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Target Operating Model: Definition, Value and Approach

What is a Target Operating Model? Defining TOM

Target operating model (TOM) is a blueprint of a firm’s business vision that aligns operating capacities and strategic objectives and provides an overview of the core business capabilities, internal factors, and external drivers, strategic and operational levers, organizational and functional structure, technology, and information resources of a company.

In today’s digital and cognitive world, it has become a strategic imperative to redefine what’s next and then realize the target state with a sound target operating model. 

Target Operating Model Definition

Understanding the Target Operating Model with a few examples: 

It seems like many smart people do have misconceptions and misunderstanding of what is a Target Operating Model.  Let’s take a couple of examples to fathom the concept of TOM.

Explaining the Target Operating Model using a Restaurant Example:  A brief case study

Vision: Bring the flavors of indigenous people’s cuisine to the world at large. 

Strategy: Sell the culture, ambiance, and experience as vital elements in addition to food. 

Core Capabilities: Service Management | Food and Beverage Management | Brand Management etc.

Processes: How does the restaurant deliver its promise and premise? The welcoming the guest process. The order taking process.  The food preparation process. The billing process. Each of these processes is important in realizing the vision and strategy. 

Current Operating Model: The current operating model is a blueprint and an operational framework of how combining cultural ambiance with delectable cuisine come together? 

Suppose if you are going to change the future state vision and strategy and how you deliver your service. You will need an operating model of how your restaurant empire will work in that future state. And the transformation journey is all about enabling that future state operating model. 

Explaining the Target Operating Model using a Futuristic Mars Colony:  A brief case study

Vision: Colonize Mars and establish human settlements. 

Strategy: Sell the concept of “Universal” or “Galactic” citizenship to the ultra-wealthy across the world. 

Core Capabilities: Interplanetary Transportation | Journey Experience Management | Life Essentials Management etc. 

Processes: Travel Process | Growing food process | Enabling breathing process | Monitoring health and well-being. 

Since we haven’t colonized Mars yet, there is no current state operating model. We will need a future state TOM to help us manage the essentials and exigencies of that future life on Mars. 

Hope these two examples have given you an understanding of what is a Target Operating Model? 

What are the components of a Target Operating Model?

A Target Operating Model contents depend on various factors. The following are a general list of components of a TOM, and you can determine what works best for you.

  • External Drivers: Understand the broader trends in the economy, ge0-politics, and related matters. A simple PESTLE Analysis (Political, Economic, Social, Technological, Legal, Environmental Analysis) would do the trick for capturing this information. 
  • Internal Factors: Understanding the current state of the organization is a vital ingredient for defining a useful TOM. One can use a SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats Analysis) for documenting the current state. 
  • Competitive Dynamics: Assess the state of current competitors as well as emerging competitors, including upstart startups. You may consider using a Factor-based Analysis. 
  • Culture and Core Values: What is the culture, folklore, and values of the firm? Besides, what is the target state culture you are striving for?
  • Vision and Mission:  Future state envisioning will help in documenting the future state vision and mission of the company, if it were to be different. It can be an incremental shift or a complete re-imagination of the future. 
  • Strategy and Plan: Define how your firm will get to the POA (Point of Arrival). 
  • Capability Analysis: Elaborate on what new capabilities are necessary, what current capabilities need to evolve, and which capabilities may require phasing out. 
  • Strategic Levers: What strategic levers will help you achieve success in the future state?
  • Tactical or Operational Levers: How will the future state operations and processes shift or evolve or leapfrog to make the future state operating model a reality?
  • Transformation Roadmap: A transformation roadmap is an incremental and sequential evolution to the target state. 
  • Initiatives, programs, and projects:  Define what types of actions, programs, and plans are necessary to get to the target state. 
  • Governance Structure: How will you govern future state operations? Of course, while you will never know what the future holds exactly, it is an attempt to provide a framework for rule-setting and enforcement. 
  • Key Performance Indicators: What does success mean and how do you measure? 

How is Target Operating Model different than a Strategy?

Business strategy and priorities change frequently based on external factors whereas a TOM provides the foundation and flexibility required to execute the firm’s initiatives. A strategy is an integral part of helping achieve the target operating model and the TOM, in turn, influences the strategies.

Why should one develop a Target Operating Model?

  • Provides a big picture of what the future steady state business may look like across business and technology domains
  • Focuses on both hard and soft skills – structures, systems, staffing, style, and shared values
  • Showcases how an organization or a business unit can deliver value and the value drivers thereof
  • The fundamental constructs of a TOM will help provide the building blocks to define business architecture and systems architecture

Target operating model (TOM) is a blueprint of a firm’s business vision that aligns operating capacities and strategic objectives and provides an overview of the core business capabilities, internal factors, and external drivers, strategic and operational levers, organizational and functional structure, technology, and information resources of a company.

What is the Value derived from a Target Operating Model?

  • A vision is an abstract dream whereas a target operating model is a simple construct of a future steady state business model and value drivers
  • A Target Operating Model helps with internal consistency, vertical integrity, and horizontal fluidity
  • Brings everyone on the team to the same page and will engender a sense of purpose and a shared mission
  • Detailed work derivatives from a TOM can help optimize resources, maximize effectiveness and accelerate the path forward

What is a potential approach to crafting a Target Operating Model?

  • In general, a TOM is a result of several weeks or months of a bottom-up effort of data gathering, analysis, interviews, workshops and envisioning sessions. However, in the interest of time, one may want to adopt an accelerated and simplified methodology to design the TOM.
  • The team should collect existing information from the envisioning sessions, business case, and other program level artifacts to compile a straw model.
  • Essential program personnel can validate the model
  • Then conduct facilitated workshops to work on refining the straw model to build the TOM

Is there a Framework we can use to think about TOM?

While we suggest you follow the components of the TOM as your guideline, we understand if you want a known framework to help you in thinking through the concept of TOM. 

Proxy Framework for TOM - McKinsey 7 S Framework

McKinsey’s 7-S framework may be a useful model to think about TOM.  For example, you may do a current state assessment of the seven parameters – Strategy, Structure, Systems, Style, Staff, Skills, and Shared Values.  Then once you have finalized the future state vision and strategy, you may use the same seven parameters to document the future state. You will need to expand the concept of systems to include a process model and a capability model. 

Of course, this may not fit the complete and comprehensive needs of what a real operating model may comprise, but at least it is better than nothing. 

At what level and when do you develop a TOM?

A target operating model may be appropriate at a functional level. For example, your firm wants to change the way the Accounting and Finance work, and a future state operating model will set the blueprint of how finance and accounting structure, systems, processes, staff, governance, and service delivery will work in the desired target state. 

One may also develop a TOM at a division or business unit level.  And of course, at an enterprise level. 

Mind you, an enterprise-wide TOM is extremely involved, intensive, and invasive endeavor. 

Typically, any time internal and external drivers or competitive dynamics are reshaping the landscape, and an enterprise is transforming to the new realities is a good time to develop a TOM.

What are the typical mistakes companies make in defining a Target Operating Model?

  • One of the most significant confusion in many enterprises is the difference between a target operating model and a business model. (Business Model as in the Alexander Osterwalder’s Business Model Canvas fame.) In a similar vein, many think a future state process model is a target operating model.  Both these assumptions are inaccurate. 
  • Enterprises should develop a target operating model when there is a substantive transformation in how the company intends to function in the future – product/service portfolio, customer segments, price points, channels, and the value proposition.  Instead, using a target operating model flippantly to define an incremental change is a waste of effort and time. 
  • A target operating model is a technology endeavor. While re-architecture and re-platforming may be necessary, the focus should be on the transformation of the business.  Never put the technology cart before the business transformation horse. 
  • A target operating model work is not a run of the mill project. A significant TOM exercise is an endeavor that demands the full support and participation of the C-Suite. 

How is a Target Operating Model relevant to Business Architecture and Capability Modeling? 

Business architecture captures the essence of an enterprise via modeling of business capabilities and value streams and overlaying them with other components enterprise entities and elements.  A target operating model influences and in turn influenced by business capabilities. 

The future state will determine what type of capabilities are necessary and what level of maturity. For example, if a company intends to go direct to customers, and not use intermediaries, the capabilities which are essential and their level of sophistication is very different. 

Similarly, the maturity and excellence in some of the capabilities may influence what the target state operating model might look like.  For example, if a firm has robust capabilities in supply chain management, that may impact what the future might be like (that is most likely the firm may continue its historical strengths), and most of the future state transformation may occur in the demand management side of the equation. 

In addition to business capabilities having a bi-directional relationship, another critical area is value streams. A value stream is an end-to-end business flow to satisfy a specific business outcome for a stakeholder. Typical value streams are “Order to Cash” “Record to Report” “Hire to Retire” etc. In most target operating model work, it involves a re-engineering of the underlying value streams and processes to serve the stakeholder better and optimize the flow. 

A sound business architecture will be a great foundation to help define and then realize a target operating model. 

For more information on how Capstera consulting services can assist firms in the construction of a target operating model, please contact Capstera by completing this form.

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