The Operating Model in Context
In “Operating Model Canvas”, the authors Campbell et al proclaimed that “[t]here is no standard definition of the operating model”. They proceeded to offer their half-a-sentence take on the subject, before brandishing colorful pages of how-to’s in fun fonts. This is common in business discourse on operating models. Audiences are implicitly assumed to share an understanding of what operating models are. Self-styled experts eagerly leap into elaborate arguments to extol pet frameworks, dish out insider tips or blame clumsy implementations, while glossing over the pre-requisite of context. This may be why discussions on operating models often descend into a jargon free-for-all.
To clarify what an operating model is, it is useful to put it in context of modern business theories. Two concepts are frequently cited in conjunction with operating models: strategy and business model. Like the operating model, these terms are also much abused. As celebrated author Michael Lewis puts it, “one of those terms of art … [to glorify] all manner of half-baked plans.”
We will explore this spaghetti junction of strategy, business model and operating model. We want to work out what an operating model is, what it is used for and why it is important. This understanding will help us define a “good” operating model that gets the job done.
Strategy, Reviewed
Much of what we understand about corporations comes from Alfred Chandler. The business historian observed that the structures of organizations were driven by changes in the marketplace. New challenges and demands give rise to new organizational structures. He theorized that “structure follows strategy”: enterprises should first determine their goals and action plans, before putting together the most appropriate organization structure to achieve this.
Chandler defined strategy as “the determination of the long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out those goals”. Strategy was intentional, determined by a conclave of executives. More than three decades later, Henry Mintzberg and James Waters observed that strategy could also be spontaneous, arising from unplanned actions from all levels within an organization. Emergent strategies, imposed by action and behavior amongst the ranks, could influence and steer the outcomes of deliberate strategies mandated by management. To fully realize strategy, as Mintzberg suggested, we have to learn how organizations structure themselves.
Organizational Structure and Business Models
Organizational structure is more than a hierarchy of reporting lines. As in evolution, roles and functions become more complex as an organization grows and adapts. Mintzberg defined the structure of an organization “as the sum total of the ways in which it divides its labor into distinct tasks and then achieves coordination among them.” He categorized organizational structure into 1) five parts of the organization — a general division of labor, 2) five systems of flows — how different parts are joined together, and 3) five coordination mechanisms — control and communication across the different parts. All organizations consist of multiple configurations of these elements, along with prescribed and informal variations.
Designing an organization is arduous, requiring “consistency, coherence and fit — harmony” across these interdependent elements and their combinations. Additionally, we need to consider constraints that are introduced by conditions which an organization operates within. For instance, older and larger organizations are typically more complex. Think of the diminishing span of control of a startup founder in their journey from mom’s garage to multinational corporation. These constraints limit the extent of streamlining techniques such as lean management in reducing hierarchies and consolidating jobs. It is no wonder that successful structures were mostly accidental, rather than by design.
With the widespread use of PCs and spreadsheets, however, components and subcomponents about how organizations behave could be linked to numbers. Assumptions about businesses can be analyzed and tested against financial performance, notably, profits-and-losses (P&L). The idea of business models emerged from this way of thinking about structure.
Peter Drucker, the founder of modern management, proposed three sets of assumptions about what an organization gets paid for, and consequently, shape the organization. These are assumptions about the environment of the organization, the specific mission of the organization and core competencies needed to accomplish the organization’s missions. A business model can test and tweak how activities and components of an organization behave against these assumptions. Or, as we have seen, how operating models are used in engineering and social science — “the managerial equivalent of the scientific method”.
A business model describes how components and activities of a business fit together — to make money. While Drucker did not use the term “business model”, he provided examples of these components, mapped against his assumptions. For instance, assumptions on the environment of the organization include society, market, customer and technology. Scholars have since elaborated on these components, as summarized in Table 1 below.
Where the Operating Model Fits
Existing discourse is murky when distinguishing between business models and operating models. Jeanne Ross, who first used the term in business academia, defined an operating model as “the necessary level of business process integration and standardization for delivering goods and services to customers.” Straightaway, we could relate this idea of “business process” with components presented in Table 1: “Key processes”, “Operation model”, “Key activities”. In other words, the operating model is a subset of the business model.
However, Ross goes further to emphasize the integration and standardization of business processes. In Mintzberg’s taxonomy, integration relates to systems of flows — how work, information and decisions are passed along. Standardization relates to coordination mechanisms — standardization of work and outputs. These aspects of organizational structure are the focus of an operating model.
In modern businesses, IT systems are used to facilitate integration and standardization of business processes. The operating model defines what and how IT would do this. As with business models, we can also tie operating models to numbers, and analyze spend and returns.
The operating model defines what and how IT is used to facilitate integration and standardization of business processes.
The CoVID-19 pandemic has accelerated the adoption of IT as well as digital technology, from paying for food at a hawker stall to diagnosing illnesses via video calls. This trend is expected to continue as advanced technologies, such as artificial intelligence, gradually take over critical processes and operating decisions. The operating model will need to consider how these technologies are deployed in an organization, and how they would change the nature (business model) and direction (strategy) of a business.
Discussions on operating models should reference technology, alongside the business model. Operating models for manufacturing and servicing sectors are distinct because the business models and technology requirements are different. Without this context, an operating model put in practice would melt into a messy puddle like a chocolate teapot.
References:
Campbell, A., Gutierrez, M., & Lancelott, M. (2018). Operating model canvas: aligning operations and organization with strategy. Van Haren Publishing.
Chandler, A. D. (1962). Strategy and structure: chapters in the history of the industrial enterprise. M.I.T. Press.
Mintzberg, H., & Waters, J. A. (1985). Of Strategies, Deliberate and Emergent. Strategic Management Journal, 6(3), 257–272. http://www.jstor.org/stable/2486186
Mintzberg, H. (1979). The structuring of organizations. Prentice-Hall.
Mintzberg, H. (1981, January). Organization Design: Fashion or Fit? Harvard Business Review. https://hbr.org/1981/01/organization-design-fashion-or-fit
Drucker, P. F. (1994, October 17). The Theory of the Business. Harvard Business Review. https://hbr.org/1994/09/the-theory-of-the-business
Magretta, J. (2002, May). Why Business Models Matter. Harvard Business Review. https://hbr.org/2002/05/why-business-models-matter
Ovans, A. (2015, January 23). What Is a Business Model? Harvard Business Review. https://hbr.org/2015/01/what-is-a-business-model
Slávik, Š., & Bednár, R. (2014). Analysis of Business Models. Journal of Competitiveness, 6(4), 19–40. https://doi.org/10.7441/joc.2014.04.02
Campbell, A. (2014, February 24). Business Models and Operating Models. Ashridge on Operating Models. https://ashridgeonoperatingmodels.com/2014/02/24/95/
Ross, J. (2005, December). Forget Strategy: Focus IT on Your Operating Model. MIT Center for Information Systems Research.
Iansiti, M., & Lakhani, K. R. (2020). Competing in the Age of AI: Strategy and Leadership When Algorithms and Networks Run the World. Harvard Business Review Press.
