What Is a Target Operating Model? With Examples
Introduction to the Target Operating Model
Although every business wants to expand eventually, they each have their own set of unique goals. In order to achieve these objectives, shareholders must define their current state and driving factors to create a plan. By developing a target operating model, organizations can slowly work towards their goals without jeopardizing the current work environment.
Target Operating Model vs Operating Model
Businesses often use the operating model synonymously with the business model even though they are two completely different things. The business model identifies the company's market, customers, and type of inventory to define revenue sources. In other words, it determines where organizations can market their products to pull income and clients.
On the other hand, the operating model nails out the when, where, and how of the business model. In other words, the operating model defines the company's required capabilities, processes, and internal systems to maintain workflow. So, while the business model illustrates the company's mission, the operating model handles the execution. An organization's success relies on both of these structures, so one can't function without the other.
The target operating model (TOM) is what businesses refer to when speaking about their future state. This term references the state that a company strives toward by implementing various strategies. Therefore, the physical TOM does not exist at the moment executives plan it.
In order to attain the TOM, businesses have to adjust their current operating model, requiring a transformation project. However, organizations must be careful when altering the original operating model as it usually defines the business strategy. Therefore, stakeholders must review any pending changes to ensure it still aligns with the core mission.
Target Operating Model Components
The target operating model relies on various internal and external components. Therefore, business owners should learn these factors and consider how they can optimize their own model.
External drivers refer to larger economic and market trends that impact an entire industry rather than a single business. Businesses can define these factors by performing a political, economic, social, technological, legal, and environmental (PESTLE) analysis.
Internal factors will vary between companies, depending on their market, customers, and inventory needs. With a strengths, weaknesses, opportunities, and threats (SWOT) analysis, businesses can define their current state and potential risks.
Competitive dynamics are the determinants of established and emerging competitors' states. Managers can use factor-based analyses to accurately evaluate each type of business.
Culture and Core Values
Culture and core values refer to a company's morals and ethics in how they conduct business and interact with customers. These values are typically what attract consumers to an organization.
Vision and Mission
A company's vision and mission illustrate where they want to be in the near future. Owners usually document these envisions to determine whether they should make incremental or drastic changes to achieve the final state.
Strategy and Plan
Strategies and plans map out how an organization will achieve its TOM. They will act as directions to where, how, and when a company needs to implement changes.
A capability analysis defines what capabilities a business requires in order to attain its TOM. Some organizations may only need to adjust their current capabilities, while others may need to completely phase out unnecessary systems.
Strategic levers are conditions in which a business must foster in order to maintain or enhance capabilities. By establishing conducive strategic levers, companies can improve their overall performance.
Tactical and Operational Levers
On the other hand, tactical and operational levers are strategies specific to various processes to create the future TOM. These levers may include expanding some departments or implementing new management systems.
The transformation roadmap outlines the slow evolution of the operating model to the final TOM.
Initiatives, Programs, Projects
Initiatives, programs, and projects determine what efforts businesses need to take in order to reach their target. These initiatives could be in the form of marketing campaigns, integration projects, or establishing customer loyalty programs.
A governance structure outlines how a business manages its operations. While no company can predict every future outcome, an adequate governance structure can mitigate risks and enforce compliance.
Key Performance Indicators
Key performance indicators (KPIs) are metrics that quantify various performance measures so managers can optimize operations and employee productivity.
Example of Target Operating Models
Creating a TOM can be challenging if owners do not have previous experience in planning and developing strategies. To get a better sense of how to outline a TOM, managers should review some common model examples.
An American-Thai restaurant wants to expand its customer reach and open up multiple store locations.
- Vision - Spread their spin on traditional American dishes with Thai flavors to people around their area.
- Strategy - Establish a unique, cultural dining atmosphere for guests that enhances the food.
- Core Capabilities - Customer management, brand marketing, food and beverage services.
- Processes - Welcoming guests, taking orders, preparing food, generating bills, collecting payments.
- Current Operating Model - Can only house 30 guests, staff of 15, no outdoor seating, only one location, no seasonal menu items.
Based on these factors, the Thai restaurant will need to optimize its processes to expand its capacity and capabilities. Managers can start by opening up outside dining and introducing seasonal menu items to attract more customers. If they are able to generate more income, they can slowly work towards saving for a second location.