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, lets take a look at how the management responsibilities are divided. In developing strategy, one must identify the specific responsibilities of each organizational 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 becoming more 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 common traditional hierarchal organization structure. To help with understanding the different levels, lets 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 direct sales 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, deals with the media, provides internal auditors and deals with the external auditors, provides

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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). They approve other corporate officers, approve or deny issuance of major debt or new stock, make suggestions to management (can be orders), insure that all stakeholders interests are 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
B C E x . V P F i nE a x n . c V e P E H xR . V h P o a r d ie f P E o f D i r e c t o r s t iv e o Gu G O f f i c e r nr o c u i l p DM iv1 G P MD r G e sr o . u A p i v2 . G M P 3 r e s . B

x e c u

l La en gn ai n l g C D iv .

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Business Functional Areas and Strategy

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., but they should be grouped to exploit synergy developed by combining aspects of similar divisions or businesses. In fact, a business group top managements primary function is to develop that synergy between units. In our automotive example, this might include insuring 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 divisions combine 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 managements strategic function is to monitor and spur the divisions 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 management does 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 a fresh perspective and contribute the experience of the usually senior managers located at the 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 East Group.

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

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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 service distributors 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 individuals that 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 plans within 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 organizations 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 managers 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 the head 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.

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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 these situations, 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 right things 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 cost effective 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 organizations success. That is why the planners 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 D i r . M a r k De ti ri n. gS a D e isr . l o r P E i v i s io n G M o r P R r e M s . g r . Q . CC o. n t r o l l e r

r o dD . i r D . n g r .

eO v p . e

r a D t ii or . n H s

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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 businesss controller) coordinating (within and outside the business unit, group, corporation and external to the corporation 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 more functional 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 level since 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 the appropriate 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 the organization 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 and contracts. Product management is the heart of the action within a company. It selects the products the 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 have no 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 level management 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 Associations 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 companys overall strategy. See the section on pricing strategy later in this book. Promotion is the activity that differentiates

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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). The channel 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 equipment manufacturers - heating wire used in toasters), etc. Note that it is easy to miss-understand the term distribution. It simply means the channel an organization uses to sell or move its goods and/or services to the customer. For example, direct sales, Internet direct, distributors, jobbers, manufacturers 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 with distribution. 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 whos 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 these cases, 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 sometimes called 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

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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 marketing manager 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 has employed 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 marketings 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 provide advice 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 by nature 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 growth oriented 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 banks 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

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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 companys 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 are under 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 product development on functionality and features the market will want, but it is product developments responsibility for identifying the components to make the product work. Product development is responsible for and would report on planning the products design and function and the projects 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 minimum capabilities 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 be working 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 markets 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 marketings criteria.

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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 product development. Operations: Operations, usually called manufacturing in a manufacturing organization, has several functions. In non-manufacturing firms, operations is responsible for the dayto-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, Six Sigma, 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 many manufacturing 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, both within 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

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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 people related 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 companys point of view in general. While HR people frequently seem to be employee advocates and councilors, and sometimes are, their real function is company management. 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 competitors and 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 closely together. IT supplies computer technology and support to the rest of the organization. Because this is a field where the technology changes rapidly, it is important 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

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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 constantly evaluated. 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 capitalists and 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 important activity 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, but sometimes 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 within ten 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. Many customers 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

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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 the suppliers 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 customers 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 are logged in the right place. They also perform the management analysis of the results of the firms various activities. It is through this action that management has the information to base its decisions. Most of the professional activities in accounting are future 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 advise management 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 analysis for 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.

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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 the needs 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 is especially important. Planning: Large corporations frequently have a planning department that assists in preparing formal plans, proposes, evaluates and arranges acquisitions, divestitures and major 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 planning function, 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 is very 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 charge several 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,

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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 are considerably more expensive. More than 50% of the price of a childs 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 mangers implement actions that directly control the profitability of the organization. As a result, line mangers typically include General Managers (who have authority to take most any action), 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, what components 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 to what to do. Potlatch Corporation explains the difference as line managers are responsible for the quality of their decisions, staff managers are responsible for the quality 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.

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Exhibit 3.3 Organization Functions, summary chart:

Department Function or Daily Activity All management functions for the organization, leadership, strategy, key project management, planning, problem resolution, legal, coordination-both internal and with outside or higher levels. Product management Customer service and order entry Market research Product service Public relations Contracts Advertising & promotion Sales planning Meeting with the customer and insuring meeting the customers needs Closing the order (making the sale) Market research Engineering/product design Research Testing IT support/interface Manufacturing support New product evaluation and test Customer problem resolution Identifying new suppliers Coordinating supplier actions required for new product launch Manufacturing/production or providing the service Purchasing Production planning (professional staff planning) Inventory control Quality control (may be separate function) Rework Repair Manufacturing (industrial) engineering Product Test Shipping Recruiting Personnel administration Training Benefits Pay/salary administration Human resources legal (with legal dept.) OSHA and other government agencies Merger and acquisition integration Treasury (accounts receivable, payable) Accounting Forecasting Stockholder relations IT (frequently) Planning (occasionally) Stockholder relations Banking Wall Street Taxes Capital accounting Planning Activity Coordination of all others, SWOT analysis Stakeholder analysis Overview Market size and forces Market share-current and projected Market growth potential 4 Ps Profitability-contribution Competitor analysis Actions Sales forecasts

General Manager (President, CEO, etc.) Marketing

Sales

Product Development

Project technical management, development (how it will work) and scheduling R&D projects Organization requirements

Operations

Human Resources

Quality programs, both in-house and supplier New suppliers New product coordination Process improvements for quality or efficiency Employee improvement, empowerment & training programs Organization requirements Scheduling Recruiting systems Training plans, especially in cooperation with operations Merger integration Major HR programs TQM, Six Sigma, etc., in cooperation with operations Profit & Loss Balance Sheet Capital budget Cash flow Risks and opportunities

Finance

Thomas A. Sgritta

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Business Functional Areas and Strategy

Thomas A. Sgritta

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