Business language is full of jargon. It can be difficult to understand the meaning of certain words and phrases, especially when it comes to strategy and execution. The term “strategy” has many interpretations, as does the phrase “strategic plan”. Other words like goals, objectives, score tables, and goals are also used in different ways.
The phrase “business model” is widely used, but no two people use the same definition. The same is true for the phrases “operating model” and “objective operating model”. To help clarify these terms, let's start with a definition. An operating model encompasses the parts of the value supply chain in which an organization participates, as well as how it interacts with other participants.
To remember all the aspects of an operating model, I use the acronym POLIST: Processes, Organization, Location, Interaction, Support, and Technology. In simpler terms, an operating model must show the work that needs to be done in the organization, the type of people and culture needed to do this work, how these people are connected to each other in an organizational structure, how important decisions are made, where people and assets are located, how people work together across the structure and locations, what other organizations are needed to support work, and how people are managed through regular meetings of planning, budgeting and performance review. The Operating Model Canvas is a single framework for showing all these different parts of an operating model. It has a limited capacity so only the highest-level thoughts can be included.
For more details, separate graphics and models are needed for each section of the canvas. Figure 4 is an example of some of the high-level sticky notes that you could place in Canvas if you summarized the operating model of McKinsey & Co., the global strategy consultancy. An operating model typically includes an IT plan, location maps, a vendor matrix, people models, decision grids, and other elements such as a dashboard for evaluating performance. The Center for Information Systems Research (CISR) at MIT suggests that an operating model is useful in guiding IT investment decisions.
Ross, Weill and Robertson found that an organization with an operating model reported 31% more operational efficiency, 33% more customer satisfaction and a 34% advantage in developing new products. An operating model is an abstract and visual representation (model) of how an organization offers value to its customers or beneficiaries as well as how it works on its own. It is one of the tools leaders can use to help them formulate and execute a strategy. Coordination and unification models benefit more from consolidated views of customers and data across the enterprise than from diversification and replication models.
In this context it is often referred to as an objective operating model which is a vision of the operation at a future time. The term is more commonly used today to refer to how a single business division or single function operates such as “the operating model of the exploration division” or “the operating model of the human resources function”. An operating model is a living set of documents that change continuously such as an organization chart. There is no generally accepted set of graphics or at least there is still no agreement on what graphics make up an operating model.
Any organization with more than a handful of people is likely to have specialists who focus on these support functions in addition to the operational people who create and deliver value. Operating models also change to adapt to new ways of working such as working in an agile way or from home new people especially leaders new capacities new geographies new suppliers and other reasons.
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