Posted in 2014, edited in 2018.
What is the difference between a business model and an operating model and who cares? First, I don’t think that it matters how you define terms like business model or operating model or business architecture. But it does help to be consistent. In this blog I will offer some definitions, not because I think they are more right than other definitions but because, in order to develop definitions, you need to think through all the moving parts.
For me a business model is the larger concept. An operating model is a part of a business model. An operating model is the engine at the heart of the business model that helps make the business model work.
A business model defines the following
– the stakeholders with whom the organisation will interact, particularly the “mission stakeholder” or “customer”
– the offer or promise that the organisation is making to the mission stakeholder – often referred to as the “value proposition”
– the resulting financial model (income statement and balance sheet) taking account of size and growth ambitions
– the operating model that makes it possible for the organisation to deliver the value proposition
This is consistent with the Business Model Canvas. So, my way of defining a business model (similar to the Business Model Canvas) makes the operating model a subset of the business model.
The operational end of the Business Model Canvas consists of Key Activities, Key Resources and Key Partners. This is a form of operating model, but, as you will see below, I think we can do better than that.
My definition of an operating model is:
– the core work processes that are needed to create and deliver the value proposition (the products or services or benefits that the organisation chooses to provide for its “customers” or “beneficiaries”
– the equipment and technology needed to execute these core processes
– the information systems needed to support these core processes
– the processes needed to support the core processes, such as financial processes or HR processes
– the suppliers needed to support the processes and the supplier agreements needed to keep the most important suppliers engaged
– the people needed to do the work and the “offer” that will attract and retain these people
– the organisation structure, decision rights and accountabilities needed to ‘govern’ and support the people
– the cultural context that will help the people be effective
– the locations, buildings and ambiance where the core and support processes will be executed
– the calendar of management meetings and scorecard needed to run the organisation
Some people use the short hand of People, Process and Technology to describe an operating model. The Business Model Canvas refers to activities, resources and business partners. My own shorthand is POLISM – Processes (in the form of value delivery chains), Organization, Location, Information, Suppliers and Management systems (planning, budgeting, etc). All this is covered in the book Operating Model Canvas , on a YouTube video The Operating Model Canvas as well as on my course at Ashridge Executive Education Designing Operating Models
The comments below were made before the latest edit so may be addressing some part of the article that has been changed
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This blog was posted in early 2014. In the last two years I have learned a lot more about business models and operating models, but the main points in this post are still the same.
What would I add today? First, a link to the Business Model Canvas. I position an Operating Model as the back end of the Business Model Canvas (the bit that covers key activities, key resources and key partners). You can look up BMC at http://www.businessmodelgeneration.com/canvas/bmc. I am developing an Operating Model Canvas as a tool on which one can stick post-it-notes in the same way that one can use the Business Model Canvas.
Second, I would add a dimension to Operating Model: the rhythm of management meetings and KPIs used to control and manage the organisation. I call this “Timetable” (as in timetable of management meetings; meaning the annual calendar of budgeting, planning, performance review and decision making meetings). My PILOS model has therefore grown to be POLIST.
Third, I have found it hard to lay out the processes for delivering value to all the stakeholders and have concluded that each organisation has a mission stakeholder: the “customer” for whom the organisation is creating value. Focusing on the processes that create this value and recognising that the other stakeholders are either supporting these processes (employees, business partners, financiers) or in a governance role (shareholders/governors) has been helpful.
Andrew Campbell March 2016
After reading your comments, I need your further thoughts about the application of operational model. Say, operational model of knowledge sharing in social network. My intention is to address the delivering quality value to customer quickly. Should I use operational model or business model? Thank you very much.
I have almost finished a book that will help you – titled the Operating Model Canvas. It should be available by next March. The answer to your question is that it depends whether you are trying to define the “quality value” that you want to deliver – Business Model – or whether you are trying to figure out how to deliver the value that has already been defined – Operating Model. Andrew
Highly appreciate your comments.
Where does the whole client experience (CX) concept fits? Operating Model or Business Model? How would you portrait the three pieces?
Esthafanie, Client experience is either the whole of (restaurant) or part of (hospital) the value proposition. So it is central to the Business Model and it is the objective of the operating model. Have a look at the business model canvas and the enhanced business model canvas https://www.ashridge.org.uk/insights/blog/march-2017/the-enhanced-business-model-canvas/
Many thanks for your reply Andrew. It makes way more sense now!