Business Function versus Department

Even if you have this impression: Business functions are not departments because a department can execute multiple functions. In enterprises with traditional organization, however, it is often common practice to establish a department for more or less one particular function. Therefore, department and function are often used synonymously. In modern and rather process-oriented enterprises, however, a function is frequently mapped onto multiple organization units.

Core and Support Functions

Depending on whether a business function directly serves the object of the enterprise or not, you can distinguish core functions or support functions.

Reflect on the typical enterprise functions of Figure 2.1 for a while and particularly memorize the terms of the functions and the tasks associated with them.

Human Resources

Special attention should be paid to human resources. Apart from the vision of a fully electronic enterprise where only robots work,² the employees (and who should know that better than you, dear reader) are the ones that enable an enterprise in the first place to implement its strategies. Nevertheless, human resources are usually considered as a support function.

Manager Delegate

So it's not important what is actually organized. The main thing is that others do it.

If you now look at a whole enterprise, another term is often used in literature:

Seven Manager Competencies

A manager requires certain key competencies to let wondrous things happen by others. To be more precise, a manager requires seven competencies:

• Goal setting

• Planning

• Decision-making

• Delegation

• Support

• Communication

• Controlling

The Strategy is the Means to an End

This similarly applies to the business strategy. It is always a means to the business end and must match the enterprise's mission (Chapter 5 distinguishes the terms, vision, mission, goal, strategy, and tactic in more detail).

The business strategy, as long as it is valid, defines the direction into which an organization develops. It thus provides a framework for decisions, similar to guardrails on the highway that ensure that all cars are driving in the same direction, at least between two exits.

To yield an advantage within the changing market environment, it is occasionally necessary to change the strategy in order to newly configure the organization's resources.

As soon as the enterprise's strategy has been defined, you can derive various factors (e.g., personnel and marketing strategy, goals). The enterprise's personnel require goals so that they can align their actions and consider them in the overall context (business strategy). Actively defined goals motivate the people, and the consolidation of contradictory goals across various departments to create similarities.

Business Strategy Steps

That's what an enterprise basically does to determine its business strategy:

• First, it analyzes the market environment. (Which forces affect the market? Which factors influence the strategy selection?)

• Then, it divides the market into segments theoretically. (Which buyer groups exist? Where are any market niches?)

• Then, the enterprise analyzes its strengths and weaknesses, if required, for each market segment separately.

• This forms the basis for setting objectives and planning the measures to be taken.

Signs like failures, times absent, and fluctuation or large amounts of overtime indicate that the enterprise's personnel management must be adapted. In the best case, this is done based on the strategy. After the strategy has been developed, you can and should plan the personnel deployment by analyzing various aspects:

• Strategic vision of the enterprise.

• Short-term and long-term goals.

• Changes in the market that impact the enterprise.

• Requirements with regard to personnel based on the strategic vision.

• Possible opposition in the organization.

Beyond personnel management, it makes sense to break down the enterprise strategy into goals. These goals (or targeted conditions) should reflect the enterprise strategy and support orientation and optimization when assigned to individual business processes.

After the internal view, the following discusses the market analysis, that is, if you continue reading you get to know some customary techniques to implement these steps.

Market Structure

The idea is simple: The enterprise's success significantly depends on the competitive strategy which is mainly determined by the structure of the market in which the enterprise is active. The market structure of an industry can be attractive or not. But which forces impact this industry structure and thus the attractiveness of a market? (Figure 2.2).

Porter's Five Forces

The following five forces exist:

• Rivalry among competitors,

• If an enterprise is already in the market: threats of new competitors, or if the enterprise wants to enter a new market: barriers to entry,

• Bargaining power of consumers/buyers,

• Threats of substitute products or services, and

• Bargaining power of suppliers.

It is obvious that enterprises should attempt to be active in an industry whose market structure is exposed to as few threats from these forces as possible.

STEP = PEST

Another option to analyze and assess the attractiveness of a market is to use the STEP analysis (Figure 2.3). The acronym consists of the initial letters of the market environment factors to be considered (this technique is also referred to as PEST analysis³).

Ready-Made System

This ready-made system simply provides references for considering the opportunities and threats of a market. For example, an enterprise can consider which threats it is exposed to with regard to the trend of interest rates. Likewise, there can be opportunities, for instance, if the enterprise can manufacture products that are subsidized.

Isemarkt in Hamburg

Have you ever been to the Isemarkt in the German Hanseatic City of Hamburg? This is a rather big weekly market that spreads almost half a mile below the city's metro rails. Various market segments, such as jewelry stands, vegetable stands, and so on, exist there. The attractiveness of the market doesn't necessarily depend on the whole market, but on the competitive situation in the respective segment.⁴

This does not only apply to weekly markets. For this reason, a complete market for products and services is usually subdivided into small, manageable segments. The heterogeneous total quantity of market participants is divided into homogeneous target groups which market policy efforts should focus on (Figure 2.4).

Division Strategies for Market Segments

There are various division strategies for the segmentation of a market:

• One-dimensional segmentation, for instance, by income classes,

• Multidimensional segmentation, for instance, by countries and income classes, and

• Complete segmentation where each customer is handled individually.

Market Niches

Because not every segment entails the same profitability, market niches can arise. They provide an opportunity to gain the leadership in the market segment.

Derive Strengths and Weaknesses

But not only is the market environment of an enterprise of interest, but also the enterprise itself. It has specific characteristics (for instance, quality of products compared to competitors, qualification of employees, level of awareness) with which it acts within the market. Within the scope of an internal analysis, these characteristics can be used to derive strengths and weaknesses of the enterprise, with regard to a market or market segment.

The collected results of the external and internal analysis can be initially presented as an overview using a SWOT matrix (Figure 2.5).

This summarizing comparison often helps you to think about how you can leverage strengths and decrease weaknesses in order to pursue opportunities in a targeted manner and avert threats.

Four Combinations

When you compare the results of the internal analysis with the result of the external analysis, you obtain four combinations that form a holistic business strategy:

• Strengths + opportunities: Pursue new opportunities that blend well with the strengths of the enterprise.

• Strengths + threats: Leverage strengths to avert threats.

• Weaknesses + opportunities: Decrease weaknesses to leverage new opportunities.

• Weaknesses + threats: Develop defense strategies so that weaknesses don't result in threats.

Because each enterprise has both strengths and weaknesses, and each market environment involves both opportunities and threats, you should always take all of these combinations into consideration.

Marketing Designs the Value Chain

But why is marketing important for an expert in business process management? One of the most important business process types is the value chain. It's one of marketing's tasks to design the value chain. Therefore, just like basic knowledge of project management, understanding this term is one of the basic competencies of a BPM expert, because business process analyses and business process optimizations are typically handled in projects.

Forms of Marketing

However you interpret marketing, you can run “marketing” either reactively or proactively. Consequently, you can distinguish two different forms of marketing (Figure 2.6).

Reactive and Proactive

An enterprise uses reactive marketing if it (only) reacts to what others do and imitates them. Proactive marketing, by contrast, is a philosophy which ensures that resources are deployed in such a way that the requests, requirements, and needs of customers take center stage in the enterprise's activity.

Marketing ≠ Brochures and Trade Fairs

Marketing is by no means limited to designing brochures and attending trade fairs. This understanding involves a very manifold and continuous process that ultimately touches most enterprise areas (Figure 2.7).

Primary and Supporting Processes

Most notations of value chains typically use arrows to distinguish between core processes (also primary processes or activities) and supporting processes. Let's take a closer look at the eight individual elements of the value chain (inbound and outbound logistics, and so on). They are indeed typical, even if you don't find the processes mentioned there in exactly this form in every enterprise, or if they have other names.

Fixed, Variable, and Overhead Costs

In the most general sense, you must be able to distinguish at least fixed, variable, and overhead costs.

Do you have a car? Excellent⁵ Then, car taxes and insurance are the essential fixed costs. They incur independently of the mileage, even if you leave your (licensed) car in garage.

In our car example, these are primarily operating costs, mainly for gas. The more miles you drive, the higher the variable costs are.

If you had an entire car pool to rent instead of a single car, then costs for personnel or garages or, electricity and water cannot be allocated to a car according to the cost-by-cause principle, but must be distributed to all vehicles.⁶

Working Capital

But how does an enterprise actually know whether it is able to meet its obligations? In principle, it's very simple: It measures the (more or less) available capital.

First, you determine the current assets. Put simply, the assets that are available within a relatively short term. These include, of course, the money on bank accounts and in cash registers, but also stocks, sellable stocks, and receivables.

To calculate the working capital, you simply subtract the current liabilities from the currently available assets. The current liabilities include all debts that must or will be cleared within 1 year. In the best case, an amount that is considerably above zero remains.

Return on Investment

When you make an investment, for instance, when you buy machinery, you want to know how cost-effective this is for the capital invested.

Let's assume that your capital employed is $10 and you use it to generate an earning $3 after a specific period of time, then the Return on Investment (ROI) is 0.3. So each dollar you invest becomes $1.30. According to this, it is good if the ROI is greater than 0.

In this context, it is insignificant if you make such minor investments or investments of billions or consider the entire enterprise itself as an investment.

Techniques for Decision-Making

Reality, however, constantly provides enterprises with a whole series of options. But which one is the best? Business management offers some well-known techniques for this decision-making in order to make different scenarios assessable.

Break-Even Point

Very simply: It stays if it is more likely to gain profit in the United States than abroad with the same quantity.⁷ The quantity where the profit zone begins is referred to as break-even point.

Both the gradient and the origin of the straight line typically run differently. While the sales revenues start at the point of origin, production costs already arise, even if not a single unit has been produced yet. Moreover, the sales revenues have a stronger increase than the costs, so that the two straight lines eventually meet at the break-even point. You can calculate this point using the following formula:

If the production costs were identical in both countries, then the enterprise would stay in the country that has a stronger sales revenue line (in other words, the country where higher prices can be reached with identical costs). You can go through the other possible scenarios yourself.

Porsche is More Expensive than Smart

If you only differentiate by costs and think about whether you want to drive Porsche Cayenne or Smart, then you don't need a crossover analysis. Compared with Smart, Porsche is clearly superior, both with regard to fixed costs and variable costs.

If you want to decide between a diesel-driven and a gasoline-driven car for the same car type, then it's worth calculating the crossover point (Figure 2.11).

Diesel versus Gas

In Figure 2.11, scenario 2 presents the diesel car. Due to higher acquisition costs, the line starts further up on the y-axis, and its lower gas costs cause a lower increase of the line. For the gasoline-driven car, the line starts further down, due to lower acquisition costs, and increases greater as a result of higher gas prices. The two lines intersect at the crossover point.

In business management, the horizontal axis usually involves quantities. In this example, however, we don't use the quantity, but the annual mileage.⁸

Study or Earn Money?

The decision tree is somewhat similar to life: You get to a fork in the path and must decide whether to turn left or right (study or earn money?). Then you get to another fork which may lead to more directions (three different job offers). Every fork is connected with probabilities of occurrence. At the end, you reach the leaves, and you can assess each path by considering the probabilities.