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Functional and business areas

We classify firms economic activities by functional and

b i
business areas
Functional areas are subsets of processes characterized by a
function (i
e developing
developing, manufacturing,
manufacturing selling new products)
and by the skills used in these processes (i.e. design, production,
A business area is a product/market area with its own distinctive
features; it differs from other areas in which the same firm
operates. Costs and revenues generated by a business area are
specific to that area; therefore income can be calculated in terms
of result per business area
area. Firms having several business areas
are called diversified companies
Functions are the organizational units that perform activities
belonging to a functional area. Divisions are the organizational
units that perform activities belonging to a business area
Functional areas
We can classifyy firms economic activities byy
functional areas
Core operations:
p theyy refer to the extensive set of activities by
which the firm actually carries out economic production. For
a manufacturing firm: R&D; purchasing goods and services;
f t i sales
l andd marketing;
k ti logistical
l i ti l processes
Debt and equity management: set of activities undertaken by
the firm in order to cover its financial needs
Equity Debt
Suffers the ggeneral risk of enterprise
p Onlyy bankruptcy
p y risk
Rewarded by dividends (depending on Rewarded by interest (regardless of profit
profitability) MORE FLEXIBLE or loss) MORE RIGID
Substantial influence on decision making Little influence on decisions making
High risks/higher expected reward Lower risk/lower expected reward
Functional areas
Management of non-core investments: e.g. when the firm invest
an unexpected surplus of funds. The aim is to create revenues in
addition to earnings from core operations by investing capital
originating from savings. The purpose of any non-core
investment is to earn positive net returns,
returns but net results may also
be negative
Tax management:
g firms are required
q to ppayy various kind of taxes
in exchange for the right to utilize public goods provided by the
Insurance management: organizations are subject to general
economic risk, i.e. the chance that general economic activities
generate profits or losses which promote or threaten the
longevity of the organization. Organizations are also exposed to
particular risks which can be covered byy insurance ((e.g.
p g
unfavorable events such as theft or fire)
Institutional Structure Design: processes involving design of the6
Functional areas
Organization: many processes classified in two groups:
organizational design and human resource management.
Organizational design centers primarily on designing the
organizational structure of the firm. Certain tasks are defined and
assigned to units that make up the structure of the organization.
Human resource management can be seen as the implementation
of organizational systems pertaining to personnel
Forms of compensation: (1) fixed wage; (2) variable wage; (3) deferred
compensation in the form of severance pay, disbursed on a one-time
basis when the employee leaves the firm; (4) deferred compensation in
the form of social security benefits, paid at set intervals beginning from
when the employees retires
Information: provide data and information to firm's decision
makers, and firm's stakeholders who need information to decide
if/how to establish and grow their relationship with the firm
Internal operations vs. external
Administrative costs vs. Transation costs
Financial resources Search costs
Capabilities Negotiation

The comparison between these two costs defines the boundaries of a

company (more in our strategy session)
Functional areas
Core operations: e.g. a manufacturing firm participates in
exchanges for private goods both as a buyer (of buildings,
facilities..) and as a seller (of its products). In modern
i transactions
t ti involving
i l i private i t goods d take
t k place
l by
means of monetary exchange. The total price in a monetary
exchange can be paid cash in hand, i.e. when the contract is
finalized, or at a later date. The good, the volume, the unit
price and total price, and the payment timetable are the main
characteristics of the exchange. Other elements could be the
quality of the good, terms of delivery, guarantees, pre and post
sale technical assistance,
assistance penalties,
penalties etc.
Debt and equity management: acquiring financial
means in
i the
th form
f off equity/debt
it /d bt capital
it l
Functional areas
Management of non-core
non core investments: they involve
different transactions corresponding with investment choices
Loan capital transactions,
transactions if a firm invests in securities issued by
the State or other firms
Risk capital
p transactions, if the firm buys
y stock in firms
Private goods transactions, if the investments entail buying
goods which generate income or appreciation
Tax management
Insurance management:
g transactions for specific
p risks,,
or insurance contracts. The aim is to provide various forms of
coverage for damages resulting from possible negative events

Functional areas
Organization and information: Labor transactions,
which take the form of contracts between the firms and its
employees (we saw the forms of compensation last time).
Labor transactions are vital not only in terms of institutional
structure of the individual firm, but also with respect to
economic systems on a local, national and supranational level.
This explains why such processes have a special regulatory
framework for governing labor negotiations