Structure vs Operating Model vs Funding Model

In complex businesses, the structure, operating model, and funding model are three fundamental elements that intersect yet remain distinct. It is crucial for business leaders to confidently differentiate between these interconnected concepts, as understanding their differences is vital for effective organisational management.

Many business leaders often confuse these elements, which results in inefficiencies and poor performance. By breaking down each component, we can better understand how they work together and impact a company’s success.

As we examine businesses’ structures, operating models, and funding models, we will discuss how they affect organisational design and strategy and what can happen if you overlook their differences. You will better understand these critical elements and be more prepared to make informed business decisions.

Business Structure vs. Organisational Structure (aka Organisational Design)

Two key elements—business structure and organisational structure—are essential for success in business operations. Though often used interchangeably, they are interconnected yet serve different purposes.

Business Structure

Business structure defines an entity’s legal and organisational framework, encompassing crucial aspects such as ownership, liability, and tax obligations. The choice of business structure significantly impacts the company’s legal and financial landscape. Common business structures include sole proprietorships, partnerships, corporations (PLC, Inc., or Corp), proprietary limited (PTY LTDs), limited liability companies (LLCs), and nonprofits. Each structure offers unique advantages and disadvantages tailored to business needs, regulatory requirements, and risk tolerances.

Organisational Structure

In contrast, organisational structure, often called organisational design, pertains to a business’s internal arrangement. It outlines the relationships between various departments, teams, and individuals and the delegation of decision-making authority. Organisational structures can take various forms, including functional, divisional, matrix, and network structures.

The Interplay Between Business Structure and Organisational Structure

A business structure provides the legal foundation, and an organisational structure acts as the internal blueprint. The choice of business structure can influence the available organisational structures. For instance, a sole proprietorship might have a simpler organisational structure compared to a large corporation.

The Importance of Understanding Both

A comprehensive understanding of both business structure and organisational structure is crucial for effective business operations. The choice of business structure impacts legal and financial considerations, while organisational structure influences internal operations, efficiency, and adaptability. A well-aligned business structure and organisational structure can foster a cohesive and efficient business environment.

Organisational Structure (aka Organisational Design) vs Operating Model

Organisational structure provides the blueprint for your business, the operating model defines the day-to-day processes, systems, and resources used to execute your strategy. Think of it as the engine that drives your business. It encompasses everything from how work is assigned to how customer service is handled.

Organisational Structure is like the skeleton of your business, providing a framework for how different parts fit together. It outlines how departments and teams interact, who reports to whom, and how decisions are made.

Operating Model is more like the muscles and nerves, bringing the structure to life. It defines the specific actions and processes that make the business work, such as how work is divided, how information flows, and how resources are allocated.

Here’s a simple example:

• Organisational Structure: You might have a sales department, a marketing department, and a product development department.
• Operating Model: The sales team might follow a specific sales process, using a CRM system to track leads and opportunities. The marketing team might use a content calendar to plan and execute marketing campaigns.

A well-aligned organisational structure and operating model are essential for efficient and effective business operations. If your structure doesn’t match your operating model, you might have bottlenecks, inefficiencies, or miscommunication.

For example:

• If your organisational structure is too rigid, it might be difficult to adapt to changing market conditions.
• If your operating model is too complex, it might be difficult to implement and maintain.

By understanding the relationship between organisational structure and operating model, you can create a business that is both efficient and adaptable.

Operating Model vs Funding Models

Operating model defines the day-to-day operations of a business, funding models focus on the allocation of financial resources. Think of the operating model as the engine that drives the business, while funding models are the fuel that powers it.

Funding models come in various forms, each with its own priorities. For example, project-based funding supports specific initiatives, portfolio-based funding enables managing portfolios of initiatives, value stream-based funding prioritises work that adds value to customers, a product-based funding model supports investing in products, and innovation-based funding fosters new ideas and products.

The choice of funding model can significantly impact a business’s direction and priorities. For instance, a company focused on rapid growth might choose an innovation-based funding model to fuel research and development. On the other hand, a company prioritising operational efficiency might opt for a value stream-based funding model.

A well-aligned operating model and funding model are essential for sustainable business success. The funding model should support the goals and priorities outlined in the operating model, ensuring that resources are allocated effectively to drive the business forward.

Funding Models vs Business Models

Funding models and business models are often used interchangeably, but they represent distinct concepts within an organisation. A funding model refers to the sources and strategies used to finance the business, while a business model outlines how the organisation generates revenue and delivers value to its customers.

Funding Models

Funding models encompass various approaches to allocating resources for different types of work. Some common funding models include:

• Project-based funding: This model allocates funds to specific projects or initiatives, providing a clear focus and accountability. However, it can be challenging to adapt to changing priorities or unexpected circumstances.
• Portfolio-based funding: This model allocates funds to a portfolio of projects or initiatives, balancing risk and return. This approach can help to diversify the organisation’s funding and mitigate risk, but it can also be complex to manage.
• Value stream-based funding: This model allocates funds based on the value that each value stream contributes to the organisation. This approach can help to prioritise work that drives the most significant impact, but it requires careful analysis and measurement of value.
• Product-based funding: This model allocates funds to different products in the organisation. It provides consistent, long-term financial support for dedicated teams responsible for a product’s entire lifecycle. This approach allocates resources based on projected value and customer outcomes rather than fixed project scopes, allowing teams to adapt priorities and deliver continuous value. It has become increasingly popular with startups and scale-ups.
• Innovation-based funding: This model allocates funds to support innovation and experimentation. This approach can foster creativity and drive growth, but it also requires careful risk management and evaluation of results.

The choice of funding model depends on various factors, including the organisation’s goals, industry, and risk tolerance. Some organisations may use a combination of different funding models to meet their specific needs.

Business Models

In contrast to funding models, business models focus on the core value proposition of the organisation, how it generates revenue, and how it delivers value to its customers. Common business models include:

• Subscription: Customers pay a recurring fee for access to a product or service. 
• Freemium: A basic version of the product or service is offered for free, while premium features or additional benefits are available for a fee.
• Advertising: The business generates revenue by selling advertising space on its platform. 
• Marketplace: The business connects buyers and sellers and earns a commission on each transaction. 
• Licensing: The business grants licenses to other companies to use its intellectual property, such as patents or trademarks.

The Interplay Between Funding Models and Business Models

The business model should be aligned with the organisation’s funding model to ensure that the resources are allocated effectively to support the core value proposition and generate revenue.

By understanding the distinctions between funding models and business models, leaders can make more informed decisions about how to allocate resources and achieve their organisational goals.

Conclusion

In the complex world of business, it’s important to clearly understand the different parts that make up an organisation for it to succeed. The business structure, operating model, and funding model are closely connected but each has its own role.

Business structure provides the legal and organisational framework, while organisational structure defines the internal arrangement. The operating model serves as the engine that drives day-to-day operations, while funding models focus on resource allocation. Business models define revenue generation and value delivery.

By distinguishing these elements, leaders can make informed decisions, align strategies with customer value, and build a foundation for sustainable growth in a dynamic business landscape.