Operating model is an abstract representation of how an organization operates across process, organization and technology domains in order to accomplish its function.
An organization is a complex system. An operating model breaks this system into components to improve understanding and suggest opportunities for improvement.
An operating model can describe the way an organization does business today. Alternatively, a fictional model can communicate how the organization wants to transform its business.
By contrast, a business model describes how an organization creates, delivers and captures value and sustains itself in the process.
Origins in corporate strategy
Operating model as defined here is similar to the definition from Lynch, et al., of corporate strategy: "the relationships among the businesses in the corporation's portfolio and the process by which investments will be determined among them."
Corporate strategy grew out of the research of Harvard Business School professor Bruce R. Scott who developed a model of the stages of corporate development. He traced the evolution of a firm from "Stage I" with a single product (or line of products) to "Stage 3" with multiple lines of business, markets and channels. Following this work, Leonard Wrigley and Richard Rumelt developed ways of classifying company structures and comparing their strategies. They identified four different operating models. (1) a single line of business where most revenue comes from a single activity; (2) related businesses where diversification is achieved by adding businesses that complement the original activity; (3) a diversified firm that combines unrelated businesses such as an oil company and a fertilizer business and (4) conglomerates – diversification is achieved without regard to complementary or synergistic effects.
The nomenclature evolved, but the categories survive:
- Integrated: single business, requiring a single strategy for competitive advantage. Issues are formulated centrally and tailored for local needs to optimize the business. Success is measured by adding up the global numbers. Examples include McDonalds or Harley Davidson.
- Allied-Related: each business contains the ability to create advantage autonomously. Common interests are worked across businesses. Some support work may be shared across businesses. Examples include Canon and Procter & Gamble.
- Allied-unrelated: each business contains the core work required to create advantage autonomously. Customers may be shared. Common interest are worked across businesses. Capabilities that portable to other businesses are shared for leverage. Examples include Avery Dennison's pressure-sensitive technology and self-adhesive base technologies that are used in Roll Materials medical group for single-use medical products.
- Holding company: includes unrelated businesses, with multiple strategies, related or not. Each business has self-contained brands/businesses with independent functional groups. The units are tied together only by ownership. Examples include Tyco International.
Some implications of the choice:
|Corporate Role||Resource allocations||Define Protocols||Define Protocols||Financial roll-ups and analysis|
|Human Capital||Common||Some Shared||Some Shared||Independent|
|IT Systems||Common||Common||Few, interconnected||Different|
|Enabling Processes||Centralized||Centralized||Some Centralized||Decentralized|
The MIT Center for Information Systems Research (CISR), a research group at the MIT Sloan School of Management suggests that an operating model is useful to guide IT investment decisions. IT investment must support the operating model.
Ross, Weill and Robertson summarized found that an organization with an operating model reported 31% higher operational efficiency, 33% higher customer satisfaction, and a 34% advantage in new product development. In the book "Enterprise Architecture as Strategy," they outline four operating models:
- Process standardization
- Coordination – low process standardization but high process integration (Compare with allied strategy – where subsidiaries provide varied products to the same customers)
- Unification – both high standardization and integration (compare with integrated strategy)
- Diversification – businesses requiring low standardization and low integration (compare with holding company strategy)
- Replication – high standardization but low integration (Compare with Franchisees or Replicated Facilities of an Integrated Strategy)
Operating models inform the appropriate level of business process integration and standardization to deliver the organizations promises to stakeholders.
The operating model informs IT leaders about how various technical and business components should be designed and implemented to enable the chosen operating model:
|Decision Making Processes||X|
|Systems Component Technology||X|
Coordination and unification models benefit more from consolidated views of customer and data across the enterprise than do diversification and replication models.
Industry standard operating models
- Business Process Framework (eTOM)
- IAA (Insurance Application Architecture)
- BIAN (Banking Industry Architecture Network e.V. (BIAN))
- IFW (Information Framework)
- ITIL (Information Technology Infrastructure Library)
- COBIT (Control Objectives for Information and related Technology)
- Business architecture
- Business model
- Capability management in business
- Enterprise architecture
- Risk and compliance
- Shared services
- Target operating model
- Marne de Vries, Alta van der Merwe, Paula Kotze and Aurona Gerber. (2011) A Method for Identifying Process Reuse Opportunities to Enhance the Operating Model. 2011 IEEE International Conference on Industrial Engineering and Engineering Management
- Richard Lynch, John Diezemann and James Dowling, The Capable Company: Building the capabilities that make strategy work (Wiley-Blackwell, 2003)
- Bruce R. Scott, "Stages of Corporate Development (Part I)" (Harvard Business School Note 371-294)
- Leonard Wrigley, Divisional Autonomy and Diversification (Thesis for Doctor of Business Administration, Harvard University, 1970)
- Richard P. Rumelt, Strategy, Structure, and Economic Performance, (Harvard Business School, Boston, 1974, Revised edition published by the Harvard Business School Press, 1986)
- Kenneth R. Andrews, The Concept of Corporate Strategy (Irwin, 1986)
- Norman Berg, General Management: An Analytic Approach (Richard D Irwin, March 1984)
- Laying the Tracks for the Technology Train www.technologyevaluation.com/.../laying-the-tracks-for-the-technology-train-15640/ April 10, 2000. Adapted from original work by Novations, Inc.
- Ross, Jeanne; Weill, Peter; Robertson, David C. (2006). Enterprise Architecture As Strategy: Creating a Foundation for Business Execution. Harvard Business Review Press. ISBN 978-1591398394.