An interconnected triangle holds the key to business success
Running a successful business involves more than just selling products or services. To create a sustainable, thriving enterprise, three core models must align and work together: the business model, the operating model, and the economic model. Each plays a distinct role in shaping how the business functions, competes, and generates profit.
The business model: defining value creation and delivery
A business model is essentially the framework that explains how a company creates, delivers and captures value. It answers critical questions: what is the market and who are the customers and competitors? What product or service is the company offering, and what is the value proposition? How does the company generate revenue from its offerings?
Consider Netflix. Its business model is subscription-based. It offers a vast library of content via a digital platform, delivered directly to consumers via internet-connected devices. The value proposition lies in providing convenience and a wide variety of content at an affordable price.
The operating model: the blueprint for execution
The operating model outlines how a company organizes its resources, processes and technologies to deliver on its business model. The model is more focused on internal operations and details the structure, workflows and responsibilities that support the business strategy. It ensures the business has the right capabilities and systems in place to consistently deliver value to customers.
The operating model addresses: how will the company produce its products or deliver services? How are operations structured (centralized or decentralized)? Does the company have the people, assets, process and culture to execute the business model?
McDonald’s is an example of a company with a highly standardized and efficient operating model. The company relies on its franchise network to maintain uniform quality and service across thousands of locations worldwide. Its operating model emphasizes:
- Standardized processes: each franchise follows strict guidelines for food preparation, restaurant layout, and customer service.
- Supplier relationships: a global supply chain ensures consistent ingredients across all locations.
- Franchise support: McDonald’s provides operational training and marketing support to franchisees to ensure consistent brand execution.
The economic model: how profit is generated
The economic model defines the financial logic of the business. It is focused on profitability and sustainability, addressing how the business makes money after costs are accounted for. The economic model includes pricing strategy, cost structure, profit margins and the overall financial viability of the business.
It answers questions such as: what are the fixed and variable costs? What margin and profit does the company typically make on its sales and is it enough to cover all costs? Does a company generate a sufficient return on investment relative to the risk it takes? How much cash flow does the company generate after reinvestment?
Walmart has an economic model based on high volume and low margins. It achieves profitability by maintaining a highly efficient supply chain, leveraging its purchasing power, and minimizing operational costs. Key components of Walmart’s economic model include:
- Cost structure: low operational costs due to efficient logistics and leveraging a strong supplier network.
- Pricing strategy: competitive pricing designed to attract a mass market.
- Profitability: high-volume sales drive overall profitability despite low per-unit margins.
How the models interact
The success of any business depends on how well its business, operating, and economic models are integrated. When these three models work in harmony, businesses can thrive and sustain success over the long term.
Professor Joe Perfetti teaches equity analysis at the University of Maryland and is an innovation fellow with Duke Corporate Education