How to Design an Operating Model

In our previous blog, we detailed an operating model: it depicts how a business functions at its core by describing how various organizational components collaborate to deliver customer value and achieve company objectives. This includes the processes, structures, systems, and resources involved in daily operations. An operating model provides a clear picture of how a business functions by understanding and defining these components. This helps ensure organizational alignment towards shared goals for smooth, effective operation. To learn more about it, check out our previous Operating Model blog, but now, let’s focus on how to design an operating model.

Designing an operating model begins with a clear understanding of your business strategy and objectives, which serve as the foundation of the entire model. Begin by mapping out your capabilities. Create a Capability Map and involve stakeholders from various departments to ensure a comprehensive perspective and identify critical activities and interdependencies.

Example of a Capability Map (at an Airport)

Be vigilant for potential inefficiencies, bottlenecks, and areas lacking alignment with the overall strategy. Address redundancies in processes, misaligned roles or responsibilities, and technology gaps that could hinder operations.

To validate the operating model’s effectiveness, continually measure it against business goals and objectives. Solicit feedback from stakeholders and conduct pilot tests or simulations to pinpoint any deficiencies. A well-designed model should enhance efficiency, align closely with strategic goals, and improve the organization’s ability to deliver customer value. Regularly review and adjust the model based on performance data and feedback to ensure it remains adaptive to evolving business needs.

While capability maps are a strong starting point for operating model design, several other tools offer structured methodologies to ensure alignment with business strategy, improve efficiency, and deliver value. Here are some commonly used tools:

The Business Model Canvas is a strategic management tool that helps visualize and develop business models. While it focuses on the overall business model, it can also guide operating model design by outlining key elements like value propositions, customer segments, channels, relationships, revenue streams, activities, resources, partnerships, and cost structures.

Example of a Business Model Canvas

Developed by Michael Porter, the value chain analysis identifies and optimizes primary and support activities that create customer value. It enhances understanding of organizational contributions to value creation and identifies areas for efficiency improvement.

Example of a Value Chain Analysis

PESTLE analysis assesses the external environment’s political, economic, social, technological, legal, and environmental factors. It informs strategic decisions and adjustments to align the operating model with external influences.

Example of a PESTLE Analysis

These tools can be used individually or in combination to design a comprehensive and effective operating model tailored to the specific needs and goals of an organization. Starting with foundational tools such as the Capability Map or the Business Model Canvas, organizations can progressively integrate additional tools like PESTLE Analysis. This iterative approach deepens understanding and ensures alignment across all aspects of the business. By systematically incorporating elements from diverse tools, organizations can develop a robust operating model that promotes understanding and engagement among employees, fostering a cohesive and efficient organizational environment.

Operating model design principles are fundamental guidelines that help shape the creation and implementation of an operating model. These principles ensure the model is effective, aligned with business strategy, and capable of delivering value. Here are some key operating model design principles:

•  Strategy Alignment

Ensure the operating model aligns with the overall business strategy and objectives. It should support the long-term goals of the organization and enable the execution of strategic initiatives.

• Customer-Centricity

Design the operating model with a focus on delivering customer value. Understand customer needs and preferences, and ensure that processes, structures, and resources are oriented towards enhancing customer satisfaction and experience.

• Efficiency and Effectiveness

Aim for operational efficiency and effectiveness. Streamline processes, eliminate redundancies, and optimize resource utilization to achieve high productivity and cost-effectiveness.

• Flexibility and Adaptability

Create an operating model that is flexible and adaptable to changing market conditions and business environments. It should be able to respond quickly to new opportunities, threats, and evolving customer demands.

• Integration and Collaboration

Promote integration and collaboration across different parts of the organization. Ensure that various functions, departments, and teams work together seamlessly to achieve common goals. Foster a culture of collaboration and open communication.

• Simplicity

Keep the operating model as simple as possible. Avoid unnecessary complexity in processes and structures. Simplicity enhances understanding, execution, and agility.

Operating Model and Organizational Design are closely interrelated, and both essential for aligning an organization’s structure with its strategic and operational goals. Let’s first clarify each concept and then explore their relationship.

• Operating Model outlines key aspects that generate value, encompassing capabilities, processes, systems, and technologies essential for executing the business strategy. It defines how these components interact to produce and deliver the organization’s products or services.
• Organizational Design focuses on the arrangement of roles, responsibilities, and relationships within the organization. It establishes formal hierarchies and structures that determine task allocation, reporting lines, and facilitate coordination and collaboration.

Effective organizational design is integral to a well-defined operating model. The operating model specifies what needs to be done to deliver value, while organizational design determines how individuals within the organization are organized to accomplish these objectives. Essentially, the operating model serves as the blueprint for the organization’s operational framework, with organizational design translates this blueprint into a functional, organizational structure.

Understanding the operating model is pivotal in business strategy—it defines how an organization functions by integrating capabilities, processes, and resource allocation. Designing an effective model requires aligning it closely with strategic goals to enhance efficiency and value delivery, guided by principles such as strategic alignment, customer-centricity, and adaptability. Tools like the Capability Map and PESTLE Analysis offer structured approaches to tailor operations to specific organizational needs, optimizing processes and promoting collaboration. It’s crucial to distinguish between an operating model and organizational design: Mastery of these distinctions empowers businesses to streamline operations and cultivate a unified workplace culture where each employee contributes to the organization’s success.