Target operating model

Key takeaways

Target operating model belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Target operating model to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Target operating model from memory before moving on to harder problems.

Reference excerpt

Target operating model is a description of the desired state of the operating model of an organization. When working on the operating model, it is normal to define the "as is" model and the "to be" model. The target operating model is the "to be" model. It is possible to produce a target operating model for a business or a function within a business or a government department or a charity. There are many different frameworks identifying the components of a target operating model. Hence each project to define a target operating model will focus on slightly different aspects depending on the challenge facing the organisation. Some target operating models are created to help with the link between information technology and strategy, others to help with the link between organisation design and strategy, and so on. A target operating model converts strategy ideas into operational plans. One framework described in the operating model definition comes from Ashridge Executive Education – POLISM. This stands for

P – processes and capabilities; O – the organization, i.e. the people that are needed to run the processes or deliver the capabilities, and the organisation structure, accountabilities, incentives and culture that will support and nurture these people; L – the locations, buildings, infrastructure and other assets and resources needed inside the organisation to support the processes and capabilities; I – the information systems and other cross-organisation or cross-location links needed to support the processes and capabilities, especially the software applications that are needed to process the information; S – the suppliers and business partners needed outside the organisation to support the processes and capabilities and the types of agreements between this organisation and these partners. M – the management systems and processes for developing strategy, planning, setting targets, managing performance and continuous improvement. A simpler framework is used in the literature on Enterprise Architecture. Strategy is converted into capabilities, using a capability map, and each capability is described in terms of "people", process and technology. A target operating model can be a one-page document – the operating model Canvas is an example. It can also be 10 pages or 100 pages. If the document is more than 100 pages it becomes a manual rather than a model. Target operating models provide the vision for organisations undergoing change. The reason for any new model is likely to be a new strategy or new business model or a significant failure in the performance of the existing operations for one or more stakeholders. Hence work on target operating models should be closely linked to strategy work. Form follows function; in other words target operating models follow strategy. A target operating model project typically also includes the roadmap over time that specifies what the company needs to do to move from the "as is" to the "to be". A good place to start is with a value-chain map. First identify the value propositions (the products and services) that the organization is offering. Then define, for each value proposition, the value chain of activities that is needed to deliver the proposition. Different value chains can then be present above or underneath each other in a "map", in order to identify steps that can be "aggregated" across chains to gain economies of scale or "standardised" to gain consistency or "kept separate" to gain local adaptation. These choices then lead directly to organisational implications. Target operating model OM work can be done at different levels of detail. At the highest level is the strategy or the design principles. Then comes a rough sketch, probably in the form of a value chain map or organisational model. Then comes more and more layers of detail arriving finally at job descriptions for every job, floor layouts for offices or factories, Key Performance Indicators for every department, draft contracts for every supplier, data input and output specifications for every software application, etc. Regional target operating model A regional target operating model is a transformational project with solution covering across regions. It forms regional standards for implementation across regions. This type of model should capture the as-is of the organization design, business capabilities, business processes and supporting technology components. It will define the to-be organization design, business capabilities, business processes and required supporting technology capabilities. The high level business benefits of this model should also be articulated. For identified gaps in the technology capabilities, the business requirements should be captured to facilitate the next phase of work – solution evaluation.

See also Business model Operating model Business plan Business process modeling Business reference model Strategic management Strategic planning Strategy dynamics The Design of Business Enterprise architecture

References

Further reading Fusion Business Solutions – Notre démarche vers la concrétisation des avantages Le Blog de la DFCG – La maîtrise des risques liés aux contrats d’externalisation[link removed] (in French) Defining the business future state – Maddison Ward Ashridge Business School blog on operating models

Worked examples

Example 1 — a first encounter with Target operating model

Start with the simplest possible case. Write down what Target operating model claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Target operating model before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Target operating model ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Target operating model

In research: Target operating model appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Target operating model in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Target operating model is common in secondary-school and first-year university syllabi. It links to neighbouring topics Business models, so understanding it makes those chapters shorter.
In everyday life: Look for Target operating model outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

How to study Target operating model in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Target operating model means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Target operating model out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Target operating model in simple terms?

Target operating model is a description of the desired state of the operating model of an organization. When working on the operating model, it is normal to define the "as is" model and the "to be" model.

Why does Target operating model matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Target operating model?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Target operating model.