29 August 2013
Business Model and Operating Model
An earlier post to this blog discussed business models and the relationship of business models — especially innovative business models — to Sustainability. Part 1 to this post divided the business model into two primary components, a Value Proposition and an Operating Model, then focused on the Value Proposition. 
This post examines the Operating Model. The Operating Model consists of that set of processes, policies, practices and procedures that allow you to reliably deliver the value offered, while generating a satisfactory profit by doing so.
The Operating Model
Business is about creating value for your customers, while capturing enough of that value to produce a reasonable return on capital employed. The Operating Model describes how that will happen. 
Every business needs to spell out expected time phased turnover and cash requirements. That is, the product ranges to be offered, the volumes to be sold (and when they will be sold), raw materials and operating costs structures, as well as the pricing necessary to produce a reasonable profit. Time phased cash requirements projections, including inventories, equipment requirements along with purchasing and collections lead times are likewise necessary. The rationale behind each set of figures (for example: finished goods inventory levels and turns rates) needs to be made explicit.
From these figures, a group of those most important to reliably delivering your Value Proposition — especially those that differentiate you from your competitors — are selected as key performance indicators. Each of these is mapped to the business processes most involved in the performance of that indicator. Then, the affected business processes are mapped to the requisite resources (people, technology, working capital, equipment, or whatever is necessary).  Action plans, accountabilities and reporting responsibilities are implemented as necessary.
Business Models Aren’t Necessarily Static
As mentioned in Part 1of this series of posts, your Business Model — Value Proposition and Operating Model — needs to be based on and express that which provides your competitive advantage. “Competitive advantage”, when used in this sense, refers to some engrained advantage expressed in your Operating Model: brand strength or proprietary technology, for example. Your competitive advantage provides what Warren Buffett called a “moat” around the differentiating components of your Value Proposition. The moat makes it difficult for competitors to copy those differentiating components. There are many, many possible sources for competitive advantage; including patent protection, brand strength, cost position, business relationships, etc, etc, etc.
However, “competitive advantage” is also a relative term that compares customers’ perception of the attractiveness of your Value Proposition to those of your competitors. When the relative attractiveness of your Value Proposition changes, you may need to respond to that change. (For example, a competitor lowers prices, creates a perception of higher product quality, hires a more effective salesperson, introduces product enhancements, runs better advertisements or whatever.)
There is a more constructive approach than simply reacting to one’s competitors. That is by making systematic improvements in your Operating Model that allow proactive enhancements to your Value Proposition. For example, employing Lean Manufacturing techniques to reduce inventories improves lead times and accelerates working capital velocity. Such advantages can then be used to enhance your Value Proposition without impairing profitability.
Take Tesla, for Example
Tesla Motors and its innovative — and very Green — electric automobile have been all over the news recently. Tesla’s Business Model emphasizes direct sales to buyers, rather than sales through franchised automobile dealerships. Direct sales allow Tesla to use pull systems to manufacture to customer orders, rather than pushing finished automobiles onto dealers’ lots. The cost of a dealership network is substantial, as evidenced when the Big 3 automakers all reduced the number of nameplates (and corresponding number of dealerships) in their networks during the Great Recession. There are other reasons to believe that a franchised dealer system would add less value for Tesla customers than for more traditional automobiles, hence would become a competitive disadvantage for Tesla.
Not surprisingly, the franchised automobile dealership industry disagrees. Coaxed by that industry, the State of Texas has banned Tesla sales, except through dealerships (there are no Tesla dealerships). The legislatures in other States, including New York and North Carolina, are considering similar bans.
The point here is that attaining and retaining a competitive advantage isn’t always easy. Tesla regards sales through a dealer network as an imposed competitive disadvantage (compared to the direct sales system Tesla prefers). The dealership industry apparently regards Tesla’s direct sales approach as a threat to their business model. Tesla is expected to sell about 21,000 automobiles this year, in a U.S. market of about 15 million.
Thoughtful comments and experience reports are always appreciated.
… Chuck Harrington (Chuck@JeraSustainableDevelopment.com)
P.S: Contact me when your organization is serious about pursuing Sustainability … CH
This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published on Wednesday evenings.
 See Greening Your Business Model, Part One – Value Proposition, this blog:
 For more detail on Business Models, Value Propositions and Operating Models, see: Johnson, Mark, Clayton Christensen and Henning Kagermann, Reinventing Your Business Model, Harvard Business Review, December 2008. Reprint R0812C, available for download at: http://hbr.org/search/R0812C/0?refinement=4294841677
 This mapping technique is based on strategy mapping, as explained in R. Kaplan and D. Norton, Strategy Maps, Harvard Business School Press, Boston (2004)