Business Basics: Why A Target Operating Model Is Important and How it Can Keep your Business Agile in Uncertain Times

Published on
February 4, 2023

I always ask a founder, do you know how to work both on your business and your business? 

And many of us who build businesses focus on the desirability ( does people want this ) and the viability ( what is the willingness to pay, can I deliver on this promise, I believe we deeply underestimate the feasibility of it all. 

How in the world do we make it happen?

We spend time envisioning the businesses of tomorrow and neglect to envision how we want to create the engine needed to run it. 

What is A Target Operating Model? 

To understand a Target Operating Model, you need to understand what an operating model is.

 An operating model is a way your business runs and is organized. It includes all the processes, people, technology, and information that make up your company.

But a target operating model (TOM) is a blueprint of how you want your business to run. It's a description of what your ideal company looks like. This can be helpful for start-ups because it gives them a roadmap to follow as they grow. It can also help businesses through a period of change, such as a merger or acquisition. 

Creating a target operating model strategy involves looking at all the moving parts of your business and figuring out how they fit together. It includes understanding your customers, suppliers, employees, and other stakeholders.

It will consider your business's unique needs and challenges to optimize your supply chain and maximize your resources. This may involve revising your processes, using new technology to manage inventory, or finding new suppliers who are better equipped to meet your needs.

For example, let's say you're a solopreneur hiring your first employee. You'll need to think about how this new person will fit into your current business model. What roles and responsibilities will they have? How to manage?

A target operating model can help you answer these questions and more.

Do I need a Target Operating Model As A Small Business or Solo Founder?

If you're experiencing growing pains or making a significant change to your business, a TOM can help you figure out how everything fits.

With all the indicators and red lights going off about the current state of the economy, it’s important not to wait for calamity to arrive before making adjustments to your business operations. 

The first place you should be tightening up is in the infrastructure and operations of your business. Making minor adjustments sooner rather than later can prevent you from making devastating adjustments like the mass lay of a trend we are seeing now. 

It can also help you plan for future growth by identifying bottlenecks in your current processes.

Supply chains are causing huge bottlenecks in nearly every industry. At one point the lack of cardboard to create sneaker boxes caused NIKE to rethink its packaging strategy.

A TOM doesn’t only help you plan for the future, but it could also help you create the future. 

When you're creating a target operating model, it's an opportunity to be innovative. 

This doesn't mean you need to reinvent the wheel, but you should look for ways to improve upon the traditional operating model.

For example, let's say you're a small business that sells products online. A traditional operating model would have you selling your products through a third-party website, like Amazon or eBay. But, what if you could sell directly to your customers? This would allow you to build a stronger relationship with them and offer a more personalized experience. This exact reimaging is what gave birth to so many of the Direct to Consumer (DTC) Companies we are familiar with.

Another example is if you're a service-based business. A traditional operating model would have you marketing your services to potential clients and signing them up for a long-term contract. But, what if you could offer your services on a pay-as-you-go basis? This would make it easier for potential clients to try your benefits and give you a recurring revenue stream.

We see this in the “subscription model” many agencies currently employ. 

The benefits of having a target operating model

There are many benefits of having a target operating model, such as:

- Improved efficiency: A TOM can help you streamline your processes and eliminate bottlenecks. This can lead to increased productivity and improved profitability.

- Improved decision making: A TOM can help you make better decisions by providing a clear roadmap to follow. It can also help you avoid making costly mistakes.

- Improved customer satisfaction: A TOM can help you improve how you serve your customers. This can lead to increased sales and improved customer retention.

- Improved employee satisfaction: A TOM can help you create a more efficient workplace. This can lead to increased job satisfaction and decreased turnover.

How to create a target operating model strategy

There are four steps you need to take when creating a target operating  model strategy:

1. Define your operating model: The first step is to understand what a working model is and what it includes.

2. Assess your current operating model: The second step is to assess your current operating model to see where there are opportunities for improvement.

3. Develop your target operating model: The third step is to develop your target operating model. This includes defining the roles and responsibilities of each stakeholder, as well as the processes they need to follow.

4. Implement your target operating model: The fourth and final step is to implement your target operating model. This includes training employees on new processes and systems and testing everything to make sure it's working correctly.

A Total Operating Model Can Help You Build Sustainable and Circular Businesses

As the business world becomes increasingly aware that consumers are more frustrated by the effects of capitalism and want to be more thoughtful in their consumption, more and more companies are turning to total operating models (TOMs) to help them scale sustainably and build circular businesses. 

When you hear significant statements like we want to be carbon neutral by 2050, this isn’t just a company goal. This is actually a view into their intended Target Operating Model.

Target operating model Templates

If you're unsure where to start when creating a target operating model, you can use a template. There are many different templates available online, such as:

- The Bain Operating Model Canvas

- The IBM Business Model Generation Canvas

- The Lean Startup Canvas

- The Business Model Canvas

You can also find target operating model examples online. These can be a great way to see how other businesses have structured their TOMs.

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