Business Models and Operating Models

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
– the offer or promise that the organisation is making to each stakeholder segment
(customers, employees, investors, suppliers, etc both internal and external)
– the contribution that each stakeholder segment is expected to make (work from employees, money from customers)
– the resulting financial models (income statement and balance sheet) taking account of size and growth ambitions
– the operating model that makes it possible for the organisation to interact effectively with its stakeholders

This is consistent with the Business Model Canvas.  The difference is that the Business Model Canvas only recognizes one stakeholder (the customer).  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.

So, my way of defining a business model (similar to the Business Model Canvas) makes the operating model a subset of the business model.

An operating model defines
– the core work processes that are needed to create and deliver value to each stakeholder group
– the equipment and technology needed to execute these core processes
– the information systems needed to support these core processes
– other processes needed to support the core processes, such as financial processes or HR processes
– the suppliers and supplier agreements needed to support the processes
– the people needed to do the work
– the organisation structure, decision rights and accountabilities needed to ‘govern’ and support the people
– the cultural context in which the people work
– the locations, buildings and ambiance where the core and support processes will be executed

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

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About andrew campbell

Ashridge Strategic Management Centre Focus on strategy and organisation Currently working on group-level functions and group-level strategy
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8 Responses to Business Models and Operating Models

  1. Pingback: Designing beyond the boundaries of the firm | Ashridge on Operating Models

  2. andrew campbell says:

    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

    • Arthur says:

      Dear Andrew,
      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.

      Arthur

      • andrew campbell says:

        Arthur,

        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

      • Arthur says:

        Hi Andrew,
        Highly appreciate your comments.

        Arthur

  3. Esthefanie says:

    Hi,

    Where does the whole client experience (CX) concept fits? Operating Model or Business Model? How would you portrait the three pieces?

    Many thanks.

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