamless data flow and process automation. This includes the use of APIs, middleware, and other integration technologies.
• Technology Skills and Capabilities:  As part of technology and infrastructure, the TOM should consider the skills and capabilities the organization needs to use and manage its technology resources effectively. This could include data analysis, software development, project management, and cybersecurity skills.

When designing the Technology and Infrastructure in the TOM, it’s important to consider the organization’s strategic objectives, the needs of its users (both internal and external), and the trends and developments in the technology landscape. A well-designed Technology and Infrastructure component can enable the organization to deliver its services more efficiently and effectively, support innovation, and gain a competitive edge.

People and Skills

The People and Skills component of a Target Operating Model (TOM) refers to the human resources the organization will need to realize its strategic objectives. This encompasses everything from the organization’s staffing needs to the competencies and skills required for various roles.

Here’s a more detailed breakdown of what the People and Skills component might include in a TOM:

• Staffing Levels and Roles:  This includes the number of people the organization needs and the roles they will fill. The TOM should outline how these roles contribute to the organization’s strategic objectives and the type of tasks and responsibilities they will encompass.
• Skills and Competencies:  Each role in the organization requires certain skills and competencies. The TOM should define these for each role and how they contribute to the organization’s strategic objectives. This could include technical skills, industry-specific knowledge, soft skills, leadership abilities, etc.
• Recruitment and Retention:  The TOM should outline how the organization plans to recruit people with the necessary skills and competencies, and strategies for retaining talent. This could include details about recruitment processes, career development opportunities, employee benefits, and workplace culture.
• Training and Development:  Given the rapid pace of change in many industries, continuous learning and development are crucial. The TOM should outline how the organization plans to provide training and development opportunities to equip its people with the necessary skills and knowledge.
• Performance Management:  This refers to how the organization will manage and evaluate the performance of its people. The TOM should outline performance evaluation methods, feedback mechanisms, and how performance is linked to rewards and recognition.
• Culture and Values:  The TOM should define the culture the organization aims to create to support its strategic objectives. This includes the organization’s values, behaviors, and attitudes contributing to the social and psychological environment.
• Change Management:  Any significant changes in an organization’s operating model will likely affect its people. The TOM should therefore include strategies for managing change, including communication strategies, support for affected individuals, and measures to overcome resistance to change.

Remember, people are at the heart of any organization, and any changes you propose in your TOM will impact them. Therefore, it’s important to consider the human aspect when designing the TOM, involving relevant stakeholders in the process, and planning for effective change management.

Culture and Behavior

The Culture and Behavior component of a Target Operating Model (TOM) is a fundamental aspect that underpins all other areas. It’s about the shared values, beliefs, attitudes, and norms that characterize an organization and guide the behavior of its people.

Here’s a more detailed breakdown of what the Culture and Behavior component might include in a TOM:

• Values and Beliefs:  These core principles guide an organization’s actions and decisions. They form the basis of the organization’s culture and should align with its strategic objectives. The TOM should define the organization’s desired values and beliefs, such as integrity, innovation, customer centricity, collaboration, etc.
• Behaviors:  These are the actions and attitudes that are encouraged and rewarded within the organization. They are a manifestation of the organization’s values and beliefs. The TOM should outline the behaviors that are expected from employees at all levels to achieve the organization’s strategic objectives.
• Norms:  These are the unwritten rules that guide behavior within the organization. They influence how people interact with each other, make decisions, and approach their work. The TOM should define the norms supporting the desired culture and behaviors.
• Leadership Style:  Leadership plays a crucial role in shaping the organization’s culture. The TOM should outline the desired leadership style that will support the organization’s culture and behaviors, such as transformational leadership, servant leadership, or democratic leadership.
• Work Environment:  The physical and psychological environment can significantly impact culture and behavior. The TOM should outline how the work environment will be designed to support the desired culture and behaviors. This could include workspace design, flexible working arrangements, and wellness initiatives.
• Recognition and Rewards:  How the organization recognizes and rewards its employees can significantly influence culture and behavior. The TOM should define a recognition and rewards system that reinforces the desired behaviors and values.
• Change Management:  Culture change can be challenging and may face resistance. The TOM should include change management strategies to help transition to the desired culture, including communication strategies, training and development, and leadership engagement.

When designing the Culture and Behavior in the TOM, involving people from across the organization is important to ensure buy-in and ownership. It’s also important to remember that culture change takes time and requires a consistent and sustained effort from all levels of the organization.

Governance and Performance Metrics 

The Governance and Performance Metrics component of a Target Operating Model (TOM) outlines how an organization will make decisions, assign responsibilities, measure success, and keep track of its progress toward its strategic objectives.

Here’s a more detailed breakdown of what the Governance and Performance Metrics component might include in a TOM:

• Decision-making Processes:  This includes identifying who has the authority to make decisions at various levels of the organization, the process for making those decisions, and how they are communicated and implemented.
• Roles and Responsibilities:  Clearly defined roles and responsibilities are crucial for effective governance. The TOM should outline who is responsible for what, ensuring accountability and clarity in the organization’s management.
• Policies and Procedures:  These provide guidelines for action and behavior within the organization. The TOM should outline key policies and procedures that will govern the organization’s operations, ensuring consistency and alignment with the organization’s strategic objectives.
• Compliance:  With laws and regulations impacting various aspects of an organization’s operations, the TOM should outline how the organization will ensure compliance. This includes mechanisms for monitoring changes in relevant laws and regulations and procedures for achieving and maintaining compliance.
• Performance Metrics:  These are measures used to evaluate and track the performance of the organization, its teams, and individuals. They provide a way to gauge whether the organization is on track to achieve its strategic objectives. The TOM should outline key performance indicators (KPIs) that align with the organization’s strategic objectives and procedures for monitoring and reporting on these KPIs.
• Risk Management:  The TOM should outline how the organization identifies, assesses, and manages risks. This includes operational risks (such as processes, systems, and people) and strategic risks (such as market changes, competition, and strategy execution).
• Reviews and Audits:  Regular reviews and audits provide a mechanism for assessing the organization’s performance, identifying areas for improvement, and ensuring accountability. The TOM should outline the frequency and scope of these reviews and audits and how their findings will be reported and acted upon.

The TOM’s Governance and Performance Metrics component provides a foundation for managing the organization effectively, accountable, and transparently. It should support the organization’s strategic objectives while ensuring compliance with legal and regulatory requirements.

What are Performance Management Strategies?

How to design a target operating model

Designing a Target Operating Model (TOM) involves a step-by-step process that helps a business define its strategic objectives, envision its future state, and map out the necessary changes in its operational capabilities. The following are some of the steps involved in designing a TOM:

• Define the Vision and Strategic Objectives:  Begin by articulating the organization’s future vision and strategic objectives. These will guide the design of the TOM and ensure it aligns with the overarching business strategy.
• Assess the Current Operating Model:  Conduct a detailed analysis of the current operating model. Identify what is working well and what isn’t. Understand the gaps between the current state and the desired state. This could include an analysis of processes, organizational structure, technology, and skills.
• Identify the Desired Future State:  Based on your strategic objectives, define the future operating model. This should cover all aspects of the operating model, including people, processes, technology, and organizational structure.
• Design the New Operating Model:  Design the TOM by laying out the changes that need to be made to achieve the desired future state. This might involve creating new processes, restructuring the organization, implementing new technology, or redefining roles and responsibilities.
• Develop the Implementation Roadmap:  Create a detailed plan outlining how to implement the changes. This should include timelines, resources required, potential risks, and mitigation strategies. It’s important to consider the impact of the changes on staff and stakeholders and to plan for change management.
• Implement, Monitor, and Adjust:  Begin implementing the changes according to your roadmap. Monitor progress against the defined objectives and key performance indicators (KPIs). Be prepared to adjust the plan based on feedback and performance data.

Throughout this process, involving key stakeholders and maintaining clear and transparent communication is crucial. Change can be challenging for an organization, and people are more likely to support the process if they understand the reasons behind the changes and their role in implementing them.

Remember that a TOM is not a static document. It should be reviewed and updated regularly to align with the organization’s strategic objectives and external environment.

Example of a target operating model

Sure, I’ll provide an example of a hypothetical company and its target operating model. Let’s take a traditional banking institution that is looking to transform into a digital bank:

Vision and Strategic Objectives:  To become a leading digital bank providing customers with seamless online and mobile banking experiences worldwide. The strategic objectives include increasing customer satisfaction, reducing operational costs, and improving the speed and efficiency of service delivery.

Current Operating Model Assessment:  The bank operates through a network of physical branches with limited online services. Customer satisfaction is low due to long wait times, and operational costs are high due to the maintenance of physical infrastructure.

Desired Future State:  The bank envisions a future where most services are delivered digitally. The number of physical branches is significantly reduced, and the primary customer interaction channels are online and mobile platforms.

New Operating Model:

• Organizational Structure:  The bank plans to establish a new digital banking department and hire a Chief Digital Officer (CDO). The roles and responsibilities within the bank will shift toward digital operations, data analysis, and cybersecurity.
• Processes and Operations:  All banking services, such as account opening, money transfers, and loan applications, will be digitized. Customers can access these services anytime, anywhere, through the bank’s website or mobile app.
• Technology and Infrastructure:  The bank will invest in developing a robust digital banking platform, integrating artificial intelligence for customer service (chatbots), and leveraging big data analytics for personalized offerings.
• People and Skills:  The bank must upskill its workforce to manage digital operations and data analysis. It will also need to recruit new employees with cybersecurity, data science, and digital customer experience skills.
• Culture and Behavior:  The bank will foster a culture of innovation, agility, and customer-centricity, encouraging employees to embrace digital transformation and adapt to the changes.
• Governance and Performance Metrics:  New KPIs will be introduced, focusing on digital customer engagement, speed and efficiency of service delivery, and digital innovation.

Implementation Roadmap:  The bank plans to achieve this transformation over five years, with specific milestones set for each year. The plan includes investment in technology, recruitment, staff training, and gradual phasing out physical branches.

This example showcases how the bank’s target operating model aligns with its strategic objectives, providing a clear path for transformation into a digital banking institution. Remember that creating a TOM is a complex process that requires a deep understanding of the business, market trends, and change management. It’s also a dynamic process that requires regular revision and adaptation as the business and market environment evolve.

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The COO agenda: Personal operating model

Energized by transformational change with emphasis on strategy, operations, and organizational topics, with particular passion for cross-functional opportunities; serves senior leadership teams in the chemicals, agriculture, transport and logistics, consumer, and private equity sectors

April 3, 2024 Successful COOs find a balance between running the operation and delivering strategic outcomes. But that doesn’t happen by accident. COOs need to be deliberate in establishing their personal operating model, clearly defining the role they will—and won’t—play in operations leadership. This allows them to be structured and intentional in how they spend their time and energy to ensure a focus on “COO-only” and strategic topics.

Previous posts in this series have outlined the importance of crafting a COO agenda, considerations, and the core elements of success—listed below. The focus of this post is in italics.

• Vision — clear articulation of the overall aspiration of the operation, consistent and supporting the overall business strategy, and the COO’s role in delivering it
• Plan and execution — specific plan with clear actions and milestones to achieve the vision, anchored by a robust operating model to drive excellence in delivery
• Stakeholder engagement — deliberate approach to effectively align and engage with a broader set of internal and external stakeholders
• Organization and talent — proactively unlocking the capacity of the organization by engaging and activating the skills and talents of the entire workforce, and addressing future-oriented succession planning
• Personal operating model— managing personal effectiveness, including time, energy, and leadership style

COO personal operating model

Being COO is different from other operations roles. Stakeholders are not looking to the COO to be a “super site manager” or a version of the COO’s previous role with just a larger scope. COOs are expected to hand off and delegate running the operation and focus on COO-only and strategic topics, many of which were not part of their previous role.

Using a basketball analogy, one COO describes it as the need to “lean into your left hand,” meaning to improve shooting with your nondominant hand. For the COO role, this means becoming stronger in areas outside your core expertise.

For example, in business case analysis, the COO is often the owner of pitching to the CEO or CFO for major operations investments. Reviewing, explaining, and often asking hard questions of their own staff become important skills. Another COO reflects that in his previous role, he was a great operator and site leader. However, his new COO role includes collaborating on core ERP systems and advanced manufacturing technology, requiring him to quickly learn much more about technology.

Be clear about the role you will play

For many COOs, this means shifting working methods to expand capacity for COO-only topics. COOs should be clear around their priorities and personal leadership focus, and limit their involvement in tasks that can be dealt with by others. Where a COO should engage will vary based on scope, situation, and mandate.

COOs should know their strengths but be honest around their limitations, and strategically align talent to bridge any gaps toward delivering the vision. This can increase personal efficiency and effectiveness, and also creates succession planning and development opportunities. Familiarity with other functional areas will serve the COO well as they look to improve collaboration.

Create an actionable plan, and stick to it

COOs should have a clear view of areas that will require more of their focus, and ensure the right mechanisms are in place to make it happen. For those COO-only topics, this means identifying and outlining the cadence for critical interactions. They should be clear on what data and reports they need to see, at what level, and how frequently.

In thinking through delegation, they should consider their level of involvement in delivering operational excellence and determine where direct leadership is required. For example, COOs can achieve high ROI from their time strategically conducting site visits, both in terms of their personal learning as well as providing visible leadership, mentoring, and role-modeling at the front lines.

Lead to inspire talent and shape the culture

COOs should move beyond a vertical hierarchy, and instead see themselves as a catalyst and connector to drive empowerment and collaboration. The result is high-performing teams, operating in a culture of trust and human connection that extends past formal structures.

Proactively manage your time and energy

COOs tell us that effective time management is a frequent challenge. Some say it is perhaps the biggest challenge of all—being able to focus on the right topics at the level of depth required. As a general rule of thumb, several COOs offer that no more than a third of their time should be spent on running the operation. The rest of their time should be on COO-only topics such as strategy, governance, transformation, people/talent, and organizational health.

Day-to-day firefighting can feel like a constant demand pull for COOs. A COO who is reactive, however, risks focusing only on the near term and making decisions based on experience, heuristics, and gut feel. Stepping back instead and making data-based decisions with a strategic, versus reactive, view will help the COO stay ahead.

To maximize time spent on critical areas, COOs need to embed a steady rhythm—for example, how they manage their year/month/week, workflow, and travel schedule. This can be codified and communicated with the operations team and reinforced through the COO’s assistant. Meeting archetypes should be predefined, as should how meetings are run, including preparation expectations. Free capacity should be actively built in to protect time for long-term needs, including critical priorities and energy maximizers.

Schedule activities to prevent “energy troughs,” and make time for recovery activities such as time with family and friends, and exercise. COOs should be comfortable and confident in setting boundaries. This ensures they set a pace they can sustain for a marathon-length effort, rather than burn out from repeated sprints.

Today’s most effective COOs are inspirational leaders and role models who are also methodical in building a team to which they can delegate day-to-day operations. This allows them to focus on COO-only topics and determine where and how to best spend their time.

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