Many people are confused by the terms operating model and business model. In fact, the two terms are often used interchangeably, which only adds to the confusion. The business model concept really boils down to one simple question: How does the business make money? This isn’t referring to the generic principle of adding value to inputs and selling the outputs at a profit – which is something every business does – but something more unique. A classic example is Gillette’s business model of giving away razors in order to sell blades – a model that many other companies have adapted to sell everything from wireless service subscriptions to inkjet cartridges.
A company’s business model explains how it creates value and competitive advantage. For instance, Dell revolutionized the PC market in the mid-1990s by selling directly to consumers and custom-configuring computers to match their exact requirements. This enabled customers to pay for only what they needed. It also reduced inventory costs and provided real-time market insights that made Dell more agile than its competitors.
A company’s operating model describes how the business model will be implemented. Where will the company operate? What kinds of products will it sell? Which customers and segments will it serve? Which processes will be outsourced, or handled in-house? Which alliances will be most critical? How will decisions be made, and performance measured?
Operating model design should not be confused with detailed design of tactical capabilities such as processes, systems and organization structures. For example, an operating model might specify which business processes are needed – and whether those processes should be outsourced, centralized as shared services or handled by the business units – but would not define the details of the processes to be executed. That said, it’s important for all three elements (business model, operating model and tactical capabilities) to be closely aligned.
Read the full article . . . . A tale of two operating models – Different situations require different approaches to restructuring
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