What Is Business

Table of Contents
Table of Contents 2
Introduction 4
Business Backgrounder 6
What kind of place is this? The Business Culture 7
What is organizational culture? 7
What defines the culture? 8
Handy's cultural stereotypes for different organizations 8
Power Culture 9
Role Culture 10
Task or Team Culture 11
Person Culture 12
Academic culture 13
The "Shamrock" organization 14
Culture: observe and ask 15
Spotlight on Startups 16
There is never enough money 16
There are never enough people 16
There is never enough time 17
One job may not be enough 17
Embrace uncertainty 17
Perks can be cool 17
Reality sucks 18
Business cultures are hard to change 18
The ingredients of business: capital and labor - Guess what you are? 18
Labor does all the work - why do we need capital? 19
Where does capital come from? 19
Labor expects to be paid for its work and investors expect to be paid for
their capital 20
What is a Profit and how do I make one? 22
Man, you have a gross income 23
When is income not income? 23
When are expenses not expenses? 24
Cash vs accrual 24
Profit - how much would you like it to be? 25
Losing money 25
Faking a profit 26
Accounting matters 26
How businesses are structured 26
Sole Proprietor 27
Private companies 27
Public companies 28
Partnerships 29
Not-for-profit companies 29
Vision and strategy 30
Two example visions: GM and Google 31
Why do you care? 32
Do strategies change? 33
How are businesses organized? 33
Functional organizations 34
Divisional organizations 35
Matrix organizations 36
Who are the rest of these people and what are they doing? 36
Manufacturing roles 36
Consulting and service firm roles 38
Administration and overhead roles 39
'Bored' of Directors 40
Virtual Reality: the future of companies 40
About Doug and dougsguides 42
Workshops 43
Introduction
Helping college students and graduates transition to the working world.
by Doug Kalish
Congratulations on leaving or getting ready to leave college, grad school, or your post-doc.
You've learned a lot, had fun and made friends. Now you're looking for a job and the reality is
sinking in... College hasn't fully prepared you for the Real World. Relax, and welcome to
dougsguides: a set of ebooks, workshops, and links built around the website
www.dougsguides.com. The guides in this series are:
Finding Your First Job

Who Are These Guys? Working with other people
Managing Your Boss and Your Career
Business Backgrounder
You should also check out my blog.
Who needs dougsguides?

You do, if you're a recent or impending graduate. Whether you are a science, engineering or
liberal arts major, you'll need a plan for getting the skills, recommendations, and contacts
necessary to get that first job.
Finishing graduate school? Then you really need the guides. You need information on how to
switch from an academic to a business mindset and understand the kinds of different business
cultures you'll encounter out there at startups, corporations and partnerships.
Done a post-doc? You have great technical skills but you're headed for your first real job. You
may be a success in the academic environment but you're going to have to develop some new
habits before you get into that job.
Been working for a couple of years? I'll bet you still could use some help figuring out how to work
with crazy people and a demanding boss. And it never hurts to get help on how to ask for a raise
or promotion.
Yeah, it's tough to get and keep a job these days. And it's not going to get easier any time soon.
Maybe this information will give you some insight that will help you out.
The version you are reading was published on Fri Feb 28 15:29:48 PST 2014. Please visit the
website for the most up-to-date information. (The links in this ebook will automatically take you to
the website.) Also, you can like dougsguides on Facebook and follow @dougsguides on Twitter
and connect with Doug Kalish on LinkedIn.
(c) 2011-2014, Douglas Kalish. All rights reserved.

Business Backgrounder
This is the basic stuff to help you understand the business
world and your workplace. Business is all about profit - do you
know what profit really is and the different ways to calculate it?
What about how the ways in which a company is financed can
affect the company culture? I'll tell you. And I'll help you
understand how the business strategy shapes just about everything
else about a company. Also, I'll give you an introduction to the way
some companies are organized so you can understand the
difference between Sales and Marketing, for example.
Lastly, the internet is changing whole industries for better or for

worse and I'll point out some trends to expect over the next ten
years that may affect the business you are in.
BEFORE YOU CLICK AWAY - WAIT A MINUTE! I know this stuff

sounds boring. I know you don't care. But this is important. Think of
it as getting a 'mini-MBA'. I'm not trying to turn you into an finance wizard, but there is some basic
stuff here that may help you understand why your boss is waiting until the start of the next budget
cycle to hire additional people, or how the company can have a giant stock price but still be losing
money. Or why partnerships go crazy trying to collect on their invoices at the end of each
quarter.
I once gave a talk to 200 members of the IT dept of one of the world's largest biotech firms. Not a
third of them knew anything about the process of drug development. That's not right. By
understanding business in general and your company specifically, maybe you'll
understand the otherwise inexplicable things the organization seems to do. Or maybe
management is just insane - but you'll be able to decide.
Continue reading online or purchase the entire contents of Business Backgrounder as part of the
dougsguides ebook.
What kind of place is this? The Business Culture
Things other than salary determine whether you are going to be happy
at your job. You need to feel valued, you need to like the people you are
working with and you need to fit into the corporate culture. Societies
have cultures which define the way people interact with each other and
what constitutes acceptable behavior and so do companies. (I'm going to
use 'corporate', 'business' and 'organizational' culture interchangeably, but
obviously not all organizations are corporations.) Picking the right place
to work is a lot like picking a college - you'll want a company that is
conservative if you are conservative, and wild and crazy if you are a freak.
I know it's hard in this job market to think that you can be choosy, but if you don't fit in with the
corporate culture, you'll probably be miserable and do a lousy job and get fired anyway. So take
some time to understand different corporate cultures and during your interviews, ask about
the culture.
What work culture would be a good fit for you? Take this quick assessment to find out.
What is organizational culture?
I can give you an idea of what corporate culture is by giving you some questions to ask about an
organization:
Does the organization appreciate and accept diversity?
Are employees treated fairly and rewarded for their accomplishments?
Are employees proud of their work and enthusiastic about the company?
Do employees understand the corporate strategy?
Does the company's brand reflect the company values?
Does the company openly communicate policies and company issues?
Do the company leaders provide strong and unified leadership?
Does the company tolerate, or even encourage, political infighting?
Does the company encourage questions about its mission, strategy and tactics?
How are disputes between employees and departments resolved?
Is the company investing in its employees with training and promotion programs?
Cultures can also be strong (where everyone understands and follows the culture) or weak
(everyone does their own thing). Companies with strong, positive cultures are great places to
work. Companies with strong, negative cultures (e.g., highly political, ruthlessly competitive
internally, confrontational) are hell on earth.
What defines the culture?
There are a lot of factors that can go into determining an organizational culture, including:
Management attitude: an aggressive, hard-driving, abusive boss communicates to the rest

of the organization that this behavior is not just acceptable, but encouraged
Markets served: banks have different cultures from breweries
Stage of life: startups will not have the roles, policies and procedures as compared to
established companies
Regulations: the government keeps a close eye on regulated businesses like financial
institutions or hospitals so that deviations from the rules can't be tolerated
Finances: cash-starved startups vs. any of the high-flying social network companies
The culture is also determined to some extent by the business structure, so take some time to
review those pages.
Handy's cultural stereotypes for different organizations
In his book Understanding Organizations (1976), Charles Handy, and organizational

design consultant, believed that the organizational structure is a main contributor to
the corporate culture and defined four types of cultures: Power, Role, Task and
Person. To those four, I have added a fifth: Academic Culture. The links below
describe the different corporate cultures.
Power Culture
Power is concentrated among a few people, and your relationship

with that person matters a lot more than your title.
Accordingly, there are few rules and not much bureaucracy in a

Power Culture because whatever the Chief says, that's the law. Very
early stage startups with charismatic leaders tend to be Power
Cultures, but you'll find them in other types of organizations as well.
Fashion, publishing, and film come to mind. In fact, "The Devil Wears
Prada" and the documentary "The November Issue" are perfect
depictions of Power Cultures. Apple under Steve Jobs and the early
days of Facebook were Power Cultures. Since access to the leader(s)
means so much, you can expect a lot of jockeying to be the Chief's
BFF.
The advantage of a Power Culture is that decisions can be made very quickly. However, the
calibre of the decision maker directly affects the quality of the decisions made. You have to
believe in the infallibility of the leader in a Power Culture or you'll be miserable.
You'll flourish in a Power Culture if you make relationships easily, can work in an less-structured
environment, and don't mind (or actually enjoy) the political wrangling.
Would this culture be a good fit for you? Take this quick assessment to find out.
(Click here to watch a video on this content)

Role Culture
Power derives from a person's place or role within a highly

structured organization.
Role Cultures are highly bureaucratic with detailed rules about how
people and departments interact with each other, customers and
vendors. Large, well-established companies like insurance companies
and banks tend to have Role Cultures because they have to. You have
to deal with too many people in the organization for personal
relationships to develop, so who gets to make decisions and who is in
control is determined by title. Also, policies and procedures are formalized into operating
manuals so that interactions are ritualized. The workflow and decision-making procedures are
documented in employee manuals which don't leave a lot of room for innovation or interpretation.
This means that management can be sure that roles are well-defined and that tasks will get
done without requiring a lot of thought or innovation on the part of the employees.
Role Culture companies will provide you with a lot of stability, certainty and continuity. But Role
Culture companies may have trouble adapting to, or generating, change. Every change in
workflow has to be carefully considered, the impacts weighed and then documented, and
employees have to be trained in the new methods.
If you like well-defined jobs with explicit expectations, a Role Culture organization is the one for
you.
(Click here to watch a video of this content)

Task or Team Culture
Teams are formed to take advantage of individuals' expertise at

particular aspects of solving a common problem, whether it is an
internal or external (client-facing) project.
The skills of the individuals are highly valued in a Task Culture, and
unskilled or incompetent team members are not well tolerated. Most
medium and large professional services, accounting, law and
consulting firms (like PricewaterhouseCoopers, Deloitte, Bain, etc.) are
Task Cultures requiring you to develop and expand a set of skills and bring them to multiple
projects. Independence, innovation and critical thinking are necessary, as well as the ability
to work with lots of different people on (frequently) demanding projects with tight deadlines.
Because individual skills are so important, the best firms in this area spend a lot of time and
money on employee education. In management consulting and accounting firms particularly,
you'll be offered (and required to take) courses to extend your expertise. Even if you can't stand
other aspects of the environment (particularly the workload), spending a couple of years getting a
paid education can pay off in the long run.
Firms with Task Cultures may have highly detailed workflow documentation like Role Cultures.
However, in a Task Culture considerable amounts of interpretation and judgment are required to
adapt the methodologies to specific client situations.
If you have a problem-solving mentality, can work in unstructured environments with evolving
objectives, and can manage criticism you will find Task Cultures challenging and fun.
(Click here to watch a video on this topic)

Person Culture
The expertise of individuals is considered more valuable than the

organization.
Person Cultures are typically found in professional partnerships, at

least in the past. Here, the lawyer or the doctor or the accountant who
leads a practice is the king (or queen). They are the 'rainmakers' (bring
in the clients), although they may or may not have the expertise to
deliver the services. Person Culture organizations are interesting places to work because they
can be loose collections of practices, each with their own resources (employees) and not
sharing much more than office space. (I once consulted for the ultimate Person Culture
organization: 10 partners who shared nothing but the name on the door. They had a dozen
different ways to charge each other for common items like rent, copiers, electricity, insurance, etc.
It was chaos and not at all fun for the employees).
Person Cultures differ from Power Cultures in that they are a collection of fiefdoms which aren't
arranged into a single hierarchy.
If you want to work in a small law or accounting office, you'll be working in a Person Culture.
(Click here to watch a video on this topic)

Academic culture
Power derives from your credentials, your ability to argue and

your results (frequently in that order).
To Handy's original description of four cultures, I've added a fifth: the

Academic culture. Companies with academic cultures look like
research labs. Your reputation outside the company (how your peers
in the industry view you) could count for more that your reputation
inside the company. These companies really are the translation of an
academic laboratory to a business environment. You might find them
in the R&D organization of a large company, but sometimes whole companies will look like this -
especially when a scientist has built a startup. Many biotech companies begin as Academic
Cultures.
The biggest challenge of an Academic Culture is that they are frequently oriented toward
technologies, not products or markets. This may be appropriate (at least for a while) if there is
a high degree of technological risk and scientific breakthroughs (like creating a cure for a
disease) need to be made to get a product to market. The serious downside is that the company
loses sight of the market in developing the technology. Scientists can become enamored of the
technology and end up developing a product that solves a problem that no one has, or more
seriously, will pay for. Lots of companies have technologies in search of a market.
If you are in a company with a great, technologically-sophisticated product, but no customers,

you're in an Academic Culture.
That said, if there is a market focus, and the scientists are willing to forgo great science in order
to build great products, these companies can be a great place to work.
(Click here for a video on this topic)

The "Shamrock" organization
In 1989, Handy published another book The Age of Unreason in

which he described the organization and cultures of companies of
the future. He called these 'Shamrock' Organizations because
they have three segments, like the leaves of a shamrock. Today,
we would call these Virtual Companies:
A core of qualified professionals working in a Task Culture

Contracted specialists in non-core areas like advertising, human
resources, information technology, etc., operating in a Person or
Role Culture
Part-time, seasonal and temporary workers to fill the gaps
working in Role Cultures
So, for example, a software company might have a core of technical software architects and
marketing people. They could outsource the actual coding to India or Eastern Europe. They
could hire an online advertising agency, get website design and hosting from Amazon, and have
HR and payroll functions outsourced. Lots of companies that make things use the same model
and have the manufacturing done outside the US. Movies have been made by virtual companies
for a long time; only a few people are permanent members of the production company. Everyone
else from the directors to the actors to the costumers, cameramen and limo drivers are contract
employees.
Whether this is good or bad, it is the way of the future. While there is less stability for the
contract employees, if you are a specialist you can find flexible and stimulating work with a variety
of employers.
If you want to determine how stable your job is, you should consider how close to the 'core'
business your role is. An HR person in a biotech firm is in a precarious position, but someone
who is delivering HR services in an HR-outsourcing firm can count on more stability.
Culture: observe and ask
At some companies, the only culture they have is the yogurt in the refrigerator. How are you
going to determine the culture during an interview? Simple: observe and ask.
Observe - What's the place like when you walk in? Does it seem friendly or cool? Do the
people you talk to look happy or are they just putting in the hours? As you walk past
people's offices and cubes, does it look like they can express some individuality in their
space? Are there actually people working there? (At some consulting firms, most of the
staff works offsite so the office is a lonely place). One thing I find very telling is whether
your meeting gets interrupted - either by other people, or phone calls, or email etc. I think
it's a sign that they either don't value your time, or the time of the person doing the
interview. I'm not saying it might not be an ok place to work, but you better expect that
pattern of interruption to be the norm.
Ask - During the interview, ask them about the culture. If they seem uneasy discussing the
culture, that's a warning sign. Some suggestions:
How would you describe the culture here? (BTW, don't expect them to use Handy's
categories above. They'll define the place as friendly, or independent, or hard-working).
Do office politics play a big part in getting things accomplished? (Maybe you like
politics. I don't).
Is there an orientation program? If so, what does it include? (This is a huge question.
Even at a small company, there should be some kind of orientation - even if it is just one
person showing you around and introducing you on the first day. If the only orientation is the
HR person throwing a W4 form and health care booklets at you, watch out. That's not a
people-oriented company).
What brand or image is the company trying to project? (Possible answers: "the
friendliest bank on the block", "the best selection at the lowest price", "bringing people
together through technology", "our customers are always right", "we are the smartest people
on earth", "do no evil")
What kind of training programs and promotional opportunities can I expect in the
future? (Companies that care about their employees will train and promote them).
How does [Engineering, Product Development, R&D, Production, Creative] get along
with [Sales, Marketing, Customer Service, Operations] ? (You'll have to fill in the blanks
here. The basic idea is to get an understanding of how the people who make the stuff get
along with the people who have to sell and deliver the stuff.)
That should be enough to get you started. Also check back on the questions about
organizational culture.
Spotlight on Startups
Lots of people ask me about what it is like to work in a startup.

I've had both the best times and some pretty miserable
experiences. It's fun to work with creative, smart people and build
something from nothing. It's fantastic to be involved in an IPO and
calculate your net worth every hour, even if you can't cash out for
six months. But it really sucks when you can't make payroll and you
have to pick, Sophie's Choice style, who stays and who gets fired.
There's one thing to look for in a potentially successful startup: urgency. Because, as you'll see
below, there is never enough money, people, or time, there had better be a sense of urgency in
hiring, product development, marketing and sales and everything else connected with being
successful. But urgency is not panic. It's doing things quickly, but thoughtfully and efficiently.
Panic - or its opposite, a lack of urgency - are huge warning signs for any company but they are
fatal to a startup.
Here's a video of a talk I gave on life in a startup.
Here are some observations:
There is never enough money
Every business has to watch the cash carefully, but in a startup it's a mantra. Managing
expenses to get the most out of every dollar is a fundamental entrepreneurial skill. Raising
money is time-consuming and takes attention away from product, people, and market
development. Having to raise money also can 'dilute' the existing shareholders (bringing in new
investors means that existing investors - and employee owners - each have a smaller piece of the
company). Expect that if you are working at a startup you'll be rewarded for finding the most
inexpensive solutions to any problem.
A corollary to the money problem is that you can expect to be compensated both with cash
and stock. Here's a link to an interesting calculator to see what others are being paid at startups.
There are never enough people
This is a corollary to the first point above. Startups need to do more with less, so hiring is done
only when urgently required. And since more startups are at the forefront of technology, there is
usually a shortage of the most skilled people because everyone is trying to hire them. On the
other hand, if you have the skills that are in demand, you'll be wooed and pursued. As I write this
(July 2011), Google is paying starting salaries of over $100,000 to recent grads with Ruby on
Rails experience. Revenge of the Nerds, indeed.
There is never enough time
Nothing can happen fast enough in a startup. It's a scramble to get the people, define and
develop the product, test the markets, get the customers and deliver and start on the next
version. There may be competition working on something similar or if you are successful you can
count on copycats to steal your ideas. The money is running out, the prospects are taking too
long to decide to buy, the customers you have are complaining about bugs and the new release
is late. Expect to work your butt off.
One job may not be enough
When I started at Scient I was the third executive hired, after the Founder and CEO. I was hired
with the lofty title of Chief Knowledge Officer and my job was to create infrastructure for acquiring
and maintaining the knowledge that our consultants would use to build our clients' ebusinesses.
That's a full time job. On the day I started the Founder said "Could you also be the Chief
Technology Officer and Human Resources Head until we can fill those positions?" Of course.
Since there are never enough people or time, you better expect to fill in any gaps where you
have expertise (and maybe in places where you don't have expertise like me and Human
Resources).
Embrace uncertainty
There is nothing more uncertain that building a product for a market that doesn't exist. When I've
lectured to budding entrepreneurs I ask them "What's the most important thing to put in your
business plan?" They'll respond with 'cash flow analysis', or 'capital structure', or 'marketing
plans'. The correct answer is 'flexibility'. Most startups don't go to market with the product
defined in the business plan, for the simple reason that it's impossible to know whether people
want the thing you are building until you try to sell it to them. Unfortunately, the developers fall in
love with their technology, or the marketers misjudge the market, and the clients don't feel
compelled to buy. Getting the right product at the right price requires a lot of trial and error - and
a lot of luck. The market will tell you what it wants - if you don't listen it will kick you in the
crotch.
Perks can be cool
Startups have a vested interest in keeping you working, so traditionally even though money is
tight, they tend to be well-stocked with breakfasts, lunches and dinners. Usually, it will be
cereal and microwave burritos and other stuff, but it will do. Here in Silicon Valley, you can also
expect a wide variety of caffeinated products. One startup exec told me that in the first month
after installing an espresso machine, he made back its cost in increased productivity. If you are
in a successful startup, meaning that there is actual revenue and the client base is growing
rapidly, the sky is the limit. Facebook, Google, etc. provide laundry, banks, drugstores and
everything else right on campus so that you never have to go home if you don't want to.
Reality sucks
I love the startup experience. The people are great, the possibilities seem tangible and success
is always just over the horizon. I've met the best and smartest people I know in startups. But the
reality is that most startups don't succeed. Most entrepreneurs will admit that there is a huge
element of luck in a successful startup. A startup needs that elusive combination of a product or
service that can't be easily duplicated, that either solves a pressing client problem or is something
people can't live without, a reliable and scalable infrastructure for delivery and support, and a
roadmap for constant improvement. Even with these things in place, success can be undercut by
problems in the external marketplace (like a global recession) or by other factors beyond
anyone's control. And by nature entrepreneurs are optimists and always see success just one
client or one release away. Go into a startup for the exhilaration, education and excitement, but
be realistic. When it stops being fun, it's just like any other job.
One situation to be aware of is the zombie startup - a company that should be dead but keeps on
living. Click on the link to see how to deal with one.
Business cultures are hard to change
Business cultures are notoriously hard to change. If it's a good culture, it's likely to stay good,
unless there is some external pressure like a shrinking market or the company habitually misses
profit or sales targets. If the culture is bad, expect it to stay bad without a significant change in
leadership. The culture starts at the top and the management of a crappy workplace usually
needs only a mirror to find the responsible party. It's become popular to write corporate mission
statements and values these days. The test of a strong business culture is whether the words
on those pages actually have any meaning and whether people are actually held accountable
for them. Early at Scient, I sat around a table with ten other people trying to agree on the values
statement. Our CEO said "I think we ought to have seven values, because I don't think I can
remember any more." I replied "I don't think the Scient values ought to be dictated by how many
our CEO can remember." To his everlasting credit, he thought that was hilarious and we agreed
to come up with a set of values that was meaningful and important to the organization. I think we
did end up with seven, but they defined how we interacted with each other and our clients and
vendors, creating the strongest organizational culture I have ever worked in.
The ingredients of business: capital and labor - Guess what

you are?
The two basic ingredients of business are capital (money) and
labor (people). Some people these days would add intellectual
property to that mix, but you can argue that is a kind of capital. In
the past there were totally barter-based business without capital
(like early farmers), and maybe sometime in the future labor will be
entirely replaced by robots, but for now any business you're likely to
work in will have both.
Some companies like to call their people 'human capital'. I think that's degrading and misleading.
They're people. Call them that.
Most businesses need outside capital because there is a timing difference between when a
product is developed and sold or a service is delivered and when those products or
services are paid for. There are a variety of sources of capital but in all cases (except for
government grants) the people offering the capital expect to be paid back more than they have
given you.
Labor does all the work - why do we need capital?
Starting a business without outside capital is called 'bootstrapping' [from 'pulling yourself up
by the bootstraps'] and it is notoriously difficult. The problem is that in any reasonably
complex business there is a lag between the time people get together to work to build
a new business and the time that revenue or income gets generated from that
business. And during that time, people need to get paid, rent needs to be paid; office
expenses, manufacturing expenses, sales expenses etc. all are accruing before there is any
money to pay them. Getting that money in advance from somewhere is called 'financing' the
business.
Different kinds of business require different kinds and amounts of financing. A guy
building an iPhone app might work at night or on weekends or live at home with his parents
and not need anything much in the way of financing. Building a pharmaceutical company, or
a car company, could require up to a billion dollars. There is a finance market just like there
is a supermarket - you can shop for the amount and kind of financing that is suited to your
business.
Where does capital come from?
If you are starting a business you'll find a lot of books and help out
there with different kinds of financing. I'm just going to give
everyone else an idea of financing options and how they differ:
Self-funded and bootstrap funding makes sense if you are

already rich, or the product or service you intend to sell is ready for
the market and you don't need to look for outside funding. It's
tough to make bootstrapping work, though, because there are lots of marketing and sales
expenses even after a product is developed. Even one-person consulting companies or
small service companies (like accounting or bookkeeping firms) will usually find a period
where they don't pay themselves because the money doesn't come in evenly over time.
Seed capital and angel investors are people willing to invest a small portion of their wealth
in very early stage companies, usually where there is only a concept of a product or a very
rough prototype. You might have to convince just one person to make the investment, so the
decision can be quick.
Venture capitalists (VCs) are small to medium-sized partnerships devoted to assessing,
valuing, and investing in companies. They pool money from wealthy individuals and
institutions (like pension funds and colleges) and spread that money over a portfolio of
companies. They are focused on their 'exit strategy' - how they will get their money back
(and more) - usually by taking a portfolio company public in an initial public offering (IPO) or
by having it acquired by an existing, richer company. Because their real clients are the Wall
St firms that will take the companies public, the VCs tend to act like 14-year old girls when it
comes to following fads. If investors are clamoring for social networking or green companies,
the VCs will happily oblige, whether or not the world needs another one.
Private equity refers to closely-held partnerships who typically provide financing for special
occurrences like buying a bankrupt company, splitting a company into component parts, or
taking a company private.
Partners can form partnerships, where each person contributes capital to the organization
from their own personal assets or by guaranteeing a loan from a bank or third party. If the
partnership runs out of money it can issue a 'capital call' to the partners to get them to pony
up more.
Lenders loan companies money and they expect to get paid back with interest over a period
of time (which can range from days to 30 years). The loan can be secured by assets of the
company. The loans are called 'bonds' and can be bought and sold like stocks.
Investors in public companies buy and sell stock on public stock exchanges, like NASDAQ.
The only time the company receives money is during an initial public offering (IPO) or
secondary or subsequent offering, or when company-owned stock is sold. The rest of the
time investors are trading between themselves.
The government also has a variety of loans and grants for small businesses, especially in
areas of defense technologies.
Labor expects to be paid for its work and investors expect to be paid for
their capital
With the exception of self-funding and government grants, none of the

financing money is free. Everyone expects to get back at least as much as
they put in and in most cases a lot more. If you've been lucky enough to get a
graduate student stipend or a grant, this might seem puzzling. After all, NSF or
NIH doesn't ask you to pay back your salary, and they didn't expect you to
develop a marketable product. Well, granting agencies are different from
investors, believe me. Investors or lenders are not giving you a grant and
they want their money back and more.
Part of this has to do with inflation, which decreases the buying power of money each
year. Suppose the inflation rate is 3% and you give me $1,000,000 for a year. Well, a million
dollars at the end of the year is only going to buy $970,000 worth of goods compared to the
beginning of the year. That's not a good deal for you, so you'll want me to pay back at least
$1,030,000 so you're even.
But there is uncertainty in the prediction of the inflation rate. Lately (since 2010) inflation
has been very low, under 1%, but in 1979 and 1980 it was over 10% per year. Imagine giving
someone $1,000,000 at the beginning of the year and getting back the equivalent of $900,000.
That would suck. If you are lending money for a year, you probably have a good idea of what
inflation will be, but sometimes money is lent or invested for 10, 20, or 30 years. You need to
make some assumptions about what inflation is going to do over that time in order to begin to set
the interest rate.
And it's the same whether you are lending money or investing it by buying stock in a company.
Your money is tied up and inflation is eating away at it.
But there's another problem: return risk. What if despite all my good intentions, I can't pay the
money back? Maybe the economy tanked, maybe a competitor came out with a better product,
maybe my gaming software caused people to go blind, etc. Tony Soprano would find a way to
get his money back, but those techniques are generally frowned upon. [By the way, don't take
money from Tony Soprano. Just saying.] So whether you get your money back will depend on
how good a business man I am, plus how tough my competition is, plus how good the economy
is, plus a lot of other factors you won't even think of until I tell you why I'm out of business.
Some people want to minimize this kind of risk. They'll only give money to big, established
companies with lots of sales and profits. If you are investing your retirement savings it makes
sense to minimize the risk of not getting paid back. Trouble is, in 2009 a big insurance
company, a big financial institution and a big car manufacturer all declared bankruptcy. So risk is
still a hard thing to measure. But in general, a company that's been around for a while, with good
products and reputation is supposed to be lower risk.
What about at the other end of the spectrum? One or two guys out of college with some hot
technology but no market and no way to generate revenue? Well, unless they are Larry and
Sergei, or Zuckerberg, that's a pretty risky venture. In fact, the rule of thumb for VCs is that out of
10 companies they invest in, five will die without returning a cent, two will pay back the
investment but nothing more, two more will do ok, but not great, and one will be Facebook. So
they have to plan for making back 10x their investment from every company (on paper) and hope
that a couple are going to actually strike it big because most won't.
So in general, the earlier the stage of the company, or the less developed the market, or
the less experienced the management, the more uncertain the product, the higher risk of
not getting your money back and the more you will demand from each investment to make up
for losses in other areas of your portfolio. So a bank might require 1-2% over the inflation rate on
a loan to IBM to account for return risk, while an angel or VC is thinking about 100-200% per year
to stay afloat.
But really, all we've been talking about getting your money back accounting for inflation and the
risk of the investment going bad. What's the point of that? You want your money to grow. But
you're not greedy. Maybe an extra 2-3% if you're lending to a big company, maybe 5-8% if you're
buying stock in public companies, and more if you are funding startups. So if you are taking
money from one of these financiers, you better have a plan for paying it back plus a lot
more.
Oh yeah, and you have to pay the costs of running the business too. So you have to find a way
to make that $1,000,000 you're going to get generate 10% return a year (in the case of an
established company) to over 100% a year (in startup) if you are going to have a reasonable
chance of paying back the financing.
How do you do that? It's called 'Profit'.
What is a Profit and how do I make one?

The concept of profit is relatively simple: you take the money
you've made from selling and deduct all of your expenses and
what you're left with is your profit. But in practice it's damned hard
to do - just ask the owners of any small business or startup. And the
concept itself gets complicated when you consider that some
expenses (like rent paid in advance or buying a computer) have an
impact in the future. And sometimes you might receive a lump sum
as income for services or products that you are going to deliver over
a period of time, requiring you to spend money in the future to deliver
those items. Various methods of trying to recognize the
subtleties of income and expenses have kept accountants in business for centuries.
This stuff can get very complicated but I'm going to try to make it simple. If you're not interested,
just remember that you are basically trying to make more money than you are spending - and if
you're not you have a problem and you better have plans to fix the problem before you run out of
money.
Man, you have a gross income
Just an aside here to get some terminology straight.
Sales, Gross Income, Revenue - these are usually the same thing: the money you receive
for delivering the goods or services from your company. It is just the money you have taken
in - no expenses are deducted from it.
Gross Profit, Gross Earnings - these are the income or sales figures minus the cost of
the goods sold. So if you make a widget for $25,000 and sell it for $100,000, your gross
profit or gross earnings is $75,000. If you are in a service or software business, the cost of
goods sold is the salaries you pay people to deliver the service or code the software.
Indirect expenses like administration, R&D, and the expenses to deliver or sell the goods
are excluded from the cost of the goods sold.
Net Profit, Net Earnings, Net Income - the "bottom line": start with the gross income and
subtract all the direct and indirect costs of doing business. Theoretically, this is the money
that is left and can be distributed to the shareholders or partners
So you see it's important when someone says their profit was $1,000,000 last year that you know
whether they are talking about gross or net. All in all you want the highest net profit (or earnings
or income) possible.
When is income not income?
Income, also called revenue or sales, is the money you get when you sell something. It's good.
And if everyone paid in cash at the time they bought or sold it would be easy to calculate
your profit by looking at the cash people paid you minus the cash you paid other people and
voila. But some people pay all at once in cash, some people pay over time, some pay in advance
(like a last month's rent deposit), and some people skip town without paying. If your customers
are paying you over time, but you have to pay your vendors when they deliver, you still
could be making a profit, but run out of cash (see the need for financing capital). Oh yeah,
and remember that there is a time value of money. That $10,000 you are paying on your student
loan isn't really worth $10,000. That's why you have to pay interest. That's why accountants are
paid a lot to figure out how much money is really coming in.
Sometimes even the cash that comes in shouldn't count immediately as income. Some
companies have a 'revenue recognition' problem. They receive payment for work to be done in
the future. Is it fair to count as income cash that you've received for work you haven't done yet?
Ask PricewaterhouseCoopers.
So a relatively simple concept like how much money you have made is complicated by when
you get paid and what you are getting paid for.
When are expenses not expenses?
It's the same with expenses. They can be paid all at once or over time. And they can be prepaid
or paid in advance. So if you are sitting on a lot of cash and pay all your vendors upfront,
but your customers are paying you over time, you can't just look at the cash at the end of
each month to determine whether you are making a profit. And it gets even hairier when you
consider that businesses can borrow money and have to pay only the interest for a while and then
have to pay back the principal (the original amount borrowed) all at once. Or a company may
sign a contract obligating it to provide services or warranties over several years.
How can a business know whether it is making money or not?
Cash vs accrual
It didn't take business people very long to figure out that differences in the timing of expenses
and income complicate the calculation of profit. And they sure didn't like waiting until the end
of the year to find out they weren't making a profit. So while simple businesses can still use cash-
based accounting, most businesses use variations on accrual accounting, which is an attempt
to rationalize income and expenses that will occur in the future. So if I get a contract to
deliver 10,000 widgets over a year and receive a lump sum payment for them, accrual accounting
gives me guidelines for when I can 'recognize' or account for the income. Conversely, if I sign a
10-year lease for an office and pay some of the money in advance, accrual accounting helps me
to figure out when the expenses should be subtracted from the income.
Now you'd like to think there are hard and fast rules for how to accrue income and expenses, and
for many situations there are. But there are also a lot of times when the company's
management and their accountants need to use some judgement about when the income
or expense is real. Here's a simple example: a credit card company in effect pays your bills for
you and then expects you to pay the money back over time. Their expense is the money they
have to pay your vendors, and their income is the money you pay them back over time. If credit
card companies used cash accounting, they would always look broke, since they pay the money
out immediately and then the income comes trickling in over time. In accrual accounting, they
need to make some estimates of when their customers are going to pay, how much they
are going to pay each month, and how many are simply not going to pay. Basically, they
have to predict the future. It should be obvious that if they want to maximize their accrual-based
profit, they should be optimistic about when and how much they are going to be paid, and figure
that only a low percentage of customers will never pay them.
It's the same in just about every other industry. Companies have to make estimates of when
they will get paid, what their inventories are worth, what obligations for future work (like warranty
service) they have, what the value is of stock options they issue is, how many customers will
never pay, etc. The bottom-line (pun intended) is that companies actually have some
leeway in recognizing revenue and expenses.
Profit - how much would you like it to be?
Accrual based accounting is a tool which can be used for good or evil. Some companies
want to maximize their profit, because that makes them able to pay good salaries, large bonuses,
and makes them attractive to investors and lendors if they need to get more cash. Other
companies, believe it or not, want to minimize their profits because they have to pay taxes on
them. So they hide away the actual profit in a maze of future expenses and bad debt estimates.
Occurrences of outright fraud are actually rare - but they are usually spectacular when they do
occur. Enron was an accounting fraud, for example. But instances of optimistic accounting
are commonplace.
Losing money
If you are paying out in expenses more than you are taking in, that's called a loss.
Companies that are losing money have to go to one of those financing sources we talked about
in order to get the cash to pay their bills. Companies can lose money for good reasons:
startups don't have product yet, so there are lots of expenses and no income. Or a company
expanding will have to invest in hiring people and new offices in advance of the (hoped-for)
increase in income. But there are probably more bad reasons for losses. Products or marketing
that suck. Competition that sells stuff cheaper. Crummy service.
Some companies that are losing money try to convince you that everything is ok...
Faking a profit
Sometimes companies that are not profitable try to convince you that they are. They will try to tell
you that they just had a one-time large expense, or they have invested heavily in their
infrastructure and aren't seeing the returns yet, or customers are slow to pay but will pay
eventually. They will take their computed "earnings" (another word for profit) and adjust them for
various factors. When you see the word 'adjusted' in front of 'earnings', it's a good time to
be suspicious. These adjustments invariably depend on optimistic assumptions. In the dotcom
era (God bless it), companies were always explaining away their poor income, by saying things
like 'we are counting eyeballs (users) not revenue right now'. Today, Groupon is asking investors
to look at Adjusted Consolidated Operating Income (ACOI). That's a mouthful. What is it? It's
income before subtracting the marketing expenses to acquire new users, which is about 33% of
all expenses. Huh? It could make sense if these are significant expenses incurred today to
acquire subscribers (the companies who offer the coupons) who will continue to use Groupon's
services for the future. If you are optimistic that the subscribers will continue to offer those
coupons, then go ahead and believe in the ACOI. Me, I like cash.
Of course, some of the companies in the dotcom era that spent tons of money to acquire new
customers did eventually end up owning their markets, like Amazon. The hard part is separating
them from the pets.com fiascoes.
Someone termed these manipulations as Earnings Before the Bad Stuff. I call it the triumph
of hope over experience.
Accounting matters
I hope you've learned something from this little jaunt into financing and accounting. While it may
seem dry and technical, there really is a lot of interesting stuff going on. And, frankly, you
need to know all this and more to be an educated employee, not to mention investor. Try to read
your company's financial statement if it's available to you: public companies have to file one every
quarter, private companies may release selected information, private partnerships usually release
nothing. Listen to what your management is saying about the numbers and ask questions, either
to them or your boss.
Don't shy away from the financial stuff - it's the lifeblood of business.
How businesses are structured

Businesses can be organized in a couple of different ways: as private
companies, public companies, partnerships, etc. The organization can have
a big influence on the kind of place it is to work. Let's look at the major
organizational types:
Sole Proprietor
As the name suggests, this is just one guy or girl working alone. It's the most flexible and
independent arrangement, though limited in what it can achieve since it's just one person. You
don't have to report to anyone (except the IRS) and you can pay yourself or not. A sole proprietor
is fully and personally liable for any debts or lawsuits against him or her.
Private companies
Many organizations start out as privately-held companies. The organizers, or founders, get
together and issue themselves stock in the company according to their contributions,
which can be financial (money), intellectual or real property, or the amount of work they
expect to do, or some other factor. That stock represents an ownership of the company, and
they can issue additional shares to themselves, or to new hires perhaps in the form of options.
They can also sell stock to other qualified individuals (usually considered to be experienced
investors), but not to the general public. Holders of stock can be compensated in a number of
ways. If the company is making a profit, some of that money can be returned to the shareholders
as dividends which could be divided up according to the proportional ownership of shares.
Companies don't have to pay dividends, though. Profits can be reinvested in the company to
help it grow, increasing the value of the shares themselves. The increased value of the shares
will be valuable if the shares are sold to someone else, or bought back by the company.
One of the nice things about privately held companies is that the individual shareholders are
not personally liable for the debts of the company. What this means is that if you are an
employee shareholder or an investor in a company that goes bankrupt, the creditors can't come
after you to pay the bills. This limitation of liability is an important aspect of corporations and
makes it possible to raise money from investors who can benefit if the price of the stock
increases, but aren't liable for the debts if the company fails.
Another nice thing is that privately-held companies don't have to publish their financial
status to the world. Since the general public can't buy and trade the stock it is assumed that the
experienced investors will have the intelligence to ask the right questions and evaluate the
investment opportunity.
Public companies
A public company is one whose stock can be purchased by the general public, for instance
through a stock exchange like NASDAQ, which greatly expands the pool of possible investors as
compared to a private company. In return for this opportunity, the government requires that
public companies publish statements of their financial status every quarter, and those
statements have to be confirmed or audited by an independent third party. This is because
financial bozos like you and me can buy the stock and the only information we have about the
company is what they tell us or we read in the paper. The auditing requirement is an attempt to
keep the owners honest about how the company is doing. Mostly the system works but there
have been notable failures due to fraud by the corporate management or incompetence on the
part of the auditors.
The price of the stock at any time is determined through a public auction in which a buyer
purchases the stock at a price she is will to pay from a seller at a price at which he is
willing to sell. Billions of shares of public company stock are traded in this way every day
around the world. Like in a privately-held company, investors are hoping that the company will
return some of the profit or earnings in the form of dividends, or that the value of the shares will
increase and the stock can be sold to capture the gain. It's important to understand that the
company doesn't benefit from the daily trading of the stock - those are transactions between the
buyers and sellers. The company makes money from the sales of newly issued stock only, at an
IPO for example (or stock that it has bought on the open market and then resells).
One of my friends once asked me "Since the company doesn't benefit from the daily trading, why
should they care if the stock price tanks once they have issued the shares?". There are several
answers to this. First, the managers and employees of the company may own stock and when
they go to sell it they want to see a nice, high price. Secondly, if the company needs to go back
into the stock market to raise additional money, they want to sell as few shares as possible to
raise the money they need. Remember those shares represent ownership of the company.
Which brings us to the last point. Since those shares represent ownership and (usually) voting
rights, if the shares are cheap someone else could buy them up and once they own most of the
company can throw out the jerk management who let the stock price slide. So management has
a lot of incentives to keep the stock price high.
Like in privately-held companies, the investors in public companies aren't liable for debts
of the company. So if the company goes bankrupt they can lose their entire investment, but no
more.
Partnerships
In a traditional partnership, people with common interests, resources and abilities bond
together in a financial marriage of sorts. They get shares in the business which are
proportional to their contributions (financial or otherwise), abilities, or some other combination of
metrics. At the end of the year, the profit is calculated and those profits are distributed among
the partners proportionately according to the shares they own. Unlike private and public
corporations, the partners are each personally liable for all of the debts of the partnership.
That means that if your partner does something stupid and costs the partnership millions of
dollars, the creditors can come after you for the money.
Partnerships were attractive as a business organization to many professionals like doctors and
lawyers and accountants. However, spectacular failures of some attorneys and accounting firms
dimmed their enthusiasm for joint liability. New structures like 'limited liability partnerships'
have been constructed which retain the profit-sharing aspects but make each partner
liable only for their own actions.
The distribution of profit and the joint liability have important impacts on the culture of
partnerships as we will see later.
Not-for-profit companies
These dougsguides are geared to for-profit businesses, but for completeness let me mention
something about non-profits. Organizations built to deliver charitable or other specialized
services may organize as a non-profit. This means that any money left over after paying
expenses (the profit in a for-profit organization) is not distributed to the shareholders or partners,
but has to be used to deliver the mission for which it was formed. The management of a non-
profit still can earn a salary - and in some cases a damned good salary - but any surplus of
income (typically gifts, grants, etc. but non-profits can also make and sell stuff) over
expenses stays in the organization to be used to further the cause. To encourage the
formation of non-profits, the government typically doesn't tax their income or real property,
although it will tax the income of the non-profit's employees.
Vision and strategy
The Vision of a company is the way that it views its products, its
markets, its customers and itself. The Vision answers the simple
question "Why are we here?". The Vision is a goal. It is not the same as a
strategy; business strategy tells you how a company is going to
achieve (or maintain) its Vision. The strategy is a plan, the tactics are
how the plan will be executed and the Vision is the end-result.
Another way to think about strategy is to look at the vision statement and
where you are now. If you haven't achieved your vision, your strategy is
what you need to do. If you have achieved your vision (pretty rare in the
business world), your strategy is how you will maintain that vision against
the inevitable competition.
Two example visions: GM and Google
General Motors' vision (as stated in their SEC filings):
"We have a vision to design, build and sell the world's best vehicles. Our executive leaderships
and our employees are committed to:
Building our market share, revenue, earnings and cash flow

Improving the quality of our cars and trucks, while increasing customer satisfaction and
overall perception of our products, and
Continuing to take a leadership role in the development of advanced energy saving
technologies..."
The Vision is to design, build and sell the world's best cars. How are they going to do that? The
strategy is to improve quality (which should increase customer satisfaction) and develop energy
saving technologies.
Google's vision (from their website):
"Google's vision is to organize the world's information and make it universally accessible and
useful." Their then-CEO Eric Schmidt put it a little differently: "We want to have a little bit of
Google in every transaction on the Internet."
How are they going to this? "Google's strategy is to combine the near-unlimited power of server-
side computing with its database of human behavior to create devices that are 'like magic'."
(Server-side computing just means the heavy work is done at their data centers, not on
your smartphone.) So it should be clear that Google's goal is to take a piece of every buy and
sell transaction on the the internet by providing the best available information and by
understanding what people want and how they act. (And they won't be evil, either, but that's
another story.)
Visions should be simple statements understandable by everyone, inside or outside the

company.
Why do you care?
So the vision is the goal and the strategy is the plan to get there. Why should you care?
Because everything about the company depends on the vision and strategy. If the
company's vision is to be 'the world's lowest cost provider of doodads, then strategies have to be
put in place to single mindedly cut costs from the development, production, and delivery of
doodads. That doesn't mean that the company itself can't spend a lot of money achieving its
vision. Maybe they have a huge R&D department dedicated to finding ways to make cheaper
doodads. But it does mean that if you, as an employee, come up with way to make an improved
doodad with more features, it will be considered 'off-strategy'. The vision isn't to make better
doodads, and it isn't to make them higher quality, or last longer. Build a cheaper doodad and
you'll be a hero. That's what matters.
(Aside: strategy is often about what NOT to do. One of my favorite Dilbert cartoons has a
panel called 'Before Strategy'. In it, Dilbert is one the phone saying "I don't know if we do that." In
the next panel, 'After Strategy', Dilbert is on the phone saying "We don't do that." You get the
idea.)
What's important to you is that you know and understand the vision and strategy and live it.
It's not helpful to make decisions or suggestions that aren't consistent with the strategy. Strategy
can, and usually does, impose constraints. One of my friends relates a story from a startup that
was building a chip which had to be of a certain size, which dictates the number of transistors you
can put on it. The junior engineers kept suggesting improvements and additions to the
functionality which would require more than the maximum number of transistors. They were all
good suggestions - and a total waste of time. Unless the engineers could also show how the
improvements could be implemented within the constraints of the chip size, it didn't matter how
good the suggestions were.
You may not agree with the strategy, but you'll have to live with it until it changes.
Do strategies change?
Of course, sometimes companies adopt the wrong strategy. Before the days of iTunes,
record companies resisted every attempt to distribute digital music, even going so far as to sue
consumers of their products. They were trying to protect the highly lucrative and profitable CD
business. Unfortunately, it was so easy to rip and distribute music that none of the protections
they put in place worked. Enter Steve Jobs and Apple who created a marketplace for digital
music. The record producers had to join in, CD sales went off a cliff, and now Apple gets a huge
cut of every song sold through iTunes. Could the record companies have developed their own
marketplace so that they wouldn't have to share the revenue with Apple? Maybe, but their
strategy was to protect what was in essence an unprotectable business.
The business world is littered with failed strategies. Technology changes, customers
demand something different, cheaper and better competitors show up - lots of internal and
external events can challenge the business strategy. The best companies review the strategy
early and often. How do you know if you have the right strategy? Go back to the vision and
figure out what has to happen to make the vision come true. Some of it is guesswork and
optimism. But no business ever succeeded without a strategy.
Changing strategies too often can also be a problem. A company starts out wanting to be the
high quality, low volume, high price producer of widgets. But nobody is buying. So they try to
become the 'celebrity widget' and pay a lot of bucks to some aging movie star to endorse their
widgets in an expensive ad campaign. That makes the movie star rich but doesn't move widgets.
So they decide to sell mass-market widgets at a mid-level price, but there is already a lot of
competition and they can't differentiate their widgets from anyone else's. Then they find that
nobody needs a high quality widgets, the cheap ones are just as good. So the company changes
strategy to produce low cost widgets, but they find the market is full of cheap Chinese widgets.
Lastly, they try to license their 'superior' widget-making technology to the other manufacturers.
Doom.
"Strategy-of -the-Week" companies aren't fun. Companies that change strategies over and
over don't understand their markets, or can't explain the value of their products, or what
problem their products solve for the customer. And changing strategy is expensive. They
burn through a lot of money very fast.
How are businesses organized?

There are three basic ways that companies can be organized:
by function, by division, product or geography, or in a matrix.
Each has it's particular advantages and disadvantages which I'll
point out. We'll look at examples of each.
Your company may not look exactly like one of the examples
because of particular business reasons, or for political reasons.
Obviously, a manufacturing company will have some departments
that a bank or a software company doesn't have and vice versa. Even in very small companies,
which tend to be 'flatter' (less hierarchical), you should expect to see roles similar to the
examples below. If you are unsure how your company is organized, ask to see the org chart.
Functional organizations
Just as you'd think, a functionally organized business is structured around business functions like
R&D, Production, Customer Service, etc.:
(from http://www.vertex42.com)
At the top is the Manager or CEO or President and all of the various business functions report to
him or her. In the diagram, the administrative functions of Finance and HR are shown off to the
side, but sometimes these are organized into an Admin dept. The advantage of a functional
organization is that people of similar skills and knowledge are grouped into a single department.
This makes training and apprenticeships easy, and it can provide an obvious career path for
advancement within the department. One disadvantage is 'siloing' - an 'us vs. them' attitude
between R&D and Marketing, for example. It can set up turf wars between departments when,
say, Marketing needs a feature added to the product, but adding that feature is not an easy thing
for R&D to do.
These kinds of organizations have to be managed carefully, or else no one takes

ownership of the products and blame-passing for problems becomes the norm.
Divisional organizations
In divisional organizations, the required business functions are grouped by product or geography,
or some other common theme:
Here, the obvious advantage is that product ownership is explicit -everyone in the division is
responsible for making sure the product is defined, designed, manufactured and
supported. There is less competition for resources across products and at least in theory there
should be less siloing among the business functions for a product. There will be competition
between the products for resources, and there can be a lot of duplication and waste in having
multiple business functions (like Accounting or Customer Service) for each line of business. In
some organizations, the common business functions might be removed from the product line and
placed in a common 'pool'. One big disadvantage to divisional organization is that it can be hard
to advance your career across the business lines and if the departments are small, the
opportunities for promotion might be limited.
Companies that have grown by acquisition will frequently have a divisional organization, because
it is easier to just make the acquisition a separate division than to try and integrate it into the
existing company. It is also easier to spin-out (sell) a fully functional division as a separate
company.
Matrix organizations
In matrixed organizations, the functional departments (like Marketing and R&D) contribute staff to
participate on products or projects, as needed:
The advantage is that employees still feel part of a functional group, can learn from their peers,
and can move from project to project. The Product groups don't need to support all the functional
groups and can use just the resources they require, when they are required. In practice,
matrixed organizations can still be siloed, with the most attractive projects attracting the best
people, and with hoarding of people and resources in anticipation of actual need. Employees
may not know exactly to whom they report - the function or the product line - which can create a
lot of stress if they are given conflicting instructions.
Who are the rest of these people and what are they doing?
My young friend Corinne asked me to include this section. She
went to work in product development after getting her PhD. On her
first day she wondered, "I'm building the product - what do we
need all these other people for?" Fair question. There is a lot of
care and feeding that goes into development, sales and support of
a product or service.
Let's look at manufacturing firms and consulting firms and see what kind of roles there are.
Certain roles are common to all organizations: I'll call those Administration and Overhead.
Feel free to add comments about other kinds of companies you are familiar with.
Manufacturing roles
Whether they're building a car or a smartphone app, companies that make stuff tend to have the
same kinds of roles, split between inventing the stuff, producing the stuff, and selling the stuff. In
some companies each of these roles is a separate department; other companies might combine
Production and Quality Control or Marketing and Sales, for example.
Research and Development: These are the engineering types who are typically hired for
their technical skills. They love to make stuff, they like challenges, and are fond of
solutions that don't just work, but work elegantly (meaning they're clever and efficient).
Some companies split pure Research (finding a solution to a technical problem) from
Development (making the Research solutions into buildable, sellable products). A good
R&D department needs input from customers (either directly or through Marketing) to
understand what the real problems are. A bad R&D department elegantly solves really
tough technical problems that no one cares about.
Production (Manufacturing): The Production or Manufacturing dept obviously makes the
stuff that the company sells. But it has to work closely with Development and Research to
make sure that what comes out of Development is something that can be built, tested, and
maintained at a profit. Good production people are very process oriented; they want to do
things according to the book with no deviations, and they pay attention to the details.
Quality Control (Testing): It's the job of the QC folks to make sure that what comes out of
Production actually works. In company that manufactures stuff, they will devise tests that
every product (or a sample from a production batch) has to pass before it is shipped. In a
software company, QC usually works with the developers to find bugs (although many
companies are letting their customers take on the QC task).
Shipping: Big companies and those that deal with big or delicate or expensive or huge
numbers of items will have a separate dept devoted to packaging and shipping the stuff
quickly and efficiently. Sometimes figuring out the fastest and cheapest way to deliver the
stuff becomes very complicated and is called Logistics.
Customer Support: Once the product is in the customer's hot little hands, they'll contact
Customer Support if they have questions or anything goes wrong. Companies want to
spend as little on CS as possible, so they should invest a lot of time in building reliable,
robust and easy to understand products. But they can also cut costs by outsourcing CS
and putting up online support forums so customers can help each other.
Marketing: It's Marketing's job to understand what customers need and will pay for (these
are two different things). This can be a challenge because sometimes the customers
themselves don't know. There are two kinds of Marketers: the Listeners and the Talkers.
The Listeners try to understand what people want by figuring out what their problems are
and finding out what solutions will work. The Talkers tell people what their problems are
and show them how the company can solve them. Both can be successful.
Sales: The Sales dept is the connection to the outside world. The job of Sales is finding
people who have problems that the company's products can solve at a price they can
afford. You'd like to think that Sales is a rational process of evaluating customer needs and
demonstrating the value (cost vs. benefit) of the product as a solution. In practice, emotions
and personalities can play a large part in Sales and really good salespeople know when to
use an argument and when to use emotion. Good salespeople are special folks: they are
competitive, compassionate, and each lost sale makes them try harder on the next one.
Consulting and service firm roles
Service firms, like attorneys, accountants and business consultants have a simpler set of roles as
compared to manufacturers. Because they tend to be Task Cultures, each person's role is
defined by their particular skill and skill level. Projects are staffed by people with different skills
appropriate to the task. Still, there are a couple of different roles:
Knowledge workers (Skill Staff): At a law firm, these are the lawyers and associates; at
an accounting firms, it's the accountants. The staff are differentiated not just on how much
expertise they have, but the kind of expertise. So a law firm may have corporate lawyers,
or tax lawyers, or estate lawyers, or criminal lawyers, etc. A firm that builds websites could
have business strategists, website designers, user interface experts, online commerce
experts and database programmers. Some may be entry-level people, others may be
world-known experts.
Account executives: Many service firms have determined that their skilled staff are
excellent at what they do, but they are lousy project managers. It's a completely different
skill, so they hire account managers whose job it is to recruit and organize the different
kinds of expertise in the firm needed to solve the client's problem. The AE also serves as
the central point of contact for the project, so if there is a problem the client doesn't have to
figure out who on the project is responsible for the resolution. The AEs are also responsible
for preparing, and defending if necessary, the invoices to the client.
Sales and Marketing: Some firms rely on the partners and senior skill staff to find new
business, or they have 'super-AE's' who have that responsibility. Others recognize that
technical expertise and project management skills don't equate to finding and signing new
customers. Being a sales person in a service organization can be a tricky business though.
The salespeople have to understand enough of the client's problems and the firm's
expertise to be able to match them up, but they don't have the depth of knowledge to
actually address the problem.
Administration and overhead roles
The main roles in the company administration are the "CxOs" - the Chief Something Officers:
CEO - The Chief Executive Officer is the person given the task of fulfilling the tactics and
strategy of the company as decided by the Board of Directors.
CFO - The Chief Financial Officer is responsible for managing the money, which includes
setting revenue targets, controlling expenses, and raising cash if necessary. In some
organizations, the CFO is also responsible for the day to day operations, but in others that
is the duty of the COO.
COO - If the company has a Chief Operations Officer, then the CEO is likely to play more of
a strategic role while the tactics of making the company run on a day to day basis are
handled by the COO.
CIO - The Chief Information Officer is usually a highly operational (meaning dealing with the
tactics and implementation) of the technology infrastructure, especially computers, phones,
databases and other specialized information systems.
CTO - Companies which are technology-based (like software or computer hardware
manufacturers) may have a Chief Technology Officer who is responsible for the strategic
(long term) selection of technologies, both for internal use and in the company's products.
If there is no CTO, these functions can be performed by the CIO.
CMO - The Chief Marketing Officer is responsible for making sure that the company's
products are designed and produced to fit the needs of the clients, and with a set of
features and a price which differentiate the products from the competition.
CSO - In a biotech, pharmaceutical or otherwise science-based firm, there will usually be a
Chief Science Officer who is responsible for making decisions about the direction of
research and product development, serving a role similar to the CTO in a technology firm.
CPO/HR - Some companies call their Human Resources Director the 'Chief People Officer'.
HR is responsible for managing the hiring and firing process, selecting and delivering the
benefits packages, orientation programs, employee education programs, and complying
with the thousands of federal and state laws regarding employees.
This is just a sampling of the CxO's. Feel free to add others you have encountered in the
comments.
'Bored' of Directors
If your company is organized as a corporation (as opposed to a partnership), the CEO is

accountable to a Board of Directors who, at least theoretically, have the ability to hire and fire
the CEO and decide his or her salary. In most privately-held companies, the CEO selects a
'friendly' Board and the CEO herself may serve as the Chairman of the Board. In a startup with
venture capital or other outside funding, the investors will demand seats on the board and if the
company isn't performing well, will really put the screws on the CEO.
In public companies, the board is elected by the shareholders to protect their investments.
The board is supposed to be independent from the company's management and
underperforming CEOs should be summarily dumped. In practice, many public boards are
'interlocking' meaning that if you put me on your board, I'll put you on mine. Since the Enron
scandal and the financial disasters of 2008, a lot more scrutiny is going into the composition of
boards of public companies, and especially to the committees which are responsible for executive
compensation. Whether this has had an effect on how good corporate management has become
is something for you to decide.
Virtual Reality: the future of companies

Have you ever wondered why do companies exist in the first
place? It may seem obvious now, but consider that only a
couple of hundred years ago most people were farmers and
artisans, working in very small groups. The corporation as we
recognize it really started in the 1500's and 1600's during the era
of colonialism. Corporations were formed to raise capital to buy
ships and pay crew who would go off to exotic places and bring
back spices, cloth and other cool stuff to sell and repay the
investors. (The ship's captains were the equivalent of today's Silicon Valley entrepreneurs.)
Companies really took off during the industrial revolution when manufacturing required masses
of complicated machines with lots of labor and many steps between the raw materials and
finished product.
So if all the skills and materials needed to produce something are available in the
marketplace, why cluster them into corporations? A guy named Ronald Coase suggested
that it is more efficient for a company to have a captive labor force and pay them a fixed salary,
than it is to hire more people when demand is high and fire them when demand is low. He
concluded that corporations would form when the transaction costs inside the company are
cheaper than it would be to transact the same business outside the company.
Building a company to minimize transaction costs made sense right up until Al Gore invented the
internet (just kidding). It also made sense when you were building some big, heavy, or
complicated mechanical or electronic device. In today's information age, a lot of the
transactions that take place involve data which can now move anywhere on earth very
cheaply. What's the result? Outsourcing of activities that either aren't core to a company's
business or can be done by cheaper labor.
Some companies have always found it cheaper to acquire the labor and materials on an
as-needed basis. The film industry, for examples, hires the directors, cast and crew they need,
and those people come together for the weeks or months it takes to film, and then everyone is
fired until the next picture. You're going to hear about more 'virtual companies' - who
outsource most or all of their activities. The biotechnology industry is one particularly in which
startups can begin with some intellectual property and outsource the R&D, clinical studies,
application to the FDA, manufacturing and distribution of drugs. It's a rare company these days
that doesn't outsource some component of its business or services. (See the discussion on
Shamrock Companies, too).
What does this mean for you? Well, if you live in a cheap wage country, congratulations. You'll
be seeing more opportunities as work moves to you. If you live in a high wage country, you might
want to consider what aspects of your job could be done cheaper somewhere else. Think about
ways you can increase your value to the company. Expect that you'll need to manage your
career and continue your training and education to stay current and useful. And expect that you'll
be changing jobs several times over your career and build up a cash cushion both for the times
you might be out of work and for your eventual retirement. Or move to one of those low-wage
countries where you can be a star.

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Table of Contents

Helping college students and graduates transition to the working world.

Finding Your First Job

You should also check out my blog.

Who needs dougsguides?

(c) 2011-2014, Douglas Kalish. All rights reserved.

Lastly, the internet is changing whole industries for better or for

BEFORE YOU CLICK AWAY - WAIT A MINUTE! I know this stuff

What is organizational culture?

Management attitude: an aggressive, hard-driving, abusive boss communicates to the rest

Handy's cultural stereotypes for different organizations

In his book Understanding Organizations (1976), Charles Handy, and organizational

Power is concentrated among a few people, and your relationship

Accordingly, there are few rules and not much bureaucracy in a

(Click here to watch a video on this content)

Power derives from a person's place or role within a highly

(Click here to watch a video of this content)

Teams are formed to take advantage of individuals' expertise at

(Click here to watch a video on this topic)

The expertise of individuals is considered more valuable than the

Person Cultures are typically found in professional partnerships, at

(Click here to watch a video on this topic)

Power derives from your credentials, your ability to argue and

To Handy's original description of four cultures, I've added a fifth: the

If you are in a company with a great, technologically-sophisticated product, but no customers,

(Click here for a video on this topic)

In 1989, Handy published another book The Age of Unreason in

A core of qualified professionals working in a Task Culture

Lots of people ask me about what it is like to work in a startup.

Here's a video of a talk I gave on life in a startup.

Here are some observations:

There is never enough money

There are never enough people

One job may not be enough

Perks can be cool

Business cultures are hard to change

The ingredients of business: capital and labor - Guess what

Labor does all the work - why do we need capital?

Where does capital come from?

Self-funded and bootstrap funding makes sense if you are

With the exception of self-funding and government grants, none of the

How do you do that? It's called 'Profit'.

What is a Profit and how do I make one?

Just an aside here to get some terminology straight.

When is income not income?

How can a business know whether it is making money or not?

How businesses are structured

General Motors' vision (as stated in their SEC filings):

Building our market share, revenue, earnings and cash flow

Google's vision (from their website):

Visions should be simple statements understandable by everyone, inside or outside the

How are businesses organized?

These kinds of organizations have to be managed carefully, or else no one takes

If your company is organized as a corporation (as opposed to a partnership), the CEO is

Virtual Reality: the future of companies

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