New Tools 4 Business Functions

8/6/2019 New Tools 4 Business Functions

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Business Functional Areas and Strategy

Chapter 4 Business Functional Areas and Strategy

Given that an organization exists, for profit or non-profit, based in any of the forms

discussed in chapter 2, let’s take a look at how the management responsibilities are

divided. In developing strategy, one must identify the specific responsibilities of eachorganizational area and specifically name individuals that will prepare detailed plans and

implement specific action plans. This chapter should help in understanding the

responsibilities associated with each area.

There are many ways to set up functioning organizations. Although the organization

structure itself is a significant strategic consideration, details of organization design will

be left to another forum. Matrix organizations, organic organizations etc., are becomingmore popular as business becomes more flexible. However, basic functions must be

accomplished no matter how the reporting relationships are structured. In this chapter,

we will provide some concepts to explain who does what in performing both day-to-day

functions and in strategy planning and implementation. We will use the most commontraditional hierarchal organization structure.

To help with understanding the different levels, let’s imagine a non-existent giant

automotive company. It is composed of many separate business units. One of these

business units (business level) might be the race car division. Its mission might be to

provide off-the-road race cars and parts to NASCAR and INDY race teams using directsales of maximum performance engineering technology. Another one of the business

units might be the tractor division. Its mission is to provide semi-trailer towing vehicles

though independent sales and service distributors to long haul trucking firms.

Levels of Responsibilities

First, lets look at the large corporation and identify how its responsibilities are divided

among various levels.

Corporate Level:

The corporate level is more concerned with the

big picture than other levels of management. It

decides the overall strategy of the organization,

works closely with the various stakeholders,relates to banks and stock and bond analysts,

raises capital, makes major acquisitions,

divestitures, joint ventures, licenses, etc, dealswith the media, provides internal auditors and

deals with the external auditors, provides

©Thomas A. Sgritta 1




training programs and makes major human resource decisions such as the compensation

of senior executives.

In this automotive example, it is the corporate level, with input from groups and

divisions, which would decide to acquire Ferrari Motor Cars or to divest its Automotive

Finance division.

Board of Directors:

The board of directors is the top level of authority in an organization in a corporation. Its

members are elected by the shareholders. In a small corporation they may be the

shareholders themselves, supplemented or not by some outside non-shareholder or employee members. Their charter is to represent the shareholders and serve as the final

authority for all corporate matters. In practice, they appoint the Chairman of the Board,

Chief Executive Officer (CEO) and/or the Chief Operating Officer (COO) or corporate

president (frequently several of these titles will belong to the same person). Theyapprove other corporate officers, approve or deny issuance of major debt or new stock,

make suggestions to management (can be orders), insure that all stakeholders’ interestsare reviewed, decide on major compensation policies, declare dividends, etc. They make

suggestions for strategy and set the vision and/or the overall corporate mission. They

will also set or approve strategic objectives. For strategy purposes, they are part of the

corporate level.

Usually under the board of directors, the corporate level has a CEO and some support.

Support will include a VP of Finance, Senior Legal Officer, VP of Human Resources,and may include a VP of Planning, VP of Training or Development and other support

functions. Shareholder relations, etc., will be part of the corporate structure. In addition

to planning for and carrying out the actions that are directed by the board of directors,this level oversees the day-to-day activities of the corporation, paying specific attention

to those activities that are not performing up to planned level.

Exhibit 3.1 displays a simplified typical organization chart.

Exhibit 3.1

Typical Organization Chart


E x . V P i E x . V P E x . V P l iL e g a l C i l

D i v . G D i v G D i v . G

G r o u p P G r o u p P

C h i e f E x e c i i

B o a r d o f D i




Group Level:

In large corporation, several individual businesses may be grouped by a common

category. They may be grouped by product, market, technology, geography, etc., butthey should be grouped to exploit synergy developed by combining aspects of similar

divisions or businesses. In fact, a business group top management’s primary function is

to develop that synergy between units. In our automotive example, this might includeinsuring that semi-trailers, made by another division within a “truck group”, fit on the

tractors made by the tractor division, that all group divisions’ designs meet both

American and European standards, or that the purchasing functions of both divisionscombine buying power to get better supplier prices and quality. For example, both the

trailer and the tractor divisions buy tires. By combining purchases, they may be able to

get better prices, terms or service. The group level can also provide common services for

several divisions or business units such as certain human resource or legal services that

may be more cost effective if shared at the group level than if each division had its own.Actions that improve synergy may be part of the team planning discussed later.

The group level management’s strategic function is to monitor and spur the division’s

strategic efforts and to identify acquisition and divestiture candidates to properly

complement the businesses within its group. The group will also combine the financial performance of the individual divisions to facilitate identifying overall corporate financial

performance, and will lend assistance to division management in solving division

problems when outside assistance is required. Note that frequently division managementdoes not welcome this assistance! It often takes as much time for division management

to explain the problem to group management as to solve the problem themselves.

However, the purpose of group management in division problem solving is to apply afresh perspective and contribute the experience of the usually senior managers located atthe group level.

In our automotive company example, we might group all truck business units together (tractors, semi-trailers, medium trucks, etc.) into the “truck group”. We also might group

them together according to an “industry group” and a “consumer group”, or a “North

American Automotive Group” vs. the “Europe Group”, or the “Europe and Middle EastGroup.”

Business Level:

The business level exists in every organization, large or small, from a lemonade stand to

Wal-Mart. It is the entity that concentrates on a specific business, that is providing a product (or service), or related product group, to a particular market or related group of

markets, using specified although possibly multiple distribution to take its product or

service to the market. These three ideas comprise its real mission. Typically, the business level is concerned with the total of applicable individual functions that make the





business operate: marketing, sales, engineering and/or product development,

manufacturing or operations, human resources, finance, etc. It is at this level that

identifying the right individual products and the right market niches is most critical.

For example, in our automotive company, a business unit (business level) might be the

race car division. Its mission might be to provide off-the-road race cars and parts to NASCAR and INDY race teams using direct sales of maximum performance engineering

technology. Another business unit we have already discussed is the tractor division. Its

mission is to provide semi-trailer towing vehicles though independent sales and servicedistributors to long haul trucking firms.

Business units may be called business units, strategic business units, operations, divisions

or even companies.

Business units are specific. They do not need to develop plans for areas outside of their

own specific missions, and may not be welcome to, especially if other business units

within the same corporation or parent organization operate in the business areas under consideration. For example, the tractor division should be free to make new products, but

they should not be allowed to design trailers that would compete with the Semi-trailer division. The general manager of that division would not be happy!

Functional Level:

Most organizations, except the very smallest, are divided into functions – specific areas

of knowledge where professionals focus. This is done to insure that there are individualsthat are truly on top of the specific knowledge and potential actions that will make the

organization competitive in those fields. Some examples include finance, marketing,engineering, legal and operations.

Managers at the functional level are responsible for two strategic contributions. First,

they are responsible to do things right . They are responsible to implement action planswithin their functions in the most advantages manner to maximize the results for the

organization. Their second strategic responsibility is to provide input to the overall

organization’s business plans. This input may be relative to their specific area of responsibility or to general strategies for the organization. They will also express

knowledge and opinions on strategies for other functional areas if the strategy interfaces

with the manager’s functional area or if the manager has specific knowledge to

contribute.

There are general management activities that start at the business level and encompass

the activities of higher level managers, and department level functions that start with thehead of a specific function and include managers further down the organization chart.

Sometimes a functional manager may be located and report at a group or even corporate

headquarters and report there as well, but the actions are still the functional, not general.





Next we will review typical actions within various functions, including general

management. This material is being reviewed to assist the planner in understanding

which areas must address specific action plans.

General Management

The person who heads a business unit may be called a president, division vice president

or general manager. It is up to him or her to make the business unit a success. In our discussion, we will assume this person has authority and responsibility for all or at least

most of the business functional areas required to accomplish this. In some organizations,

there may be a sales force that is shared between multiple divisions, and that legal,

human resource and other functions may be shared as well. We will not address thesesituations, but even if these cases exist, our discussion as to what these areas do will still

be valid.

In management, we are concerned with looking at actions in two ways: doing the rightthings and doing things right. From the business unit level (and the general manager) up

through the corporate level, we are primarily concerned with “doing the right things.”This means selecting the right market niches to serve, insuring having the right product

areas, technology and distribution, along with insuring the business has the right capital,

financial and intellectual, and partners to make it successful.

Functional levels will contribute to these plans, but primarily their responsibility is to “do

things right.” Their primary concern is that we have the specific products and

distribution to serve the selected markets, that we provide our goods or services in a costeffective manner, that we treat our employees and other stakeholders appropriately, etc.

Their job is to identify and implement actions in an optimized way that will make our

organization a success. Is their job any less strategic that that of higher level mangers? No, selecting the right strategic action on a functional level is critical to an organization’s

success. That is why the planner’s ability to identify critical action plans is key.

Exhibit 3.2 depicts a typical division or company organization chart.

Exhibit 3.2

Company Organization


D i r . M a D i r . S D i r . P r o

o r E n

D i r . O p D i r . H M g r . Q C o n t r o

D i v i s i o n G




Lets discuss some of the key functions and what functional heads do.

General Managers: General managers will spend their time planning, organizing,

staffing, controlling (including spending much time with the business’s controller)

coordinating (within and outside the business unit, group, corporation and external to thecorporation such as with financial and legal institutions), resolving problems, and, of

course, leading, by setting an example and coming up with innovative ways of

management. Typically good general mangers have a solid background in one or morefunctional areas. They will delegate authority to accomplish the required functional tasks

to the appropriate functional managers, but may lend their expertise in a few specific key

projects, like recruiting a potential large customer or initiating a major quality program

like Six Sigma. They will not be involved in too many projects or at too deep a levelsince good managers know that micro managing is both inefficient and destructive to

moral for the rest of the team.

Marketing: Marketing is strategically key because its function is to select theappropriate market niche(s) in which to compete and to determine the products and

distribution method(s) that will generate the revenues and profit margins to make theorganization successful. In doing so, it must use strategic analysis tools.

Some of the key functions within marketing include product management, advertising

and promotion, customer service, market research, product service, public relations andcontracts.

Product management is the heart of the action within a company. It selects the productsthe company will provide and the markets it will serve. Product Management carries out

the rest of the four “Ps” of marketing –pricing, promotion and placement or distribution.

Product managers should be charged with profit and loss responsibility. Since they haveno authority over the non-direct marketing aspects of profit (operations, financing etc,),

the job can be difficult. However, success as a product manager can lead to top corporate

positions. In some companies, like Proctor and Gamble, product managers are called brand managers.

Product manager (or brand manager) have key positions since they have much

responsibility but little authority. This prepares them well for future higher levelmanagement where they will have considerable authority and even more responsibility.

It is also a place to demonstrate creativity. John Smale managed Crest toothpaste at

Proctor and Gamble. He obtained the American Dental Association’s endorsement of Crest and went on to become Chairman of the Board at P&G, then became chairman of

General Motors.

In reality, the market sets price or at least tells the organization (if it will listen) what its

unit sales can be at given a price. A good product manager will select the best price/unit

sales volume to maximize profitability given the company’s overall strategy. See the

section on pricing strategy later in this book. Promotion is the activity that differentiates





products or services and to make them known to, and desired by, potential customers.

Managing the distribution is the province of the sales department, but marketing, with

input from sales, will usually select the type of distribution (channel of sales). Thechannel refers and describes the selling links and process between the manufacturer (or

ultimate provider) and the consumer. It may be through dealers (for example, cars), via

the Internet (Amazon.com), direct sales (electricity), though OEMs (original equipmentmanufacturers - heating wire used in toasters), etc.

Note that it is easy to miss-understand the term distribution. It simply means the channelan organization uses to sell or move its goods and/or services to the customer. For

example, direct sales, Internet – direct, distributors, jobbers, manufacturer’s

representatives and others are all methods of distribution. A company may use more than

one method at a time. Do not confuse the shipping process or freight handling withdistribution. For example, UPS uses direct sales to its business customers by having their

own people make sales calls on potential customers, and owned and franchised retail

outlets to interface with individuals. Their truck deliveries are their operations, not their

marketing distribution.

The marketing function may have a separate advertising and promotion department or a professional who’s responsibility is to coordinate with an ad agency, set up trade shows,

etc. There is usually a customer service department that enters orders, provides literature,

answers customer questions, etc. Contracts is a sub-function of customer service that

coordinates and negotiates with customers for products that are custom made. In thesecases, contracts define the product, delivery, purchase and/or warranty terms.

Construction projects and customized equipment manufacture are two examples of

businesses that require contract administration.

Product service, or repair of the product is usually the responsibility of marketing

although it could be performed by manufacturing or operations. This area is sometimescalled technical support, especially in technology oriented companies. Market research

can be a separate department, person or just one of the many functions of a product

manager. Public Relations differs from advertising in that it looks for free (usually) publicity to put the organization or its products in a good light, not specifically ads. It

may include press releases, announcements, public service messages, new technology

articles, program or event sponsorships, etc.

From a strategy analysis and presentation point of view,

marketing is responsible for identifying current and potential

new market niche size and growth potential for both existing products and potential new ones, evaluating competitors and

ranking key factors of success, projecting the four “Ps” for new

ventures and improvements in existing operations, and for forecasting sales and profitability of products.

Sales: Many individuals (and companies!) confuse the sales and

marketing functions. They are distinctly different, as are the





people who fit well into these functions. Marketing is about profitability and the four Ps.

Sales is about personal selling. A marketing manager must have a good sense about

making profit. A sales professional must be able to deal with people. A marketingmanager usually has the luxury of some time to make decisions; a sales person frequently

makes quick, on the spot decisions. However, both areas must be focused together,

communicate well and support each other or risk a dangerous political struggle.

Professional selling is not the stereotype of a high-pressure sales person trying to

convince a reluctant prospect to buy something he or she does not need. Instead a professional sales person is a councilor, someone with technical expertise in a specific

field who councils the buyer on what the buyer should do. The sales role is then, to meet with the customer and to assist the customer in designing, selecting or incorporating the

right product or service. Because the sales person represents the company that hasemployed him or her, the sales person will usually only be involved with a customer who

is selecting a product provided by the organization. It is marketing’s job to identify or

create the need; it is sales job to meet with the specific potential buyers and to assist them

in selection. Sometimes a salesperson becomes close enough to a customer to provideadvice on other products and even sometimes selects competitive products, when that fit

is better for the customer. There is nothing wrong with this – it is a sign of professionalism but should not and does not happen too often. If a sales person suggests

products of another organization very often, that organization may be a good acquisition

or alliance fit for the original company.

For planning purposes, sales is responsible for identifying specific key potential

customers and developing sales strategies to land them. They will also focus on the sales

organization and interface, critical in developing customers efficiently. Sales efforts bynature have a more immediate impact on the company than marketing; therefore, sales

tends to be near term oriented.

In strategic presentations marketing and sales are sometimes combined as one function

for brevity. Many organizations also do this on a day-to-day basis as well, but one should

remember that they really are two distinct functions. Marketing and sales should work well together, but large organizations that combine them are often not very good at

strategy.

Product Development: Product development is an important function in any growthoriented organization. In a manufacturing firm this is usually done within the

Engineering department (more below), but firms in all industries have the function of

developing new products. The product development department at a growing bank, for example, is often large and key to the bank’s future.

Functions within product development may include: idea generation and evaluation, product engineering, research (chemistry, biology, physics, materials, psychology, etc.,

but not usually marketing or market surveys), new and old product testing and evaluation,

competitive product testing, information technology support, manufacturing support

(manufacturing engineering is usually within the manufacturing department, but could





exist within a combined “engineering” department), and contract engineering, for

products that require modification or a new design to suit customer needs.

Product development usually works closely with marketing. New product ideas may start

from marketing which may have identified an unfilled need, based on market analysis or

an idea from sales. New ideas may also come directly from product development or research. It is their job to come up with ideas that others have not thought of.

Good product development managers consider their company’s products as their children. They get personally

insulted if someone dislikes their products, and often they

have little tolerance for someone who does not appreciate

the virtues and intricacies of their products. While their pride sometimes gets in the way, it is actually healthy.

Without good products (or services), there is no reason for

an organization to be in existence. We are lucky if we have

good, enthusiastic parents of our children!

In terms of planning, the product development department works on projects that areunder the control of the marketing department for customer preferences, product variable

cost limits and ROI. Product managers are the ones responsible for profitability.

However, the technical development of the projects is under the control of the product

development (or engineering) department. Marketing will have a say in advising productdevelopment on functionality and features the market will want, but it is product

development’s responsibility for identifying the components to make the product work.

Product development is responsible for and would report on planning the product’sdesign and function and the project’s cost, time frame and key milestones in

development.

For example, in an aircraft manufacturing company, marketing may give a project to

engineering to design a new aircraft capable of transporting 600 people non-stop from

New Your to Tokyo. They may also specify maximum noise levels, the minimumcapabilities of the galley, etc., but it is up to the engineering department to determine the

size of the wings, select the engines, design the fuels systems, etc.

Engineering may also have their own, non-marketing sponsored projects. They may beworking on a nuclear powered aircraft, for example, things beyond the current state of the

art.

Within a bank, marketing may desire a new product – for example an all in one account

designed to attract retirees. Marketing will identify the potential market’s size and the

best methods to approach pricing, promotion and distribution. They will make a list of product features that will be desired. But it will be product development that will identify

specific components of the product, including checking accounts, savings accounts, credit

cards, etc., providing they meet marketing’s criteria.





Of course marketing, particularly product management, will review and approve all new

products, whether originated by marketing or product development, before they are

released to the market.

For planning purposes, product development determines plans and reports status on

projects underway, potential new projects and the technical capabilities for future productdevelopment.

Operations: Operations, usually called manufacturing in a manufacturing organization,has several functions. In non-manufacturing firms, operations is responsible for the day-

to-day activities for the process area of firm. That may mean insuring delivery of food

and its preparation for a chain of restaurants; controlling the use of facilities and

equipment for an airline; allocating field professionals for a large consulting company,etc. In manufacturing, the key functions are purchasing, operations planning/scheduling,

inventory control, manufacturing or shop operations, manufacturing or industrial

engineering, packaging, quality, training and shipping. Note that Quality is frequently,

and sometimes inappropriately, a separate function reporting directly to the president or general manager, to insure that quality is not sacrificed in favor of speed. However,

quality will usually be included within operations for formal planning purposes.

The operations area has come under new focus in

recent years, as quality and efficiency have become

critical to competitive position. ISO 9000, TQM, SixSigma, Reengineering Lean Manufacturing, Demand

Flow and other programs have revolutionized

operations and made this area critical. Note that purchasing is often the key to a business. As

competition becomes fierce, the company who is most

cost effective is usually in the best position. In manymanufacturing operations, materials represent 80% of

the variable cost, with labor only 20%. In retailing,

this ratio is even higher. As such, purchasing or supplier management is often the area of the

organization that has the most influence on profit.

For planning purposes, operations will have three key focuses: improving quality, bothwithin its own operations and as bought from suppliers; improving cost, through better

purchasing and improving its own efficiency; and by providing capability for new

products as determined by marketing and product development. Note that all three of these activities may be interrelated.

Human Resources: Human Resources is a specialized field that supports the total

organization. Its purpose is to insure that the company has the talent it needs to be

competitive within its industry. In fact, Human Resources is gaining in strategic

importance as firms use people to obtain competitive advantage and knowledge based





industries become more important. Human Resources recruits people, but usually does

not select them – individual functional managers do that. Human Resources obtains the

pool of individuals from which the departments select. Once an individual is selected for employment human resources typically prepares a written offer and assists with the

administrative work in bringing him or her on board. Human resources also provides or

coordinates training, sets up and administers personal, salary, promotion and other peoplerelated policies, interfaces with the union if there is one, assists in future planning

including acquisitions and becomes critical in human interface programs from the

company picnic to dealing with OSHA (Occupational Safety and Health Administration)inspections. They will perform or interface with benefit administration, including

insurance, savings and retirement programs and will also act as councilors for individual

employees.

Never forget that Human Resources is part of the company management. They exist to

serve the company management, to carry out the company strategy and to represent the

company’s point of view in general. While HR people frequently seem to be employee

advocates and councilors, and sometimes are, their real function is companymanagement.

In terms of planning, human resources interfaces with all departments to forecast

personnel needs, identify and develop plans for training, evaluate the potential for new

personnel or to make the plans for reducing the workforce. Plans for training and

development insure the firm has the skills it needs, benchmarking worldwide competitorsand other companies in the geographic area insures competitive position or advantage,

and assists with cultural issues, especially for acquisitions.

IT (Information Technology – or IS – Information

Systems – or MIS – Management Information

Systems): The “computer” function may be a separate

department or contained within the finance

department. The IT department may also, but rarely, be part of the engineering department. Whether it is

separate or integrated, there is great demand for IT

interfaces between the IT department and engineering,

so the two separate departments will work closelytogether. IT supplies computer technology and

support to the rest of the organization. Because this is

a field where the technology changes rapidly, it isimportant to keep the people in the field current.

Therefore education for the people is a must, usually though outside classes and contact

with vendors, or there is high turnover in the department.

IT is a service function. It typically works in two distinct areas. First, it provides service

to the people of the company. When someone has a problem with their own equipment

(personal computer), the individual calls a customer support person in the IT department





to fix the problem. Second, IT constantly scans the technology to evaluate the cost

benefit relationship of updating systems or hardware to newer technology. Speed is a

source of competitive advantage. As such, speed in information must be constantlyevaluated.

In terms of planning, IT looks for new, more efficient or faster technology and benchmarks competitors. IT also looks for new methods of automation to improve all

areas of the firm. For example, it may plan on adding bar coding to improve inventory

handling, sales lead following to improve follow-up, new MRP (material requirement planning) systems that make scheduling easier and faster, etc. IT plans are frequently

made in conjunction with other departments, just as their day-to-day activities should

support other departments.

Finance: The finance function in any organization has a special position. It collects

money from customers, pays money to suppliers and employees, advises managers on

how their functions are performing both relative to their budgets and to their own performance targets, plans much of the future, and often deals with shareholders and

important outside stakeholders, such as financial intuitions - banks, venture capitalistsand Wall Street.

The head of the financial function may be called the Controller or the Vice President of

Finance. Within finance, functions are often broken down as follows:

Treasury: These are the people who collect money owned

to the company and pay the bills. This is an importantactivity and a tricky one. For many retail businesses,

collecting money is fairly easy; customers pay when they

receive the merchandise, either in cash or by credit card.Stores with lay-away and their own credit programs may be

more complicated, but most do not have major problems

with collections. However, in most business-to-business(B2B) companies, payment terms are extended. This means

that the customer has a specified number of days after

receiving goods or services before the supplier expects the

customer to pay. Most terms in the US are 30 days, butsometimes 45, 60 or even 90 days are granted.

Internationally, terms are frequently longer. Additionally, some firms grant discounts for

paying early. Two 10, net 30 are frequent terms meaning that if the customer pays withinten days, he can take a 2% discount. If not, he should pay the full bill within 30 days.

Customers usually like to take as long as possible to pay unless there is a discount for

paying early since the outstanding invoices in effect are interest free loans. Manycustomers will pay in 45 days or later, even though the terms were 30 days. It is the

function of a credit or treasury manager to call the customer who is late and get him to

pay, without upsetting the customer, since the firm wants to obtain more business from





the customer in the future. It is a tricky activity. See the receivables section with the

chapter “Financial Analysis for Strategists” for more information.

Similarly, the firm usually wants to pay its bills (payables) as slowly as possible to take

maximum advantage of the interest free loan it receives from its suppliers. Of course, the

firm must balance the advantage of paying slowly with the potential of losing thesupplier’s willingness to continue to support the firm. The supplier may charge interest,

deny credit or even quit supplying the firm. The firm must also consider its reputation.

Slow payments will make it harder for the firm to have credibility. Additionally,independent organizations, most notably Dunn and Bradstreet, keep credit histories on

most American firms. A new supplier will most likely check a potential customer’s

credit history before they extend terms.

In any case if the payment is too late, the supplier may refuse to provide more goods or

services to the customer until he pays, or will take other action to help force in the

payment. If the customer goes bankrupt during the process, the supplier could lose most

or all of the money.

Sometimes lack of payment is due to supplier problems – faulty goods or services, lack of follow through, etc. In that case, treasury personnel are required to become involved to

resolve the problem.

Accounting: Accounting is the area that insures that revenue, expenses and assets arelogged in the right place. They also perform the management analysis of the results of

the firm’s various activities. It is through this action that management has the

information to base its decisions. Most of the professional activities in accounting arefuture oriented, designed to analyze the current data to prepare for decisions about future

actions. Cost accounting is a special sub-section, designed to measure unit variable cost

and margin, and to allocate variable and fixed costs to the correct product to allow future product or pricing decisions and to identify and prioritize cost reduction and product

elimination candidates.

In addition to treasury and accounting functions, finance is also responsible for banking,

tax planning and preparation, shareholder relations (and perhaps running this portion of a

web site), budget preparation, (in conjunction with other managers) and perhaps planning

and IT, if there are not independent departments. Their key role, however, is to advisemanagement about future decisions to control the business (hence the term “Controller”).

Finance must always be objective and honest. As such, in large corporations, division or

group financial leaders will have a special relationship, quite often called a “dotted line,”with higher level group and corporate finance. If there is some questionable management

activity, either in terms of actual actions or ethics, it is finance that should communicate

this concern to a higher authority. Group and corporate level finance perform analysisfor group and corporate level executives and also send the auditors to business units to

both improve their operations and to insure that proper, efficient and ethical actions are

taking place.





In terms of planning, the finance department has several roles and a critical position.

Normally, finance holds the last or “anchor” position in any plan, as they are charged to

explain the profitability of any project, budget, strategy, etc. (“worth”). Typically they present profit and loss, balance sheet, ROI, capital budget and cash flow statements. For

projects, they also present discounted cash flow ROI analysis. They will also present any

additional needs within the finance department, such as for personnel or IT to meet theneeds of a plan. If they are arranging outside financing (corporate level), they will

present this plan as well.

The plan should be based on the most probable outcome of environmental assumptions

and actions. Usually at the end of a presentation, finance will indicate threats and

opportunities to the financial results forecasted in the plan. Threats mean the profit

impact of major potentially faulty environmental assumptions or significant failures of planned actions. Opportunities are the positive impacts of a more favorable environment

or better than planned success of actions. Only a limited number of major items are

included. If there is a great likelihood of many threats or opportunities, then the plan

needs to be reevaluated.

Because finance is the keeper of the ethics as well as the bankbook, their presentation isespecially important.

Planning: Large corporations frequently have a planning department that assists in

preparing formal plans, proposes, evaluates and arranges acquisitions, divestitures andmajor business relationships and helps to find new locations for expansions, etc. They

may also exist at the group and business unit levels, sometimes as separate departments

and sometimes as sub functions of finance. In organizations without a formal planningfunction, this is done primarily by functional managers. In all cases, planners are there to

assist function managers; it is the function managers’ responsibility to insure that proper

planning is done.

Legal: Legal considerations are becoming a critical part of business. Most small

companies have a law firm on retainer or at least have a relationship with a legal firm,and refer legal questions to the law firm. Large companies usually have lawyers on their

payroll. Lawyers review contracts, advise on what to do and not to do in making

business decisions, help with warranty statements and other publications, and check on

patents and copywrites, etc. When a company becomes involved in a lawsuit, which isvery common today, they coordinate the legal action, but hire independent law firms in

the geographic jurisdiction of the lawsuit to handle the case locally. It is not uncommon

for a large company to be in the process of handling hundreds of lawsuits at any one time.Wal-Mart, for example, averages two new suits against it per day. Since it can take years

to resolve a case, corporate lawyers are very busy. Defending a lawsuit is very

expensive. Courts require specific documents and require filing fees, lawyers can chargeseveral hundred dollars per hour for work, and cases frequently require travel to resolve.

As a result, there are many “frivolous” lawsuits brought by people who hope that a large

company will pay a relatively token amount to the plaintiff to drop the case, saving large

legal bills. Such cases, plus jury verdicts awarding huge sums in product liability cases,





have caused a large increase in the cost of doing business. An average manufacturer, for

example, may pay over 1% of its selling price for product liability insurance, plus another

1 percent for legal costs. Coupled with a wholesaler and a retailer paying another 1 percent each, nearly 4% of the cost of a their product to the consumer represents legal

requirements, much of which is to defend against frivolous lawsuits. Considering that the

average company makes about 6% profit, this is very costly. Some products areconsiderably more expensive. More than 50% of the price of a child’s football helmet,

for example, is required to cover costs associated with potential legal liability.

The legal department is a separate consideration, and its planning is usually separate from

other departments. Senior management will deal with legal separately, given the nature

of this part of the business.

Line vs. Staff

Business differentiates “line” vs. “staff” managers. The difference is that line mangersimplement actions that directly control the profitability of the organization. As a result,

line mangers typically include General Managers (who have authority to take most anyaction), Marketing (which sets prices, selects niches, changes products, etc.), Sales

(which meets with the customer and decides who will get what product, etc.), and

Operations (which decides what product will be made or service will be rendered, whatcomponents to use, etc.). Engineering is often a staff function except in companies where

engineering is a critical part of the product itself. Aerospace and construction are

examples of industries where engineering is a line function. Human Resources, IT,

Finance and Planning are typically staff functions. They advise the line managers as towhat to do. Potlatch Corporation explains the difference as “line managers are

responsible for the quality of their decisions, staff managers are responsible for thequality of their advice.”

Exhibit 3.3 provides a summary of the daily and the functional activities of common

business functions or departments at the business level.





Exhibit 3.3

Organization Functions, summary chart:

Department or Function

Daily Activity Planning Activity

GeneralManager

(President, CEO,etc.)

All management functions for the organization,leadership, strategy, key project management, planning,

problem resolution, legal, coordination-both internal andwith outside or higher levels.

Coordination of all others,SWOT analysis

Stakeholder analysisOverview

Marketing Product managementCustomer service and order entry

Market researchProduct service

Public relationsContracts

Advertising & promotion

Market size and forcesMarket share-current and projected

Market growth potential4 “Ps”

Profitability-contributionCompetitor analysis

Sales Sales planning

Meeting with the customer and insuring meeting thecustomers needsClosing the order (making the sale)

Market research

Actions

Sales forecasts

ProductDevelopment

Engineering/product designResearchTestingIT support/interface

Manufacturing support New product evaluation and testCustomer problem resolutionIdentifying new suppliers

Coordinating supplier actions required for new productlaunch

Project technical management,development (how it will work) andschedulingR&D projects

Organization requirements

Operations Manufacturing/production or providing the servicePurchasing

Production planning (professional staff planning)

Inventory controlQuality control (may be separate function)Rework

Repair Manufacturing (industrial) engineeringProduct TestShipping

Quality programs, both in-house andsupplier

New suppliers

New product coordinationProcess improvements for quality or efficiency

Employee improvement,empowerment & training programsOrganization requirementsScheduling

HumanResources

RecruitingPersonnel administration

TrainingBenefits

Pay/salary administrationHuman resources legal (with legal dept.)

OSHA and other government agenciesMerger and acquisition integration

Recruiting systemsTraining plans, especially in

cooperation with operationsMerger integration

Major HR programs – TQM, SixSigma, etc., in cooperation with

operations

Finance Treasury (accounts receivable, payable)Accounting

ForecastingStockholder relationsIT (frequently)Planning (occasionally)

Stockholder relationsBanking

Wall StreetTaxes

Capital accounting

Profit & LossBalance Sheet

Capital budgetCash flowRisks and opportunities





©Thomas A Sgritta 17

New Tools 4 Business Functions

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