The Operating Model Choices Facing Tech Companies

Intense competition, volatile capital markets, and investor scrutiny are putting pressure on technology companies to constantly review and adapt their corporate strategies. This process must include rethinking their operating models more often than they have in the past—and more often than most think necessary. That’s because a static operating model in today’s environment is likely to yield static growth, at best. Leaders must ask themselves how to reshape the organization’s operating model around its evolving digital strategy to ensure success and resilience.

In our work with two dozen industry-leading companies, we have learned that to continually evolve the operating model, a company needs to take three steps: define its strategic priorities, evaluate whether central or local governance will create the best competitive advantage, and adapt the most critical business processes accordingly.

Define Strategic Goals

There is no single “right” operating model for technology companies. Each organization’s model will depend on its strategy, which means that it needs to be very clear about what it wants to achieve for its customers, how it will differentiate itself to grow and compete in the marketplace, and which metrics it will use to measure performance.

For technology companies, this is an especially critical and urgent question given how rapidly many are evolving through different phases of growth in a hypercompetitive market. While a large number of companies are still in the startup phase, some have begun to scale up proven offerings. Meanwhile, highly successful companies have attracted sufficient investment and attention to reach unicorn status, and a rare few are so established that they’ve begun to dictate the terms of their market.

In our experience, the choice of operating model is often linked to a company’s growth stage. For example, young companies often focus on quickly adapting their offerings to customer needs in order to ensure continuing market fit. Established companies often prioritize efficiency and aim to leverage economies of scale.

The first step in choosing an operating model is to answer questions that will clarify the company’s overarching strategic goals. Questions that technology companies need to ask include: How is the company pursuing growth? Is it looking to scale quickly across the globe or to expand in one or a few core markets? Does it aim to beat local competitors by leveraging global scale? Or to beat global competitors through a tailored, local approach? Is the target market evolving and expanding?

Central Versus Local Governance

The second step in evolving the tech operating model is to determine how centralized or localized the operating model can or should be given the company’s products, customers, and competitive environment. Fundamentally, the issue is whether the source of a company’s competitive advantage is economies of scale or customization.

That said, the fact is that while a few companies have operating models that are either extremely centralized or extremely localized, most pursue a middle path. Even those with the most standardized processes have some processes that are customized to some degree to local markets. Regularly comparing the benefits of localization with the benefits of centralization is important for success.

A few questions to keep in mind include: Are the company’s products intended to be the same across different markets or segments? Do customers on the demand side have similar characteristics, transaction patterns, and needs? Likewise, do customers on the supply side (such as Airbnb hosts or Uber drivers) have similar characteristics, patterns of behavior, and needs?

Centralized Global Players

At one extreme, companies such as Facebook, Amazon, Uber, and Twitter roll out the same products globally without a lot of customization. Although they want a presence in many markets, they optimize products only for key markets and are willing to “lose” in others. As one senior technology executive explained, “We choose to centralize most of our functions to drive innovation, efficiency, and speed to market. But we had to make tradeoffs. We lost some customers because of our slow response to local market dynamics.”

A centralized approach is often a smart way to “speed to global growth” and create cost-efficient scalable products, but it’s not right for penetrating markets that are hyperlocal (and fast growing, such as Indonesia and India). Uber, for example, does little to adapt its Western-centric business model, based on four-wheel-vehicle ride hailing, to regional markets. Yet heavily congested markets such as Indonesia rely more on two-wheel modes of transport, such as motorbikes.

Hyperlocal Players

At the other end of the spectrum are players whose competitive advantage derives from being hyperlocal. “We strive to be as local as possible,” said a senior executive at a leading Asian super-app, “by adopting a highly country-centric approach to our commercial functions. We have a high conviction that the way to win is to be closest to what the specific market needs and solving its specific frictions.”

For example, some of the local ride-hailing players in Asia focus on building a deep understanding of each market and customizing products accordingly to penetrate deeper and increase their share of wallet. These companies have managed to beat global competitors in their local markets precisely because they customized their offerings for two-wheel modes of transport, including the way they engage with drivers and merchants and the way they localize their pricing strategy.

As successful as this approach can be, there are pitfalls. In general, a company pursuing a localized strategy should avoid entering a new market if its characteristics are not well understood or if they are very different from those of the company’s core market. One major risk for hyperlocal players is getting stuck at the local level and becoming unable to make gains in global markets.

Assessing the Tradeoffs

Whether a company pursues a centralized or a localized strategy, there are standard questions and tradeoffs around issues of accountability, coordination, and structure and location. (See Exhibit 1.)