Every ambitious CEO will tell you that the way to beat the odds is to have the right strategy. That’s because a smart, actionable strategy is the foundation for how a company allocates its scarce resources, including people, capital, and materials.
Yet even the best strategy does not magically yield a strong performance. For that, companies need an effective operating model that is intentionally designed to deliver four outcomes that all organizations covet: clarity, speed, skills, and commitment. The right operating model is what can turn strategic potential into market-beating results.
Leaders understand this, which is why they frequently try to adapt their operating models. Two-thirds of the organizations we surveyed have redesigned their operating models in the past two years, and half of the organizations say they plan to embark on a redesign in the next two years.
Numbers like that highlight the ongoing challenge of creating a high-functioning organization that consistently generates value. McKinsey research indicates that even high-performing companies have a 30 percent gap between their strategy’s full potential and what is actually delivered, which can be attributed to shortcomings in their operating models.
Given the scale of this gap, we decided the time was ripe to update the best practices for operating model design. Our analysis, based on academic research, interviews with hundreds of executives, and extensive experience working on redesigns, yielded a new approach: a dynamic system composed of 12 elements (including purpose, talent, leadership, and rewards) that can be tailored to an organization’s particular circumstances and goals. We call this the “Organize to Value” system.
The new research represents a substantial evolution from McKinsey’s 7-S framework (see sidebar “The classic 7-S”), which helped leaders design operating models in a more stable world. Because executives today must address so many fast-moving geopolitical, technological, and societal trends, their operating model needs to anticipate and react to change just as rapidly.
In this article, we describe actions CEOs can take to develop an optimal operating model “fingerprint”—defined as the unique combination of design choices CEOs make across all 12 elements—that can deliver their strategy and create value. Our research shows that the operating model is one of the most significant enablers of performance within a CEO’s direct control. Before embarking on this journey, however, chief executives should identify the root causes of their strategy-to-performance gap, consider how broadly to redesign their operating model, and chart a course to lead the deep change required.
What’s beyond traditional organizational structure?
When rethinking their operating models, many leaders begin by focusing on structure. This made sense in the past, given the traditional hierarchical structures and more stable environment that most executives were trained to operate in. Structure matters because it gives CEOs insight into how strategy is implemented. It is also meant to create accountability and the basis for managing performance.
But structure alone will not create value. Instead, companies should evaluate structure as just one of 12 interlocking design elements, which we discuss later, that create a holistic system.
Operating model design has evolved substantially over the past decade, as organizations have had to respond to fast-moving geopolitical, technological, and societal trends. A tailored operating model, and how much change may be required to implement it, will partly depend on the way in which an organization is experiencing these trends and the design choices they imply.
As part of our research, we asked executives to assess a wide range of developments to identify both the most positive factors and the biggest challenges affecting their business and their approach to organizational structure (see sidebar “Our methodology”).
Across industries, executives told us that the top opportunities relate to technology—specifically, scaling AI and automation, accelerating digitalization, and expanding the value of data. Thirty-eight percent also suggested that they would add a chief AI officer to address these opportunities. Regarding geopolitical challenges, executives cite increasing regulatory complexity and declining trust in business as their top concerns, while shifting workforce demographics, including loss of skills from aging in developed economies, tops the list of the most significant societal hurdles they face (Exhibit 1).
How do different operating model structures respond to these trends? Many leaders have been looking for new ways to make traditional structures, for example, matrix management, more effective. Others have adopted new structures, such as enterprise agile, which is designed to focus on speed, technology investments, and better deployment of scarce digital skills.
We asked executives to identify which structure out of six typical configurations most closely represents their current design. The findings show that 89 percent of organizations in our sample are still primarily using a traditional hierarchical structure—that is, a business unit/holding company approach, matrix management, or a functional organization. The remaining organizations have adopted one of three emerging structures as the basis for their redesign: the product platform model, the enterprise agile model, or a decentralized network (Exhibit 2).
We then asked executives to rate their organizations’ readiness to address the trends they had identified as the most important opportunities and challenges today. The research confirmed that no one structure can drive operating model effectiveness; high-performing organizations can be found using any of these six structures. However, those that use one of the three emergent structures tend to outperform those with a more traditional structure in their readiness to address key trends. In particular, organizations that use emerging structures are more likely to prioritize innovation, technology, and data and to be well prepared to handle the impact of scaling AI and digitalization (Exhibit 3).
This research on structure and the potential benefits of emerging approaches helps explain why so many leaders focus on structural redesigns. Our analysis further reveals that structure alone does not determine how fit an organization is to fulfill the business’s strategy in the current volatile context. Other factors beyond structure are critical to building a future-fit operating model.
The 12 elements of a dynamic operating model design
When we moved our research beyond structure, we set out to refresh our understanding of the key organizational factors CEOs need to consider when designing their operating model. Decades of experience working with organizations and new data collected on high-performing operating models have yielded an updated system of 12 elements that together represent the best of modern operating model design. In addition to structure, the elements are purpose, value agenda, ecosystem, leadership, governance, processes, technology, behaviors, rewards, footprint, and talent (table).
| Element | Definition | Link to performance | |||
| Purpose | How the organization defines its core reason for being | Clear purpose helps employees and stakeholders navigate uncertainty | |||
| Value agenda | How the organization creates value | Clarity on the value agenda enables optimal resource allocation | |||
| Structure | How accountable units and mission teams are designed | Internal organization in the service of strategy enhances prioritization and accountability | |||
| Ecosystem | How the organization works with partners to create value | External partnerships create and share value beyond the organization’s boundaries and capabilities | |||
| Leadership | How leaders make decisions and catalyze action | Roles and dominant approach to decision-making are clear and consistently implemented | |||
| Governance | How to set priorities, allocate resources, and manage business performance | Ensures enterprise resources are managed in a consistent, integrated way in alignment with the strategy | |||
| Processes | How workflows are designed | Approach to value-creating activities is clear and consistent across the enterprise | |||
| Technology | How digital, data, and AI enable value creation | Data and AI are deployed to increase productivity and drive new sources of value creation | |||
| Behaviors | How culture is nurtured across the organization | A unique “secret sauce” creates value for employees and customers | |||
| Rewards | How people are rewarded for performance | Rewards support the desired behaviors and practices that increase value | |||
| Footprint | How the organization locates and deploys talent | The right skills are available in the right locations in alignment with business needs and priorities | |||
| Talent | How the organization attracts and develops talent | The right capabilities are available to meet value creation goals | |||
These elements act together as a system that enables the organization to deliver on the strategy. By mapping current organizational choices across the 12 elements, leaders can better understand their organizations’ unique operating model fingerprint and determine whether each choice is aligned with their strategic goals. The system offers a way for leaders to either move to an adjacent fingerprint, by refining only the elements that matter most to delivering on strategy, or shift all 12 elements to an entirely new fingerprint. With either choice, they can create a unique form of competitive advantage.
The case of a top-performing airline illustrates how an intentionally designed operating model fingerprint can support performance. The company focused on achieving two business outcomes: delivering an exceptional passenger experience and driving industry-leading efficiency and financial resilience.
To reach those goals, the airline made specific choices across each of the 12 elements. For example, to support passenger experience, it anchors its purpose in organizational reputation and customer benefit. To ensure that the same high standards are met for every passenger, it maintains an integrated approach to its location footprint, meaning that its globally distributed workforce is directly employed by the company. To spur efficiency and resilience, it leverages a traditional value chain ecosystem; to make its matrix structure work, it emphasizes decisive leadership to ensure clarity and speed of decision-making. Finally, given the importance of costs and safety in the industry, it relies on control-oriented processes.
Collectively, the airline’s choices across these elements and others formed its unique operating model fingerprint. This clarity helps leaders execute the airline’s strategy on passenger experience, efficiency, and financial resilience.
By making intentional design choices across its operating model, the airline has achieved higher performance compared with its peers. It has better on-time performance, an EBITDA margin that is several percentage points higher than that of its peers, and a customer satisfaction score above the sector average.
Future-proofing the operating model
Leaders who become frustrated with their organizations’ performance often turn to redesigns. But again, they are focused mostly on structure rather than the 12 elements and the system they form. That is why redesigns happen so frequently—and why they tend to leave value on the table, according to McKinsey research. Four actions can help organizations avoid this constant churn.
The first step, as noted earlier, is to understand the organization’s unique operating model fingerprint, or the combination of design choices it has made across all 12 elements. Next, leaders can compare their fingerprint and outcomes to highly successful operating model fingerprints across industries. They can then choose whether the best course is to move to an adjacent fingerprint by refining select operating model elements or to move to an entirely new fingerprint. Finally, they can commit to specific performance outcomes and a path to deliver them.
Consider the case of a global financial-services-infrastructure company (Exhibit 4). It had grown through acquisitions, but organic growth was slowing relative to its competitors, partly due to its high cost base. Those costs reflected duplicated investments in functions such as marketing and technology and the lack of an integrated and scalable infrastructure.
When beginning the operating model redesign, the company’s senior leadership team worked through the four-step process.
Documenting the current fingerprint
First, leaders assessed their current operating model fingerprint. The historical strengths of the fingerprint included the company’s purpose, which focused on customer benefits, and its value agenda, which was based on differentiated products. These choices kept the company externally focused but diverted attention from creating effective ways of working and operational efficiency. The leadership also realized that the company’s matrix reporting structure had become too complicated, as acquisitions required senior leaders to make too many decisions, which slowed down innovation.
Comparing operating model performance with successful fingerprints
Next, the leadership team explored options for how best to increase growth, either by evolving select elements or shifting to an entirely new fingerprint. In the first option, the team considered placing more emphasis on competitive performance and innovation while focusing on cost reduction by adopting a global integrated footprint that would enable investment in new product development.
The second option drew inspiration from technology companies that operate in a software-as-a-service model. By learning from exemplars, the leadership team realized that a step change in performance across critical dimensions such as innovation, time to market, and return on technology investment was possible. These outcomes were exciting but required shifts across all elements of the operating model to move to an entirely new fingerprint. This included a big structural shift from matrix reporting to an enterprise agile structure. To make the new structure work, the team’s leadership style would need to shift from decisive (a top-down approach) to empowering, and rewards would need to move from individual contribution to collective performance.
Choosing whether to refine or remake the operating model fingerprint
The leadership team established the value at stake and examined the risks of the two options, employing two methods. They first set an overall aspiration for the change by comparing their outcomes against the performance of exemplar technology companies. Then they set specific targets for key capabilities—in this case, increasing the effectiveness of their product management function. This combination of top-down and bottom-up analysis created a robust business case for each option.
While option one carried a lower risk in the short run because it focused primarily on liberating costs and reinvesting them in innovation, the team decided on option two, shifting to an entirely new fingerprint grounded in an enterprise agile structure. The thinking was that significantly higher value more than compensated for the breadth and depth of change required.
Committing to specific performance outcomes and a path to deliver them
Equipped with the complete definition of the company’s target operating model fingerprint, the team moved ahead with a broader group of 50 executives, giving them the opportunity to refine how the fingerprint would be implemented and how talent decisions would be made. Together, they enacted a program that made fundamental changes over the next 12 months. These changes covered not only what some executives think of as the “hard” operating model elements—such as structure, processes, and technology—but also the “soft stuff” encompassing leadership style, culture (for example, new roles, behaviors, and rewards), and talent development.
The leadership team also compared the company’s historical performance and future plans to benchmarks for digitally native companies. This helped them commit to significantly more ambitious goals for revenue growth, better customer experience, and accelerated new product development, including up to 40 percentage points in speed to market and a 25 percent increase in technology ROI. Upon completion of the transition, leaders continued to evaluate their new operating model fingerprint, refining it as needed to align with their strategic aspirations.
Positive outcomes and performance gains
Our experience helping leaders to implement new operating models reveals that CEOs and their teams are often confused about whether their models work as well as they could. Lacking a perspective on the full range of possible structures and the 12 elements that can be used to increase performance, they can get stuck in a frustrating cycle of underwhelming redesign efforts.
Instead, it’s helpful to remember that there are many winning fingerprints, as we see in our airline and financial-services examples. The robustness of these fingerprints depends significantly on the organization’s strategy, business context, and the trends it faces. CEOs can create a unique fingerprint for the organization and what it wants to accomplish.
Ultimately, a fit-for-purpose operating model that maximizes value creation enables CEOs to achieve four measurable outcomes—clarity, speed, skills, and commitment:
- Clarity: Resources and accountabilities are aligned to strategy. In volatile times, it’s essential that CEOs can see for themselves how resources and teams deployed throughout the organization reflect strategic priorities. By clarifying who is accountable for this value agenda, the whole organization can navigate change and replace bureaucratic layers with flexible teams that have a clear sense of purpose. Creating ideal spans of control and flattening the organization are crucial. The value of clarity also extends beyond the traditional boundaries of the organization by enabling the development of an ecosystem of partners. This alignment should also be dynamic, since the context will continue to change as the strategy is implemented.
- Speed: Workflows are fast, tech enabled, and frictionless. Getting resource allocation and accountability right is important, but it’s just the first step in translating strategy into performance. It is often difficult to execute a great strategy quickly, either because leaders take a long time to make decisions or because poor governance prevents the right decisions from even being identified. Also, when work is done in silos with multiple hand-offs rather than in streamlined workflows, it can be hard to capture the value of emerging technologies, including gen AI. For leaders needing to move quickly, it’s no longer enough to codify decision rights and incrementally improve processes to automate repetitive work. Instead, leaders must also develop ways of using technology to spur human creativity, including establishing how people and AI work together.
- Skills: A future-ready workforce is equipped to deliver the highest value. Geopolitics and new technologies are challenging long-held assumptions about how to source talent and whether to develop skills in-house or by partnering with others. Leaders can go beyond a static workforce plan by continually upgrading their talent and reevaluating location and outsourcing decisions. This allows them to keep up with a labor market that is changing at a dramatic rate. With the wrong operating model fingerprint, the risk is that the market for skills changes faster than the organization’s ability to source, hire, develop, and deploy talent.
- Commitment: Creating a performance-oriented culture. The implementation of strategy, especially in a volatile era, requires a highly committed workforce and a motivating culture. By creating a shared set of behaviors—a cultural “secret sauce”—organizations can move more quickly and engage colleagues effectively. Reward systems can be designed to encourage those behaviors, support how decisions are made, and ensure that the right work is getting done. When employees adopt common behaviors, it creates a healthy organizational culture that can act as a multiplier effect on performance, further focusing resources and accelerating strategy.
When organizations take this holistic approach to operating model redesign, what can they expect for their bottom line? Our research reveals that a great operating model can go a long way toward closing the strategy-to-performance gap.
For example, the financial-services company discussed earlier achieved step changes in multiple metrics after shifting from a traditional structure to an emerging structure and redesigning the other 11 elements of the system. McKinsey research shows that gains from such shifts include a 10 to 30 percent increase in customer satisfaction, operational performance, and efficiency; a fivefold-to-tenfold increase in speed in driving change and decision-making; and an increase in employee engagement of ten to 30 percentage points.
The big picture: Practical questions for CEOs
Before embarking on an operating model redesign, CEOs should take a step back to identify the outcomes and risks of evolving or more radically redesigning their model. Many leaders overestimate the results of changing individual elements of their model, especially structure, yet underestimate the degree of difficulty in implementing a more holistic change. That’s why a practical approach to refining and evolving their model as a system starts with asking five key questions:
- What is the gap between your value agenda and delivered performance? Assess your recent strategic plans, identify areas where you have not achieved your goals fully, and identify potential root causes for these gaps.
- What are the critical outcomes your operating model should generate to enable the value agenda? Define your desired future performance across the four outcomes, creating accountability for your most important initiatives and the specific performance metrics you must achieve.
- How does your operating model work as a system to create value? Assess the 12 operating model elements to make design choices that work together and reinforce your ability to deliver business outcomes and strategy. This includes identifying obvious inconsistencies across the 12 elements and areas where poor execution has limited the effectiveness of your design choices.
- What are the trade-offs between refining your current operating model and moving to a new design? Evaluate the degree of change required to capture the value creation potential of a new model and determine the hard and soft factors that could prevent you from doing so effectively.
- How will leaders need to engage differently to enable the operating model at scale? Take stock of how leaders (including middle managers) can lead in the ways required in the new operating model and demonstrate the mindset and behavior shifts necessary for the model to succeed.
Organizations looking to make their operating models more effective can start by identifying the causes of their strategy-to-performance gap, followed by choosing whether to redesign several of the 12 elements or all of them. Whatever choice they make, viewing the elements as a holistic system can help leaders meet strategic goals and bolster performance in a complex business environment.
