Strategy, Business Model, & Operating Model

Aligning Business Strategy, Business & Operating Models for Business Success

Unlocking the Secret to Business Success
Have you ever wondered how successful companies seamlessly translate their grand visions into day-to-day operations? The answer lies in the intricate interplay between business strategy, business model, and operating model. According to Harvard Business Review, a business strategy refers to the plan a company uses to gain a competitive advantage in the market by choosing a unique position and business model. A business model describes the logic of how a company operates and creates value for stakeholders. Operating model defines the tactics - the specific actions taken - to execute the strategy within the framework of the chosen business model.

The patterns of decisions embodied within the strategy, business model, and operating model can be viewed as the strategic and operational engines that drive an organization toward success. The 'pattern of decisions' perspective emphasizes that a strategy or model (e.g., business model or operating model) is best understood by observing the consistent results (outcomes) of the actions taken. Think of the 'pattern of decisions' as the organization's track record, showing what it consistently does, as opposed to what it merely plans to do.

Business Strategy: Management Perspective
This perspective highlights a structured and organized framework of decisions made by management. It's more about the systematic approach and the interconnectedness of decisions that shape the overall strategy. It suggests a deliberate, methodical process where each decision is a part of a well-thought-out plan. The focus is on the management's role in systematically guiding the organization towards its goals. From management's perspective, a business strategy is a coherent system of decisions shaped by a structured framework. This framework defines strategic choices regarding how to uniquely position the organization in the market. These choices include:

1. Market Positioning: Determining where to compete, which customer segments to target, and how to differentiate the company's offerings from competitors.
2. Value Proposition: Deciding what value the company will deliver to its customers, which problems it will solve, and what unique benefits it will offer.
3. Resource Allocation: Making decisions about the optimal allocation of resources (e.g., financial, human, technological) to support the strategy.
4. Operational Processes: Establishing the processes and actions needed to execute the strategy effectively.
5. Competitive Advantage: Identifying and leveraging unique capabilities, strengths, and assets that will give the company an edge over competitors.
6. Environmental Factors: Taking into account external factors like market trends, regulatory changes, economic conditions, and technological advancements.

It underlines the importance of the decision-making process, how these decisions are made, and how they fit together to form a coherent strategy. By considering these management decisions and factors, the business strategy aims to create a sustainable competitive advantage and achieve the organization's long-term goals.

Business Strategy: Pattern of Decisions
A business strategy is a pattern of decisions and actions that shapes a company's direction and influences its outcomes in a competitive business environment. This perspective focuses more on the observable outcomes of the decisions and actions taken over time. It's about the recurring and consistent behaviors that emerge as a result of these decisions. It implies that strategy can evolve organically based on the pattern of decisions made in response to changing circumstances. The focus is on the adaptability and the iterative nature of strategy. It addresses fundamental questions or problems related to strategic issues through a layered set of approaches across four key dimensions:

1. Strategic Direction
   • Core Purpose: What is the fundamental reason for the organization's existence?
   • Vision: What is the desired future state of the organization?
   • Mission: What are the organization's primary goals and objectives?
2. Positioning and Competitive Advantage
   • Value Proposition: What unique value does the organization offer to its customers?
   • Target Market: Who are the organization's ideal customers?
   • Competitive Advantage: How will the organization differentiate itself from competitors?
3. Implementation
   • Capabilities: What resources, skills, and processes are needed to execute the strategy?
   • Governance: How will the strategy be implemented and monitored?
   • Organizational Structure: How should the organization be structured to support the strategy?
4. Operational Execution
   • Operations: How will the organization's day-to-day activities be managed?
   • Technology: What technologies will be used to support the strategy?
   • Risk Management: How will the organization identify and mitigate risks?

It highlights the overall direction and influence of the cumulative decisions and actions, rather than the specific process of making those decisions.

These dimensions involve addressing specific strategic issues, forming layers of a comprehensive business strategy, which include:

• Corporate Strategy: Focuses on the overall strategic direction, long-term goals, and resource allocation.
• Business Unit and Competitive Strategy: Deals with how individual business units compete within their markets and gain a competitive advantage.
• Functional Strategy: Pertains to strategies of specific functions like marketing, finance, and operations, ensuring alignment with the overall business strategy.
• Operational Strategy: Focuses on the execution of strategies at the operational level, ensuring day-to-day activities align with strategic objectives.

By addressing strategic issues within these dimensions, a business strategy provides a structured approach to achieving organizational goals and maintaining a competitive advantage. It offers a framework for guiding a company's activities and ensuring they align with its long-term goals.

Business Model: Management Perspective
This explains the logic of how the company operates and creates value for stakeholders. It answers the "how" and "why" a company can generate revenue and sustain profitability.

A business model, from the management's viewpoint, is a comprehensive system of decisions that collectively outline how an organization creates, delivers, and captures value. This system encompasses several key components:

1. Value Proposition
   • Core Decision: What unique value will the organization offer to its customers?
   • Management Focus: Identifying and defining the products or services that address customer needs and deliver distinct benefits.
2. Customer Segments
   • Core Decision: Who are the target customers?
   • Management Focus: Segmenting the market to determine the most valuable customer groups to serve.
3. Channels
   • Core Decision: How will the organization reach and deliver value to its customers?
   • Management Focus: Selecting and managing the distribution and communication channels to ensure effective delivery of the value proposition.
4. Customer Relationships
   • Core Decision: What type of relationship will the organization establish with its customers?
   • Management Focus: Deciding on the nature of interactions, from personalized services to automated solutions, to enhance customer satisfaction and loyalty.
5. Revenue Streams
   • Core Decision: How will the organization generate revenue?
   • Management Focus: Identifying the pricing mechanisms, revenue models, and sources of income that align with the value proposition and customer segments.
6. Key Resources
   • Core Decision: What resources are essential to deliver the value proposition?
   • Management Focus: Ensuring the availability of physical, intellectual, human, and financial resources required for the business model.
7. Key Activities
   • Core Decision: What activities are crucial for delivering the value proposition?
   • Management Focus: Determining the operational processes and actions necessary to create and deliver value effectively.
8. Key Partnerships
   • Core Decision: Who are the key partners and suppliers?
   • Management Focus: Establishing and managing relationships with external entities that are critical for the business model's success.
9. Cost Structure
   • Core Decision: What are the major costs involved in operating the business model?
   • Management Focus: Identifying and managing the cost drivers to ensure profitability and sustainability.

By integrating these management decisions into a cohesive system, the business model serves as a blueprint for how the organization operates. It provides a structured approach to achieving strategic goals and delivering consistent value to stakeholders. Through this system, management can align resources, activities, and relationships to support the organization's long-term vision and competitive advantage.

Business Model: Pattern of Decisions
Describing a business model from the perspective of a pattern of decisions emphasizes the dynamic and adaptive nature of how a company creates, delivers, and captures value. Here’s a breakdown:

• Value Proposition:
  1. Decision Pattern: Consistently refining and updating the unique value offered to customers based on market feedback and evolving customer needs.
  2. Outcome: A continually relevant and compelling value proposition that adapts to changes in the market.
• Customer Segments:
  1. Decision Pattern: Continuously identifying and targeting the most valuable customer segments, adjusting focus as demographics and preferences shift.
  2. Outcome: Sustained engagement and growth within key customer groups.
• Channels:
  1. Decision Pattern: Regularly evaluating and optimizing the channels through which value is delivered to customers, incorporating new technologies and methods as they emerge.
  2. Outcome: Effective and efficient delivery mechanisms that enhance customer experience.
• Customer Relationships:
  1. Decision Pattern: Developing and maintaining relationships with customers through personalized interactions, loyalty programs, and responsive customer service.
  2. Outcome: High customer satisfaction and loyalty.
• Revenue Streams:
  1. Decision Pattern: Exploring and adopting diverse revenue models, experimenting with different pricing strategies, and adjusting based on financial performance and market trends.
  2. Outcome: Stable and growing revenue streams that support business sustainability.
• Key Resources:
  1. Decision Pattern: Continuously assessing and acquiring the necessary resources—physical, intellectual, human, and financial—to support the business model.
  2. Outcome: Adequate and strategic resource allocation that aligns with business goals.
• Key Activities:
  1. Decision Pattern: Identifying and optimizing core activities that drive value creation, adjusting processes and practices as needed for efficiency and effectiveness.
  2. Outcome: Streamlined operations that maximize value delivery.
• Key Partnerships:
  1. Decision Pattern: Building and nurturing strategic partnerships, collaborating with external entities to enhance capabilities and reach.
  2. Outcome: Strong, mutually beneficial partnerships that support business growth.
• Cost Structure:
  1. Decision Pattern: Regularly analyzing and managing costs, identifying opportunities for cost reduction without compromising quality.
  2. Outcome: A lean cost structure that ensures profitability.

By viewing the business model as a pattern of decisions, management can adapt and evolve the model in response to internal and external changes, ensuring sustained relevance and competitiveness in the market. This perspective emphasizes the iterative and dynamic nature of business decisions that collectively shape the organization's ability to create, deliver, and capture value over time.

Operating Model: Management Perspective
Operating model is the detailed plan that outlines how your organization will execute its business model. While the business model focuses on the “how you do it,” the operating model is all about the “how you do it day-to-day.”

From the management's perspective, an operating model is a comprehensive system of management decisions that outlines how an organization will execute its business model effectively. This system encompasses several key components:
​

• Process Design
  1. Core Decision: What processes and workflows are necessary to deliver the value proposition?
  2. Management Focus: Defining and optimizing end-to-end processes that ensure efficient and effective operations.
• Organizational Structure
  1. Core Decision: How should the organization be structured to support the business model?
  2. Management Focus: Designing the organization’s hierarchy, roles, and responsibilities to align with strategic objectives.
• Technology and Infrastructure
  1. Core Decision: What technologies and infrastructure are required to support operations?
  2. Management Focus: Selecting and implementing the necessary technological tools and infrastructure to facilitate seamless operations.
• Human Resources
  1. Core Decision: How will the organization attract, retain, and develop talent?
  2. Management Focus: Managing recruitment, training, and employee development to ensure a skilled and motivated workforce.
• Performance Management
  1. Core Decision: How will the organization measure and manage performance?
  2. Management Focus: Establishing key performance indicators (KPIs) and performance management systems to monitor and drive operational success.
• Governance and Risk Management
  1. Core Decision: What governance structures and risk management practices are needed?
  2. Management Focus: Implementing governance frameworks and risk management strategies to ensure compliance and mitigate potential risks.
• Cost Management
  1. Core Decision: How will the organization manage and control costs?
  2. Management Focus: Identifying cost drivers and implementing cost control measures to maintain profitability.
• Continuous Improvement
  1. Core Decision: How will the organization foster continuous improvement?
  2. Management Focus: Encouraging a culture of innovation and continuous improvement to enhance operational efficiency and effectiveness.

By integrating these management decisions into a cohesive system, the operating model provides a detailed plan for executing the business model. It ensures that all aspects of the organization--processes, structure, technology, human resources, performance management, governance, cost management, and continuous improvement—are aligned and working harmoniously to achieve strategic goals and deliver consistent value to stakeholders.

Operating Model: Pattern of Decisions
Describing an operating model as a pattern of decisions highlights the dynamic, adaptive nature of how an organization executes its business model. Here’s a breakdown of this perspective:

• Process Design:
  1. Decision Pattern: Regularly evaluating and refining processes and workflows based on feedback and performance data.
  2. Outcome: Continuously optimized processes that enhance efficiency and effectiveness.
• Organizational Structure:
  1. Decision Pattern: Adjusting roles, responsibilities, and hierarchies to adapt to changing strategic goals and market conditions.
  2. Outcome: A flexible and responsive organizational structure that supports strategic objectives.
• Technology and Infrastructure:
  1. Decision Pattern: Continuously assessing and integrating new technologies and infrastructure to support evolving operational needs.
  2. Outcome: An up-to-date technological environment that facilitates seamless operations.
• Human Resources:
  1. Decision Pattern: Ongoing recruitment, training, and development programs to build and maintain a skilled workforce.
  2. Outcome: A motivated and capable team that drives the organization forward.
• Performance Management:
  1. Decision Pattern: Regularly setting and reviewing key performance indicators (KPIs) and performance metrics.
  2. Outcome: Consistent monitoring and improvement of operational performance.
• Governance and Risk Management:
  1. Decision Pattern: Implementing and updating governance frameworks and risk management practices to address emerging challenges.
  2. Outcome: Effective oversight and risk mitigation strategies that ensure compliance and resilience.
• Cost Management:
  1. Decision Pattern: Continuously analyzing and controlling costs to optimize financial performance.
  2. Outcome: A lean cost structure that supports profitability and sustainability.
• Continuous Improvement:
  1. Decision Pattern: Encouraging a culture of innovation and continuous improvement through regular feedback and iterative changes.
  2. Outcome: An organization that constantly evolves and adapts to enhance operational efficiency.

By viewing the operating model as a pattern of decisions, management can adapt and evolve operational practices in response to internal and external changes, ensuring sustained effectiveness and competitiveness. This perspective emphasizes the iterative and adaptive nature of operational decisions that collectively shape the organization’s ability to execute its business model successfully.

How They Work Together
 Understanding the relationships between strategy, business model, and operating model.

• Strategy:
  1. Definition: The overarching plan that outlines the long-term vision, goals, and competitive positioning of the organization.
  2. Role: Sets the direction and provides the foundation for decision-making. It defines what the organization aims to achieve and how it plans to compete in the market.
• Business Model:
  1. Definition: The system of decisions that defines how the organization creates, delivers, and captures value.
  2. Role: Translates the strategic vision into a tangible framework. It outlines the value proposition, customer segments, revenue streams, and key resources and activities needed to execute the strategy.
• Operating Model:
  1. Definition: The detailed plan that describes how the organization will execute its business model on a day-to-day basis.
  2. Role: Provides the structure and processes to implement the business model. It focuses on the specific actions, resources, and technologies required to achieve the strategic objectives and deliver value effectively.

Interconnection:

• Strategy Drives Business Model:
  • The strategy defines the high-level goals and direction, which in turn informs the business model. For example, if the strategy emphasizes innovation, the business model will include elements that foster creativity and unique value propositions.
  • The business model must align with the strategic vision, ensuring that all components—value proposition, customer segments, revenue streams—are designed to support the strategic goals.
• Business Model Drives Operating Model:
  • The business model outlines the key elements needed to deliver value, which guides the development of the operating model.
  • The operating model provides the detailed plan for executing the business model, specifying the processes, organizational structure, technologies, and resources required.
• Alignment:
  • Ensuring that the business model and operating model are aligned with the strategy is crucial. Misalignment can lead to inefficiencies and hinder the organization's ability to achieve its strategic goals.
  • Continuous review and adaptation are necessary to maintain alignment and respond to changes in the market or internal conditions.
  • The alignment of these three elements (strategy, Business Model, and Operating Model) is not a one-time event, but an ongoing process that requires constant feedback loops and adjustments. Misalignment can lead to missed opportunities, increased costs, and ultimately, a failure to achieve strategic goals.

The strategy sets the direction, the business model translates that direction into a framework for value creation, and the operating model provides the detailed plan for execution. Understanding this interconnectedness helps ensure that all aspects of the organization work together harmoniously to achieve long-term success.

​