Modern Operating Model. Part 2.

 

Part 2. Why Use the Modern Operating Model?

The Modern Operating Model is an updated approach to business operating models. It describes a new way of thinking regarding how to best align, run, change, adapt, and optimize your business. In turn, you can bridge the strategy execution gap and better navigate a fast-changing world. 

As an overview, here’s what the model looks like: 

• Component 1 — Define the destination: Mission, cultural values, vision, and strategy
• Component 2 — Change the business: Create alignment with strategic objectives and OKRs 
• Component 3 — Run the business: Business observability through OKRs and KPIs
• Component 4 — Do the work: Organization architecture, culture, systems, and procedures to empower work 
• Component 5 — Assess and adapt: Identify threats and opportunities, navigate, optimize, and adapt

In this article, we dive deeper into why the model was created and how adopting the Modern Operating Model enables you to: 

• Achieve goals and outcomes faster and more effectively through increased organizational productivity, efficiency, and speed. 
• Survive in a rapidly changing world through adaptiveness and agility. 
• Gain a competitive advantage and win in hyper-competitive, evolving markets. 

Operating models, strategy execution, and the bigger picture

With 70% of chief strategists reporting challenges with strategy execution, there is substantial evidence to suggest that conventional operating models are no longer meeting the demands of business today and driving strategic results. In fact, the concept of the Modern Operating Model was created in response to three issues impacting businesses: 

• The lingering strategy execution gap 
• Megatrends in a rapidly changing world 
• The fourth industrial revolution and the wealth of data

The lingering strategy execution gap

Strategy execution is arguably the hardest yet most important challenge for businesses to overcome. There is a reason for this — all goals and outcomes including market leadership and people retention are directly influenced by strategy execution. From this perspective, strategy execution can be framed as one of the key enablers of business success.  

But what makes strategy execution so difficult? There are many factors to get right including: 

• Alignment: Bringing the organization together to work in sync toward common goals 
• Prioritization: Focusing on the most important things with strategic objectives and OKRs 
• Capabilities: Understanding the extent of your organizational bandwidth, market position, people, and resources 
• Efficiency: Making the best use of your capabilities and processes 
• Engagement: Unlocking the full power of your people 
• Change management: Leading and managing the difficult process of organizational change management   
• Culture: Creating a transparent, learning, and adaptive culture 
• Performance management: Reviewing and optimizing progress toward goals  
• Organization design: Optimizing your structure and processes to improve decision making, collaboration, and information flow  
• Observability: Pulling together and monitoring KPIs to identify threats, opportunities, make data-driven decisions, and continuously improve strategy execution 

For strategy execution to be effective, an operating model must account for and optimize these different variables. As it stands, many operating models fail to incorporate these factors into a cohesive, self-optimizing unit. Particularly, modern elements of strategy execution such as OKRs and AI driven observability are not utilized to their full potential.

Megatrends and a rapidly changing world

But it’s not only these lingering challenges that need to be addressed. We also need to think about current and emerging trends that are influencing strategy execution.  

At the heart of these trends is one core idea: the rate of change across all dimensions of life is accelerating. Although change can be observed throughout the entirety of history, what’s different now is how quickly it’s occurring — all aspects of our lives are evolving at an increasing rate. 

Particularly at the business level, the rate of innovation, disruption, and competition is increasing. The ubiquity of data and information, direct-to-consumer channels, and greater access to capital mean market opportunities are filled faster by a greater number of vendors. What’s more, this rate of change will continue to increase as time progresses. 

Other megatrends include: 

A new generation of workers: 35% of the current workforce are millennials and by 2025, 27% will be Generation Z. These generations value autonomy, flexibility, and social impact. They also place less value on company loyalty and longevity of tenure. 

New ways of working: Accelerated by the pandemic, the way we work is changing. Remote and hybrid work, gig work, asynchronous, and decentralized work environments are becoming more common. 

The age of uncertainty: The business environment is becoming more complex and difficult to navigate. Risks have evolved in the form of pandemics, supply chain disruptions, climate change, war, recessions, inflation, interest rates, inequality and cybersecurity. 

With lingering strategy execution challenges amplified by a fast-changing world, a company’s operating model must not only optimize for efficiency, speed, and productivity, but also for adaptiveness and agility.

The fourth industrial revolution and the wealth of data

Aside from the accelerated rate of change, a core megatrend at the technological level is the fourth industrial revolution. This describes the level of technology that includes autonomous systems, microservices, edge computing, interconnectivity, artificial intelligence, data, and the digitization of the physical world through the internet of things.  

This new suite of technologies represents a significant opportunity to rethink conventional operating models — particularly when it comes to data. Factors such as how decisions are made can be completely overhauled through edge computing and interconnectivity — to become more data-driven, at the edge of the network, and closer to the points of execution. 

Artificial intelligence can be leveraged to gain insight and foresight to solve problems before they manifest. Overall, strategy execution can be optimized using the wealth of data and tools provided by the fourth industrial revolution.

The Modern Operating Model: Themes, benefits, and outcomes

With the historic challenges of strategy execution and the megatrends in mind, let’s now look at how the Modern Operating Model is best suited to meet the business demands of today. 

From the collective components of the model, two key themes arise which produce various business outcomes:  

• Alignment toward goals and objectives 
• Data-driven optimization 

Theme 1: Alignment toward goals and objectives 

Alignment is achieved primarily through OKRs and strategic objectives, but other factors such as a strong mission, transparent culture, and a more flexible organizational structure also contribute to alignment within the Modern Operating Model. 

Through greater alignment, your entire team can focus and prioritize the right things with a clear connection to top-line objectives. This creates less waste and a more outcome-focused culture which boosts efficiency and productive power. Alignment also contributes to adaptability — your organization will be able to change form or direction without operational lag or cultural resistance.  

Greater alignment serves to empower your employees through a clear line of sight, both vertically and horizontally. This boosts engagement as your people feel better connected to the company's objectives, in addition to improving collaboration as silos are removed. Decision-making power, backed by data, is distributed across the organization which increases accountability and ownership. 

This empowers employees to do their best work and provides freedom to innovate without needing higher-level approval. Finally, employees adopt a growth mindset and are continuously learning and improving through regular OKR reviews and retrospectives. Taken together, engagement, distributed power, and continuous learning contribute to boosting organizational output and problem-solving. 

Theme 2: Data-driven optimization 

KPIs, OKR data and reports, and market intelligence are used for monitoring and business observability. Through the interconnectivity and monitoring of data, your organization gains greater certainty, validation, and precision about working in the right direction. 

You gain a more complete picture of your organization’s progress and can identify any potential roadblocks toward objective achievement. This also serves as a mechanism for incremental improvement. The organization now has an embedded learning system which collects data and information, turns that into knowledge and then utilizes it to improve how the organization functions. 

Ongoing monitoring also boosts the speed of your business. As feedback loops are compressed, you don’t have to wait for quarterly or even annual reviews to make important adjustments. Speed is also increased through decision-making power being distributed and closer to the points of execution. 

Decisions no longer need to go up and down the chain of command so they can be made quicker. Combined, greater organizational speed, observability, and alignment improve adaptiveness. You will be able to more readily identify threats and opportunities in your business and move quickly in response. 

The opportunities of the Modern Operating Model

Most executives know that improvements, sometimes major, need to be made to their strategy execution. But the discipline of strategy execution is often framed through the perspective of solving challenges such as a lack of alignment. Although this is valid, what’s less spoken about is the opportunity — what happens when your organization achieves mastery over strategy execution? 

Through an updated operating model and correct implementation, strategy execution can become the ultimate competitive advantage — achieve strategic goals faster and navigate the threats and opportunities of a fast-changing world. 

Opportunity 1: Achieve goals and outcomes faster and more effectively 

Effective strategy execution is the catalyzing force behind better goal and outcome achievement. The Modern Operating Model acts as an updated driver and engine of strategy execution. 

Hence, through the increased productivity, efficiency, and speed that the Modern Operating Model offers, you can achieve strategic goals and outcomes faster and more effectively. Your various strategic imperatives of growth, diversification, and innovation can be simultaneously optimized toward by updating your operating model and approach to strategy execution. 

Opportunity 2: Survive in a rapidly changing world 

Only 52 US Companies have been on the Fortune 500 since 1955. Fundamentally, corporate extinction comes down to not adapting both strategy and strategy execution to a fast-changing world. Although change comes with new threats, it also comes with new opportunities — there will be a new generation of winners and losers. 

Through the Modern Operating Model and the adaptiveness and agility it provides, you gain the ability to navigate the threats and opportunities of a fast-changing world.  The productivity, efficiency, and speed increases also ensures that your organization is operating at its best to overcome challenges. 

The promise of the Modern Operating Model

By achieving goals and outcomes more effectively, in addition to navigating threats and opportunities, you gain two significant competitive advantages which help you win in hyper-competitive, evolving markets. 

Strategy execution, amplified by the Modern Operating Model, represents a hidden opportunity for all companies. Regardless of size, stage, or industry, you can gain a needed edge in the complex, uncertain, and hyper-competitive business environment of today. 

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Seizing the $3 Trillion Midmarket Opportunity

 

By Aviel Marrache, Christoph Lay, Hugo Garnier, Justin Lim, and Liz Sasse

Key Takeaways

Increasingly, midsize companies are underperforming large ones, but CEOs of these firms can leverage their company’s inherent advantages to kickstart growth and close the performance gap. Four steps are critical:

• Start with a big vision and fund it, potentially using a zero-based mindset to cut costs.
• Capitalize on their company’s more compact management team by quickly aligning incentives, starting with their own.
• Drive execution and prioritize projects with the greatest potential impact.
• Focus and empower staff by communicating clearly and effectively.

At scale, we estimate that ending the performance gap could boost GDP in the 23 countries we analyzed by $3 trillion over a five-year period.

Since 2018, midmarket companies have delivered only half the average annual total shareholder return (TSR) that large-cap companies have generated—and the cumulative performance gap for growth has widened since 2021. (See Exhibit 1.) For CEOs, these numbers represent a strong warning sign: a lagging TSR is a symptom of structural challenges that can translate into lower capital inflow from investors and reduced long-run growth potential.

The findings are equally unsettling for investors and policymakers. The data, taken from a BCG analysis of midmarket companies in 23 countries, shows that over the next five years, in the absence of effective action, the performance gap will result in a cumulative GDP loss of more than $3 trillion for the economies studied.

However, the challenge also serves as an opportunity. In our work with midmarket clients, we have found that they possess differentiated strengths: simpler organization structures, closer customer connections, and faster leadership alignment on bold decisions. CEOs of midmarket companies can leverage these advantages to drive innovation, enhance competitiveness, and accelerate growth—potentially transforming their firms into tomorrow’s large-caps. The make-or-break factor is the how, which will determine whether the strategies they adopt will enable them to fulfil their potential.

Midmarket companies are important. Across the 23 countries, our analysis indicates that the midmarket companies in our study directly or indirectly contribute $14 trillion in GDP and support 170 million jobs. We based these figures on publicly available company data, so they do not capture all privately held firms and may understate the true scale of the midmarket sector as an engine of growth, employment, and resilience for local economies globally.

According to our analysis, the economies poised to benefit the most from a revitalized midmarket sector include the US, the UK, Southeast Asia, and the mostly German-speaking region of Germany, Austria, and Switzerland.

The Key Challenges for Midmarket Companies

Midmarket organizations face many structural challenges, but three are particularly pressing:

• They struggle to attract and retain talent, resulting in loss of experience, team disruption, and higher ongoing recruitment costs. BCG’s analysis of LinkedIn Talent and Insights data reveals that annual employee attrition at midmarket companies is 9%, compared to 7% at large-caps. Our analysis of Glassdoor data indicates that employees see midmarket companies as offering weaker career opportunities, scoring 3.5 out of 5 on that measure versus 4.1 for large-caps.
• Capital markets are unforgiving, exposing midmarket companies to rate increases and limiting their ability to make big bets on transformation. In our analysis, only 35% of midmarket companies received investment-grade ratings, compared to 85% of large-cap companies. Midmarket companies typically have a higher debt-to-equity ratio—typically around 1.5x to 1.6x, compared to 1.2x to 1.3x for large-caps. In addition, midmarket companies tend to have greater exposure to variable-rate debt instruments, leaving them more vulnerable to changes in interest rates.
• Subscale operations create a cost disadvantage, reducing midmarket companies’ bargaining power with suppliers and providing a smaller cushion to deal with inflation spikes, tariffs, and supply shocks. Although data varies from sector to sector across the 23 countries, midmarket companies consistently face cost ratios that are 3 to 5 percentage points higher than large-caps.

(See the slideshow for a more comprehensive analysis of our research.)

These structural headwinds have long constrained the growth of midmarket companies, but they will only intensify in this AI era. Our analysis also reveals a self-imposed obstacle: midmarket companies tend to prioritize hiring for core operational and customer-facing functions such as sales and customer service. In contrast, large-caps are building for the future, ramping up recruitment in data science and machine learning skills that support AI capabilities for long-term competitive advantage. As a result, midmarket companies risk being underprepared for the next wave of competition, in which advanced digital and AI capabilities will separate the leaders from the laggards. (See Exhibit 2.)

Four Critical Steps to Close the Performance Gap

To combat these issues, CEOs need to adopt a holistic approach to the how that will drive executional certainty and bring their teams along the journey to deliver outsized results. Of course, each company must find its own path to growth—one that reflects market dynamics and its own strategic choices. Nevertheless, in the current challenging environment, four steps are especially important for midmarket companies seeking to drive successful transformation.

Start With a Big Vision and Fund It

By default, midmarket companies tend to be highly operational, focusing on near-term performance and issues that will affect current-year P&L. To close the growth gap, they should think ahead and concern for the near term with attention to a new horizon: developing a more distant, strategic vision and planning the journey that will make it a reality. A CEO who adopts this twin focus is taking the first, vital step toward kickstarting change.

A disciplined path to growth is crucial, starting with setting stretch targets for costs and adopting a zero-based organization mindset. This approach frees up funding for the transformation and, if done with discipline, helps prevent unnecessary costs from creeping back in. Targets should be ambitious, as companies tend to underestimate the value leakage that often leads transformations to fall short of their expected impact.

Organizations typically need to deliver 20% to 40% of the target impact of a transformation to the P&L within the first year if they are to generate the financial oxygen required to fund the broader journey. Doing so enables the organization to reinvest in high-impact initiatives, such as digital and AI, innovation, and supply chain resilience to emerge as market leaders in the medium term.

We observed this dynamic in action at a leading Nordic engineering services company, which launched a strategic transformation program as it struggled to generate margin improvements while facing rising needs for investment in new materials, technology, and AI. The CEO and executive team recognized that doubling margins required more than continuous improvement; it demanded a dedicated transformation mindset and bolder ambition. From the outset, the company’s leadership set clear stretch targets and reset the business’s cost base. This allowed them to fund their transformation journey through targeted reinvestments. Within eight months, the company improved its EBITDA margin from 4% to 7% and achieved 8.5% during the following year.

Hardwire the Company’s Commitment, Starting With the CEO

One significant advantage that midmarket companies possess is their ability to bring the CEO and leadership team together behind a shared transformation agenda. Every organization faces fragmentation and competing priorities, but midmarket companies have the structural agility to align quickly and act decisively, ensuring that the entire leadership team can mobilize around the same objectives.

But this collective push for growth becomes self-reinforcing only if the CEO visibly focuses on it. To drive substantive organization-wide change, the CEO must ensure that the transformation effort is a clear priority and commands a substantial share of the corporate agenda. Human nature being what it is, the CEO’s view of what is essential will quickly cascade through the leadership team and the wider organization.

It is equally important to link incentives directly to transformation objectives. Bonuses, performance reviews, and recognition should be tied to the delivery of transformation outcomes, starting with the CEO and senior leadership and flowing down to the entire organization. According to BCG’s Behavioral Science Lab, when companies directly link incentives to leaders’ personal success, transformation is 1.4 times as likely to succeed.

A global jewelry company made transformation a core priority from the very beginning of the process. The CEO and board quickly replaced the traditional balanced scorecard with a transformation index that weighted what each executive would drive alongside shared outcomes. As a result, the company delivered a quarter of the overall transformation target value to the P&L in the first year.

Make the Tough Choices and Drive Execution

Speed is essential if a transformation strategy is to gain momentum and unlock value as early as possible. This requires ruthless prioritization and discipline, ensuring that the company devotes resources and investments to projects that have the most significant potential impact. This is even more important for midmarket companies, given that their scale requires them to operate with smaller talent resource pools and to make critical investment tradeoffs.

Even so, execution needs to remain agile. To deliver tangible value early and often, leaders can break transformation into short sprints, such as 90-day cycles, while maintaining the flexibility to adjust if conditions change.

Finally, clarity beats consensus. In midmarket companies, CEOs can make big calls at speed—a characteristic that brings urgency and simplicity to the transformation. Most employees don’t need endless debate; they need direction and certainty. When leaders move quickly and decisively, the whole organization tends to follow.

A leading global fleet management company demonstrated how decisive leadership and tough choices can accelerate impact. Early in its transformation journey, it made bold decisions to divest noncore portfolio elements, simultaneously streamlining the workforce and driving back-office automation to create the financial capacity needed to reinvest in new ventures. These moves signaled clarity and conviction from the top, promoting rapid progress and confident organizational alignment. The organization saw a 50% improvement in EBITDA and a 230% increase in share price over two years.

Lead the Change and Communicate Regularly

Midmarket companies can also take advantage of their smaller size to communicate more effectively. They don’t need complex platforms to manage internal communications. Instead, they can focus on making a clear, consistent, and compelling case for change. The CEO and other leaders should set the tone that they want to cascade through the organization—being direct about what is changing, why it matters, and what the implications of the changes are. Updates should be frequent and authentic to help focus and empower staff.

Because employees want to feel informed about the change journey, regular, two-way communication through newsletters, live Q&A sessions, and other interactive channels can help sustain their engagement. BCG’s Behavioral Science Lab analysis shows that timely and topical communications can boost desired behavior by 59%.

Leaders should create feedback loops that allow the organization to listen, adapt, and reinforce progress. Change champions—employees who play an outsized role in the transformation but also serve as influencers—can disseminate messages and model new behaviors, ensuring that the change feels lived rather than broadcast. Special interventions to identify and engage top talent are equally important, as these individuals can make or break the transformation through their expertise and energy across the organization.

At a North American fintech, leadership prioritized frequent, transparent communication to mobilize employees. The company launched a tailored newsletter with CEO-led messaging and organized live Q&A sessions at town halls to address concerns. Updates reinforced that transformation was a top priority and necessary to power the company’s next decade of growth.

Employees saw the connection between transformation outcomes and productivity and growth targets, as leadership defined its expectations for the first year at the outset. Clear, timely updates minimized drift, boosted engagement, and accelerated behavior change—a competitive advantage for a midmarket company moving at speed. In 24 months, the organization saw faster growth and a 35% annualized profit uplift, and its share price outperformed that of its main competitor by 40 percentage points.

Starting the Growth Engine

In our ongoing work with midmarket companies, we consistently identify significant opportunities for growth. This leads to a broader message to policymakers: unlocking the midmarket sector’s potential at scale could transform an economy. BCG analysis finds that closing the gap between midmarket companies and large-caps across the 23 economies we studied; based only on publicly available company data, could add $3 trillion or more in cumulative GDP over the next five years. Taking all privately held firms and additional markets into account would likely yield evidence of an even greater degree of combined impact.

It’s easy to see why midmarket companies receive less attention from governments than large-caps. Large firms have stronger lobbying operations and may enjoy the benefits of being deemed national champions or too big to fail. But collectively, midmarket companies are an essential and powerful force, too—driving innovation, providing a large employment pool, and possessing enormous untapped potential. Policymakers should treat the midmarket sector not as an afterthought to be considered after helping large corporations and small enterprises, but as a critical growth engine to be fueled by improved access to capital and increased investment in workforce skills.

CEOs, however, should not delay their transformational initiatives until policymakers act. Transformation cannot wait until the environment for midmarket companies becomes more forgiving. In the absence of decisive action, structural headwinds could intensify over time, eroding competitiveness and making it harder for midmarket companies to capture future growth opportunities. CEOs should lead with bold ambition and deploy the four-step strategy to set a new, positive path for their business, potentially growing it into a large-cap stock of tomorrow.

ABOUT THE RESEARCH

The term midmarket refers to companies that occupy the range between small and large enterprises in scale, revenue, and organizational complexity. In some regions, midmarket firms are categorized as midsize or medium-size. We use midmarket as a globally recognized descriptor encompassing this segment of firms that are too large to qualify as small or emerging, yet are not as expansive as major multinationals.

We gathered data for the following 23 countries: Australia, Austria, Canada, China, Denmark, Finland, France, Germany, India, Indonesia, Italy, Japan, Malaysia, Norway, Philippines, Singapore, Sweden, Switzerland, Thailand, the UAE, the UK, the US, and Vietnam. We selected these countries to reflect both developed and emerging economies and to obtain a robust and balanced view of midmarket company dynamics across diverse market conditions.
We calibrated the definition and threshold of midmarket in each country to match local market conditions in order to identify sizable enterprises that do not have the benefits of global scale.

The authors would like to thank Quentin Monaghan, Jae Park, Phuong Huynh, Taina Puddefoot, Pamela Guadamuz, Daniela Soto, and Noah Schilling for contributing to the study.

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