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An Introduction to Business

I have long held the opinion that if common sense were truly common, the world would have little use for business schools.

Many years ago, I was asked to write a digest of a popular business book written by a number of business scholars, which was to be used as a guide for training first-time supervisors. The project was a disaster for many reasons. Among them was that, having been reasonably successful in business even before studying it formally, I could see that some of the ideas presented were just dead wrong and often defied logic and common sense. (The most notable error was in the book's backward treatment of technology as a dictator of business processes and methods; Good to Great author Jim Collins more-accurately identifies technology as merely an accelerant of good or bad business methods.) The book also presented little practical information about actually forming or running a business.

Now, I hope to present a better resource here.

Why Study Business?

I believe that good business methods ultimately benefit everyone and every organization. Though I write primarily with for-profit businesses in mind, those within not-for-profit organizations or governmental entities should think of those whose interests are intended to be served by the entity as being analogous to a business's customers and investors.

Engaging in business, much as simply living life, is like any game: participants compete to reach their goals through learning how to use available resources to greatest advantage.

The Rules of the Game

Laws, industrial standards and other professional, technical and social conventions form a vast framework of rules that govern all people, whether acting independently or as parts of organizations. The first challenge to every new endeavor is to learn the rules by which it is governed. Recall the old (and often upheld) maxim, "Ignorance of the law is no excuse for breaking the law."

The Goal: Adding Value

As long as we comply with established rules, we may aspire to become successful businesspeople by constantly seeking ways to create the greatest possible value for our customers and investors.

What Is Value?

To understand the concept of value, I often find it useful to imagine a mathematical model in which the value of a particular product or service is equal to its total utility divided by its total cost, as below:

A Mathematical Model of Value
value    =   total utility 

total cost

The concept of value is central to the study of scientific management, which involves the collection of data to form the basis of decisions. It is also particularly relevant to purchasing and sales processes, which usually precede and follow the value add (often "conversion") process, as below:

Progression (left-to-right) of Goods and/or Services through an Organization
1. Procurement (Purchasing)
2. Value Add (Conversion)
3. Sales and Marketing

Maximizing Value Through Management

Managers plan, lead, organize and control the actions of the organization's portion they each have both responsibility for and authority over.

Managers' decisions should always be based and evaluated on how well they maximize the value provided by the organization.

Structuring an Organization

Early in my career, I learned to appreciate the foundational structure of companies while working for Nolan Bushnell, one of Silicon Valley's most prolific entrepreneurs and the Atari co-founder who turned it into what was once the fastest-growing company in the history of American business. (Within only a few years, Atari was surpassed for this title by Apple Computer, which was co-founded by one of Bushnell's former employees, Steve Jobs.) From Bushnell, I learned that a company should have exactly three chief officers, forming a triad of chief executive, financial and operating officers (commonly abbreviated c.e.o., c.f.o. and c.o.o., respectively), as below.

Management Structure of an Organization
Board of Directors
Chief Executive Officer
Chief Operating OfficerChief Financial Officer

Though there is often much discussion and negotiation among the three chiefs, within this arrangement:

  • the chief executive officer is ultimately responsible for managing the company's day-to-day operations and finances to assure that the company's overall direction is in line with the strategy established by the company's board of directors,
  • the chief operating officer devises methods (or tactics) needed to implement the strategy within the company's financial means, and
  • the chief financial officer accounts for the company's resources and financial position, and devises methods to optimize the use of its financial resources over time.

Too Many Chiefs

In the years since about 2000, many companies have added more chief officers with trendy titles, such as chief technology officer (c.t.o.) and chief information officer (c.i.o.). Especially among recruiters, this trend has also spawned the term "C level" (unfortunately pronounced the same way as "sea level") used to describe the new myriad of chief officers.

Ultimately, these officers all perform functions that fall under the purview of one of the three in the triad, usually the chief operating officer. So, I recommend maintaining tight "unity of command" (a concept I borrow from the United States armed forces) by limiting the number of officers to the three described above.

Related Articles

For further reading on business management, see Operations Management.

For further reading on economics, see P.O.W. Economics and Price Inflation.