The Product Operating Model Explained

In his latest book, Transformed, Marty Cagan introduces the term The Product Operating Model (POM) which he defines as “How the best tech-powered companies work …— principles, practices, and competencies ”. I feel that, like Product Discovery, which Cagan also coined, the Product Operating Model is going to be an important and useful concept, but also one that may be misunderstood and divisive. In this article I’ll explain my interpretation of the product operating model and why it’s very much relevant to you. 

The Direction of Change

Imagine a gamut of companies with different operating models. On the left end is the fully ‘traditional’ product company. This company operates largely by the playbook of classic business management: top-down leadership, revenue focus, “delivery teams” doing the bidding of the business, etc. On the far right of the gamut is the fully ‘modern’ company that uses what Cagan calls the Product Operating Model. It is very customer-focused, empowering people and teams, and evidence-guided. I’d argue that both extreme ends don’t exist in reality, but they’re useful abstractions to describe the direction of change. 

Your company is somewhere on this spectrum, and so are Oracle, Amazon, OpenAI and every other tech-powered company — they all have elements of the old and the new. Cagan and others (me included) argue that in today’s market and technology environments, the modern product operating model creates massive advantages in business performance, product innovation, and the ability to attract and retain talent. 

Modernizing the operating model is often called transformation, but I think that’s somewhat of a misleading term. A 100-year-old organization can’t just teleport forward and become a new Spotify or Stripe in a few quarters. It’s better to think in terms of evolution — working steadily to become a better version of ourselves rather than attempting to copy someone else’s playbook. 

But beyond generalizations, what makes modern companies different and better? To answer this question we must look at how product companies operate under the hood.

A System View of the Organization

At a glance, all tech companies of a similar size look the same: they’re all split into business units and offices, organized around departments/disciplines such as engineering, sales, and marketing, and have a hierarchy of top management, middle management and employees. This model is useful for many things, but it doesn’t explain why company A is so much more innovative than company B. We do know that doubling-down on this system model by adding more layers of management and process (which usually occurs with age and size) tends to make things worse: siloing, misalignment, and bureaucracy increase and the pace of innovation slows down. If anything we need to wonder how modern companies stay viable despite their size and age. 

A more useful system model in my opinion breaks tech-powered organizations into eight functions that are all cross-disciplinary and cross-rank: 

• Strategic context
• Goals and Metrics
• Research
• Product Discovery
• Product Delivery
• Go-To-Market 
• Operations and Infrastructure 
• Culture

Each function can be seen as a sub-system with its own processes and outcomes. The functions are co-dependent, but you can work to improve each on its own, which is good because modernizing everything all at once is impossible.

Every product company, no matter where it is on the gamut, has these eight functions, but there’s a marked difference in how they operate. 

Strategic Context — In traditional companies the mission is all about business success (“To become the market leader in X…”), the vision is often unclear, and the strategy is just a long wish list of objectives organized around “pillars” (which perfectly match the org structure). The strategic void is filled with multi-year plans and roadmaps that almost never materialize. 

Companies using the modern product operating model have a vision of a better future state of the world, a mission that states how they can play a part in bringing about this better future, and a strategy that specifies the top opportunities and challenges the company aims to tackle to get there, along with clear principles to guide the work. Like everything else in the modern company, the strategic context is agile, adaptive, and is guided by evidence. 

Research — In a traditional company Research often boils down to collecting customer requests and casually surveying the competitive landscape. Modern companies use a broad spectrum of research activities including interviewing and observing users, monitoring the market and the competition, conducting data analyses, and experimenting with new technologies. People at all levels can initiate research and have access to research data and findings. 

Goals and Metric — In a traditional company the goals and the metrics are focused on business success (revenue, profit, market share…) and on output — execute on the plans, complete projects. 

Modern companies care a lot about business performance, but measure and optimize also value-to-customer, user experience, product health, and company health. They separate between outcomes and outputs and try to set goals only for the former. They work off outcome roadmaps rather than release roadmaps. 

Product Discovery — Traditional tech companies don’t have a formal concept of product discovery. Ideas are chosen based on opinions, consensus, rank and sparse data (“this customer asked for this feature – it’s a must have!”). Once a project is approved and funded, challenging its core assumptions is not expected nor encouraged; it’s all heads-down execution, perhaps with one late-stage MVP/beta that changes nothing. 

Modern companies consider their ideas hypothetical ways to achieve the goals. They’re willing to spend time evaluating and testing ideas before committing to delivery, and have no qualms about dumping or pivoting the ideas that don’t work. 

Product Delivery — Most companies practice some version of Agile development, but the rituals tend to be more elaborate and strict in the traditional company, and the expectation of delivery of the full scope on time much stronger. For this reason the product managers/owners are expected to create perfect specifications and tickets that the developers can execute on. The traditional company is also more likely to adopt SAFe (Scalable Agile Framework) that brings back central project management and coordination. 

Modern companies are much more lax about agile rituals and definitions of done. The details of the implementation are defined through pm/eng/UX collaboration and the company is realistic about the ability to deliver exactly on time with full scope and high quality. It’s much more important to do the right things and to do them right, than to hit made up sprint goals and deadlines. 

Go-to-market — In traditional companies marketing and sales teams work off a predefined roadmap and prepare for launches months in advance — an extension of the classic waterfall model. Slipping or changing the product often creates cross-functional friction and escalations; pressure tactics are common. For this reason product folk are wary of their business stakeholder and often withhold information from them. 

In modern companies sales, marketing, product, ux and engineering work collaboratively as they’re all aiming for the same goals — getting the right product to the right customers and capturing value for the company. Many modern companies have cross-functional growth teams to optimize business performance and customer value. Generally, product discovery, product delivery, and go-to-market are parts of one continuous effort to deliver value to the customers and to the company. 

Operations and Infrastructure —In traditional companies the infrastructure and operations functions — IT, dev ops, legal, HR, finance, etc — are aiming to minimize costs, reduce risks, and enforce company policy, even at the cost of adding bureaucratic overhead and slowing down innovation. 

In modern companies infra and services are optimizing for serving their internal customers and helping them to create more value faster. They use the same evidence-guided product model to develop and improve their internal services and products.

Culture — culture includes the values, beliefs, norms, and practices of the organization. It is arguably at the heart of the differences between traditional and modern operating models and the biggest blocker for change. These are some of tell-tale signs of the culture:  

• Decision-making — Traditional companies use a more centralized decision model, while modern companies strive to delegate most decisions. 

• Hiring — Traditional companies are looking to fill roles based on qualifications and experience. In modern companies “culture fit” plays a major factor — they only want to hire people that will work well in their unique culture. 
• Managers — In traditional company managers’ roles are to get work done and enforce decisions and policy. Management skills vary, and many managers are either too hands-on or too hands-off. Modern companies a key role of a manager is to ensure that reports are successful. Managers are taught how to provide guidance, context, feedback and coaching. 
• Trust — Mistrust is a common problem in traditional companies, exasperated as the company grows. Modern companies are much more trusting of their employees, and assume by default that they’ll do the right thing within their area of responsibility. 
• Company focus — Traditional companies tend to be very much about revenue and profit. Modern companies care a lot about business success, but are also very customer-focused (famous example: “Customer obsession” is the number 1 leadership principle at Amazon). More broadly, modern tech companies are able to strike a balance between business needs, user needs, engineering needs, shareholder needs, employee needs, and the greater good. 
• Predictability vs. adaptability — Traditional companies emphasize predictable execution and risk reduction, and tend to invest a lot more into planning, processes, and oversight. Modern companies wish to move fast and stay adaptive to new information, even at the cost of occasionally breaking things. 

Perhaps the biggest difference is that in companies like Amazon, Google, and Hubspot (at least at their best times) culture is explicit and dynamic; a thing that the leaders work to develop and cultivate (culture as a product), while in traditional companies culture develops organically and often degrades over time. 

The Unthinking Robot

The product operating model shows that the traditionally-operated tech company sufferers from acute imbalance: everything to do with execution — Delivery, Go-to-market, Operations and Infrastructure — is bloated and takes up most of the resources, focus, and energy, while things to do with observing reality and thinking are severely underdeveloped or non-existent.

Traditional product companies are a bit like a robot equipped with strong limbs but weak software. It has potential to do a lot, but it’s very disoriented and uncoordinated. The left hand doesn’t know what the right is doing due to the lack of a clear strategic context and shared goals, and even the simplest task can become difficult. This robot keeps bumping into walls and tripping over furniture due to its lack of peripheral vision (research and product discovery). And yet the operating system (culture) keeps pushing it to do more, faster, and spend less time looking or thinking. 

Like all models, the eight-part product operating model I’ve shown you is an abstraction. It’s possible to find financially successful companies that use a more traditional playbook (or have reverted to it over time). Luck, size, and other factors also play a role. Still, I find that the product operating model correlates well with the best product companies I meet. If you feel your company is underperforming, if you’re frustrated with your inability to create impact, if things just feel too hard, I hope this model helps explain what your company is doing right and where perhaps it is coming short. My goal with such articles is to drive discussion and feedback, so please feel free to share this article with colleagues and to share what comes up.