Operating vs business models
Understanding the difference between operating and business models
Although operating and business models are tightly interconnected and mutually reinforcing, they embody very different concepts, so it is useful to make a distinction between them.
- Operating model: How does an organization create value?
By operating model, we mean the value (in a product or service) that an organization creates, the locations where value-adding work is done, the information systems that support operations, the supplier network and the management systems that coordinate the overall value chain.
- Business model: How does an organization capture and deliver value?
By contrast, the business model is the way an organization realizes revenues (and profit or loss for profit-oriented businesses) by capturing and delivering value to customers.
Business model examples
There are different ways in which organizations capture and deliver a part of the value created by the operating model. These include:
1. Linear value chain
A standard business model constitutes taking full responsibility for the value chain, delivering a product/service to an end-stage or intermediate customer and profiting by producing the product/service at a lower cost than the price the firm charges. Products such as consumer-packaged goods fit into this category. Durable goods such as capital equipment also fit the definition with the caveat that many organizations such as Rolls-Royce Aerospace rely on service revenues from their installed base to be profitable.
2. Making markets
A market arrangement exists when an organization helps (at least) two external parties complete a transaction and profits by taking a percentage of the complete transaction. Similarly, an organization may facilitate transactions among external parties for a fixed fee. Amazon Marketplace and eBay exemplify this type of business model.
3. Enhanced access
A third arrangement is where an organization may facilitate access by one group to another for some kind of fee (advertising revenue models would fit in this category). In addition to well-known ad-sponsored platforms such as Facebook, Google Search, YouTube and Twitter, additional examples include LinkedIn, which charges additional fees for enhanced access to users.
The lines between operating and business models are blurring
Manufacturing and supply chains have become one of the most information-rich sectors in the past 10 years. However, much of the data has been kept in isolation as back-end know-how. Operating models that are highly digitized and leverage data to connect through to the end user become integrated with their business models, allowing them to better scale up.
As an example, FastRadius, a company that is part of the Forum’s Global Lighthouse Network, is providing a complete solution, which extends through the end user marrying the demand to the execution, referred to as digital thread. At FastRadius, validated design, manufacturing and supply chain entities are available on the cloud (operating model) and can be readily accessible (business model) by physical entities through solutions such as additive manufacturing and UBS’s Worldport.
Another example comes from leveraging existing low-cost digital data and infrastructure. Firms that leverage digital platforms as part of their operating model, such as the ones provided by the manufacturing technology company Tulip, can have direct visibility of their production capability and operations, and can also monitor their products through Internet Of Things sensors once they reach the end users.
This allows firms to reinforce and fashion their business model (e.g., lifecycle-based warrantee pricing) by leveraging existing low-cost digital data and infrastructure.
The imperative for business-model innovation
Business models are likely to be disrupted during times of value-chain reconfiguration because of economic crisis or other externalities, such as COVID-19. In many industries, operating models have built up over many years and include stable relationships among value-chain partners. This allows firms to develop strong partnerships and deep sources of technical capability. During times of disruption, however, those stable relationships may collapse in the face of a loss of demand and/or supply.
Conversely, there may be large increases in demand that can also place significant stress on existing arrangements. In order to effectively respond to disruption, firms may need to rapidly reconfigure their operating models in speed of response, location of activities and identities of supply-chain participants. Traditional value-capture models where organizations take responsibility for large portions of the value chain may find themselves under attack from entrants that rely on different business models, especially market-based models which, by their very nature, are more fluid in the identity of the participants.
Hence, it is important for organizations to be clear about their current operating and business models, how they reinforce one another and what might change during times of disruption.