Article originally published in the American City Business Journals on December 7, 2020.
Companies are organized in two ways. Those with a single line of business are organized functionally, with the CEO responsible for the operation, growth and profit/loss of the entire company. More complex companies in multiple lines of business are organized by business units, in which business unit leaders – typically general managers – are responsible for the operation, growth and profit/loss of their business. These general managers report through a hierarchy to the CEO.
At companies in multiple lines of business, business units receive services and are allocated the costs of corporate functional staff units, such as finance, human resources, information technology and legal, which also report up to the CEO, but through a separate hierarchy.
Why are more complex companies organized by business units rather than functionally? It focuses the effort of business unit leaders and their teams who are closer to their customers and who have specific expertise in their business. It also focuses accountability for generating results.
Based on my experience, there are three universal issues that need to be addressed in order to maximize the effectiveness of a business unit organization.
Avoid operating in silos
General managers are held accountable for meeting the earnings and growth objectives of their own business. Sometimes their decisions are in conflict with maximizing the results of the entire company. This is not in the best interests of the shareholders.
When I was the general manager of PQ Corporation’s Canadian subsidiary, we were able to negotiate a very low 12-month price for a raw material for product produced and sold in Canada. Due to this low raw material price, we could supply U.S. customers at a cost less than product manufactured in the U.S. The savings to the corporation amounted to $200,000 for that year.
The general manager of the U.S. business unit that produced the product didn’t want to lose the business for the year because it would cause him to fall short of his P&L goal. I went to the CEO of the company to resolve the issue, who lowered his goal, and production was transferred to Canada for that year. The principle that guided this decision was to maximize the results of the corporation first, and the business units second – and that became one of the operating principles of the company.
Ensure the business units have crucial resources needed to achieve their goals
When I became CEO of PQ, one of the issues I faced was whether to permit business units to hire staff or buy a service from a third-party provider, even though that resource also resided in a corporate staff unit. The general managers argued that since they were being held accountable for results, they should be able to choose to source their crucial needs from the best provider.
The general managers argued that in some cases, an internal staff unit was not sufficiently knowledgeable of their business, didn’t have the needed expertise, would not be as responsive as required or they would prioritize corporate imperatives first rather than the needs of the business unit. Based on a history of doing an inadequate job, the general managers also argued they would adversely impact the ability of the business unit to achieve its objectives.
As a former business unit general manager, I was sympathetic to the general managers’ point of view. However, as CEO, I needed to balance the needs of these general managers with the needs of the company. We resolved the issue by permitting the business units to hire staff or a third-party provider in areas that were crucial to the achievement of their growth and operational goals. The functions that were not crucial to achieving their goals would be provided by internal staff units.
Hold business unit general managers accountable only for what they control
Business units are not independent, but part of the larger enterprise. Functional staff unit costs (corporate overhead) allocated to the business units vary each year and are outside of the control of the business unit general managers.
In order to effectively hold business unit general managers accountable for achieving longer-term financial goals, we locked in the functional staff unit allocations to the business units for a multi-year period, and the positive/negative changes in these expenses each year were reflected in what we called the Holding Company, a corporate cost center that did not impact the business units.
Business unit organizations drive responsibility closer to the front line and the customer, compared to functional organizations. Addressing the three issues outlined above will help the business units and the company as a whole be more effective in achieving their operational and strategic goals.
Stan Silverman is founder and CEO of Silverman Leadership and author of “Be Different! The Key to Business and Career Success.” He is also a speaker, advisor and widely read nationally syndicated columnist on leadership, entrepreneurship and corporate governance. He can be reached at Stan@SilvermanLeadership.com.