Successful business principles: Beyond efficiency, the key to success

Business principles to follow after starting your business – Part 3

As we saw in the previous article, the first business principle that is related to organization states that as a business grows it is broken up into smaller parts for easier management and better productivity, and arranged in a functional structure as shown in Figure 1.

Figure 1: Functional structure  

I believe this principle to be a “Correct Business Principle” that should be used in all businesses to ensure Long Term Business Success

Now how do we manage these various functions which could be spread across many different locations? 

Until the 19th century, when most businesses were very small, management was done by owners using visual measurements.

With the advent of the industrial revolution and the growth of large businesses, it became important to develop a formal system of management using performance measures.

This led to the development of accounting and later cost accounting to manage and control large businesses which were divided into specialized functions and spread across multiple locations.

Today, we find that while top management usually uses holistic indicators like ROCE (Return on Capital Employed) to make long-term decisions, this is not the case at lower levels.

This is because indicators like ROCE are not very useful to functional managers in making day-to-day decisions and it is necessary to have a bridge between these decisions and the ROCE of the company.

Accounting and Cost accounting were developed to provide local indicators which would allow lower-level managers to align their functions with the overall objective of the business.

However, since most functional areas are cost centers, cost accounting has naturally focused on reducing costs or improving productivity in each function i.e. increasing efficiency.

This has resulted in the second business principle related to management of a business, which states that every function must be managed for maximum efficiency as shown in Figure 2. 

Figure 2: Managing a functional structure – Maximum efficiency

It is a common belief that improvements made in every function to increase efficiency, especially cost reductions, are good as they translate into cost savings for the company as a whole, which increases total profits.

In this worldview, every function in a business is considered to be of more or less equal importance, and management attention is spread as evenly as possible over the entire organization.

I believe this principle to be a “Wrong Business Principle” that should not be used by businesses as it will lead to Business Failure.

I will explain in my next article, what I believe is the “Correct Business Principle” related to Management that should be used in all businesses to ensure Long Term Business Success.

The author is the founder and CEO of Results Consulting Group. He is a recognized thought leader on helping entrepreneurs build and implement significant and lasting competitive edges in India and the GCC. The views expressed are personal. Email: [email protected], website: www.we-deliver-results.com