Sunday, August 19, 2007

Business Model or Operating Model

Recently on one of EA online discussions the concept of Business Model vs Operating Model was explored. I just wanted to use this post as a way to summaries the thinking for my own use.

Chris Potts view on components of operating model

  •  Key operational performance ratio(s) - usually only one or two primary ones from which everything else cascades
  • Core financial structure - P&L, new investments and cash flow
  • Distribution of accountabilities and competencies - e.g. product versus geography
  • Organisation - capability areas, not actual roles
  • Processes and knowledge (as one composite framework, not two separate ones)
    Systems and technologies

Following reasons why an Organisation might want to invest in Operating Model.

  •  To provide input to their plans for investing in change
  • To help figure out why their current operations are underperforming
  • To decide how best to integrate a new acquisition
  • If a company is planning to change its business model, to compare current and intended operating models and expose the impacts and costs of the change 
  • When the company is scenario planning its business model, to explore the operating impacts of different scenarios and therefore help assess their relative merits

There are some schools of thought out there to define the Business Model as a construct following are links to some of them.

If you take a Value Chain or Process Viewpoint following links might help.

There is a Business Model Design template from Arvetica that is helpful when starting the journey.


The only challenge with this model is it does not give a lot of weight to Market Architecture which is Chris Potts speciality and I am eager to find out :-)

MIT Sloan has published some material on Business Models and they describe the same as "what a company does and how they make money from doing it". They then classify it using 16 Archetypes more info here the concept can be downloaded from the following location working paper.

Lets not forget the book "Enterprise Architecture as Strategy" which started the whole discussion. It defines the business model as following types.

  •  Replication - Few shared customers with highly variable product design. Example is a holding company that has a set of companies in related businesses. An example might be a company that owns auto dealerships, auto financing, and auto parts stores.
  • Coordination -  Shared customers with highly customized products, services, and features. A wealth management firm is a good example. They sell a set of services such as financial planning, insurance, and estate planning. Each of those services is provided by different companies but there is a high degree of sharing customer information. The services are coordinated by a single representative.
  • Replication - Few shared customers with operationally similar product units. This is the franchise model. (McDonalds)
  • Unification - Consistent product design and globally integrated processes for all customers. (Dow Chemical Example)


  1. A small typo in the last paragraph of your post talks about "Enterprise Architecture as Strategy": The first bullet should be Diversification.

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  5. There's a mistake in the last sentence. The book "Enterprise Architecture as Strategy" defines the four following items as operating models, not business models.

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