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A how-to guide for building an effective operating model
If you’re running a business, you know that there are plenty of different components that make your business work.
Of course, every business wants to bring value to its customers. In order to deliver that value to your customers, your company needs a strong operating model. An operating model can help you hit your organizational performance goals.
Especially in today’s climate, everything changes — and changes fast. Many companies are pivoting their direction, veering the steering wheel left to right to avoid roadblocks. Maintaining profitability — while caring for your people and your customers — is radically important. In times when margins for error may be slimmer than before, an agile operating model is a must.
In order to adapt to the changing economic environment, an operating model can help your organization perform better. Let’s dig into what defines an operating model. We’ll also talk about how to build an effective operating model that’ll help keep your company one step ahead.
What is an operating model?
First, let’s define what we mean by operating model.
What is an operating model?
An operating model is a visual representation of the business model. It’s the way an organization carries out its business model to deliver value to its customers.
It’s estimated that nearly 70% of well-formulated strategies failed due to poor execution. Beyond that, 61% of executives reported not being prepared for the challenges they faced once put into leadership roles. The result? An estimated 50%–60% of executives fail within the first 18 months of being promoted or hired. It’s a radical shift in responsibilities to become a manager. In those first few months, it’s critical that leaders get the support they need to lead teams well.
Despite strong business models in your organization, it’s the operating model that brings your business (and profits) to life.
4 types of operating models
Let’s dig into the four different types of operating models — and how they may interact with one another. While it might sound like a lot of corporate jargon, there are some key differentiators to what makes up each type of model.
- Coordination operating model. Think of coordination as shared access to data. This type of operating model calls for high levels of integration but low standardization. This essentially means that many key parts of the business are integrated with one another. However, each business unit or team has its own way of doing things.
- Unification operating model. This is probably the most hands-on type of operating model. The unification operating model runs on a theory that when things are tightly integrated and tightly standardized, companies maximize efficiency. The risk here is that there’s little autonomy or wiggle room for how different business units operate.
- Diversification operating model. This type of operating model applies to companies that have very few shared customers, suppliers, or even ways of doing business. Essentially, this model helps companies diversify their products and services to different customers to avoid a central hub to limit control over different business units.
- Replication operating model. Another way to think about this operating model is autonomy but with some standardization. This type of operating model makes sure different business units have autonomy over their operations. But first, there’s a standardization of how things are done.
How do you build an effective operating model?
If we really get down to it, an operating model is how your organization runs. If we think about your business model as the strategy, your operating model is the execution.
So, when it comes to building out an effective operating model, there are a few things to keep in mind. Follow these seven steps to help build an effective operating model for your company.
1. Reflect on your company culture
While it might not be the first thing that comes to mind when you think about execution, your company culture can be a guidepost for how you operate.
How do your key stakeholders interact with one another? What sort of partnerships or connections do you hope to foster within your organization? As a leader, what’s your decision-making philosophy? What type of customer experience do you want to create?
Take a minute to reflect on your company culture. This might help guide some decisions you make about your operating model. At its heart, your operating model is about people. It’s about helping your people run efficiently to optimize the business process.
And when you put people at the center of your organization, oftentimes, your profits reflect it.
2. Identify (or create) your value chain
Now, let’s get into your strategic plan. As a business leader, you’ve likely put together a roadmap for your value proposition. You’ve probably put together the business model that’ll help guide your target operating model.
To make sure you’re delivering value to your customers, you need to understand what that value is. Work with your corporate strategy team to ensure you’re measuring the right values, too. Together, you can track the right KPIs, business metrics, and other key components of your business methodology.
3. Align with your business strategy
Let’s say that you run a supply chain business that relies on automation to help move your product through different parts of the business.
Your business hinges on cross-collaboration. You need defined business processes to make sure your products can move from one step to the next. In this type of business, teams working in silos simply wouldn’t work. You know that your strategy demands open access to information and coordination.
Think about the core of your business strategy. What does it take to get your product delivered to customers? What sort of product lines will your product move through before it hits the market? What about your business strategy needs to align with your operating model?
4. Invest in performance management solutions
Oftentimes, these systems, processes, and lines of communication help focus on strategy. At its heart, performance management is about helping employees reach their peak performance.
Especially now, it’s important that your employees see growth opportunities. Your operating model is dependent on the people who run it, which means employee retention needs to be top of mind.
In what ways are you encouraging career development within your company? How are you attracting and retaining top talent? How are you investing in your employees to reach their full potential? How does talent management weave into your performance management strategy?
With BetterUp, you can provide individualized support for your employees. If you want to tap into the potential of your workforce, consider how virtual coaching can help.
5. Think about how your digital transformation strategy fits into the picture
People help your operating model come to life. But the right technology, especially today, can drastically improve how your people work.
If you haven’t already, make sure you take a hard look at your digital transformation strategy.
What tools will help your employees do their jobs well? For example, what technology can help streamline workflows? In this future state of work, how do you see technology working within your ecosystem? What initiatives or programs will need new tools or technology to successfully launch?
6. Develop a strong leadership team
At the helm of every good operating model is a strong leadership team. But contrary to popular belief, leaders aren’t born leaders. It’s important to invest in your leadership development to make sure you have the right folks to execute your operating model.
A good starting point is investing in virtual coaching. After four months of leadership training with BetterUp, Members report lower stress, higher purpose, and higher resilience. Employees who are thriving:
- Lead teams that are 31% more productive
- Have direct reports who are 78% less likely to leave voluntarily
- Recover from setbacks 1.2x stronger
- Are less likely to experience mental illness
- Are 22% more satisfied with their jobs
What’s the difference between an operating model and a business model?
This is a good question. The two models work together in a symbiotic relationship of sorts.
But it’s important to note that a business model and operating model are not the same things.
A business model is how the company will offer its value proposition to the market. Strategic business model planning outlines products, service management, customer base, and key stakeholders.
Think of the operating model as how the company will carry out its business model. It’s the execution arm—the pathway the company will take in order to deliver its value proposition.
Build a strong operating model with a mentally fit workforce
In a world that’s constantly changing, it’s important to make sure your people are at the center of everything you do.
With the rise of hybrid and remote work, people are working from all geographies. It’s imperative that companies have that competitive advantage to keep ahead of the competition. But it starts with having the strategic foresight and future-mindedness to execute with agility.
If you’re in an operating model redesign or starting from scratch, BetterUp can help. With access to virtual coaching, you’re investing in your employees’ mental fitness.
We know things are going to continue to change. There’s uncertainty looming ahead, and strategy needs to stay flexible to be able to adapt to what the world has in store for companies. After all, companies can only focus on their own locus of control. It’s important to be pragmatic and optimistic about the future.
But with a mentally fit workforce, your company can feel prepared for what the future of work holds. In fact, our research found that employees with the best mental health had 56% fewer missed days for health reasons, were 5X more likely to be rated a top performer, and had 25% higher productivity and 34% higher engagement than those struggling with mental health.
Being mentally fit translates into a more resilient workforce. This means that resilient workers are better poised to have more flexible thinking, contribute to more agile teams, and are 20% more innovative.
Together, we can help you build a resilient, agile workforce prepared for the future.
Madeline is a writer, communicator, and storyteller who is passionate about using words to help drive positive change. She holds a bachelor's in English Creative Writing and Communication Studies and lives in Denver, Colorado. In her spare time, she's usually somewhere outside (preferably in the mountains) — and enjoys poetry and fiction.