Chapter 11:PLAN SECTION 6: MANAGEMENT AND ORGANIZATIONAL STRUCTURE

CHAPTER 11

Plan Section 6: Management and Organizational Structure

IF EVERYONE IS THINKING ALIKE, THEN SOMEBODY ISN’ T THINKING. – GEN. GEORGE PATTON

EVEN THE BEST PRODUCT or the most talented group of product developers cannot succeed without good company management and an appropriate organizational structure. In reality, wise investors will not take a serious look at any business plan that does not include participation by an experienced team of professional managers. Even if the plan is strictly internal to the company, describing team and management players is important. Each should have a proven track record in the specific industry or functional activity. Management and organization issues are particularly demanding for global companies and should always be analyzed in great detail in the business plan. Sadly, this area is often ignored while the plan drafter spends most of the time discussing new products. Good ideas are easier to find than good managers.

Senior Managers and Owners

If your plan is being written in part for outside investors it should include an extensive description of the company’s senior managers and owners, including: ■ Management team’s names, skills and experiences ■ Recruitment and compensation of senior managers ■ Directors’ names and experience ■ Owners’ names and ownership structure

MANAGEMENT TEAM’S NAMES, SKILLS AND EXPERIENCES The business plan should list the names of the managers in such a way that surname and given name are easily distinguished. This can have serious consequences when working with transnational/multicultural teams. Gender indicators should also be used to avoid confusion and embarrassment. Next, describe the skills, experience and performance record of the senior managers, and then relate these background items to the company’s needs. Do not merely list education and job titles, but also describe how they are related to their position and duties at the company. Investors want to know if managers’ experiences are applicable to the company’s purposes. To evaluate, they must understand the person’s previous career history. In addition, they want to see if the skills of the managers will carry the company through its takeoff. They do not want to worry about replacing managers soon after funding.

If the business plan is simply being prepared for internal use in connection with the launch of global operations, it should still include an inventory of the skills and experiences of senior managers. You may find that one or more members of the existing management team have prior experience in a particular foreign market or that they have worked with companies with an active global marketing or manufacturing strategy. These connections can be a valuable resource for recruiting new talent or understanding the problems that may confront the company as it goes global.

In many cases, some of the required managerial positions will be unfilled at the time the plan is being prepared. Therefore, your business plan should identify all the anticipated managerial staffing requirements, the anticipated timing for recruiting candidates to fill additional positions and the specific qualifications for such positions. For example, in the case of a start-up business, the company may delay bringing on an experienced chief financial officer until funding has been obtained. However, investors will want assurances that their money will be well protected once the investment is closed. For your global plan, key management positions in each of the target countries must be identified in advance. PLAN NOTE: Individual managers can be quite sensitive about how their work experience is presented in the business plan. Plan writers/editors should get each manager to write their own “mini-CV” based on guidelines (e.g., word count, applicable experience, etc.). Often “embellishments” have to be deleted, but this saves time and avoids bruised egos. It is also a good indicator of what each manager “brings to the table” for the new business. Often it is a matter of interpretation.

RECRUITMENT AND COMPENSATION The business plan should describe how the company intends to recruit and compensate its key managers. Compensation practices may vary substantially from country to country and no single answer will always apply across the board in any global organization. The business plan should describe base salaries, cash bonuses, equity incentive plans, profit sharing plans and other benefits that might be included in the overall compensation package. Remember that retirement and health benefits commonly offered to employees in one country may be a completely new concept in another country. Where such services are provided and highly regulated by the government, they may even be taxable. PLAN NOTE: Accordingly, you will have to determine what benefits can be provided on a company-wide basis. Whenever possible, compensation should be tied to specific business milestones. This is a particularly important strategy for entering a new foreign market. The formula should be fair to the manager and recognize the risks associated with the venture. Such compensation should also foster goal congruence.

DIRECTORS’ NAMES AND EXPERIENCE Assuming the business is organized as a corporate or limited liability entity, which is the predominant form of business organization throughout the world, responsibility for management oversight will be vested with a board of directors or similar body. Accordingly, the members of the company’s board of directors should be identified in the business plan, along with a description of their background, experience and how they became involved with the company.

Directorships should not be handed out carelessly and each director should be able to provide tangible value, experience and contacts to the business. ADVISORY: When the company is entering a new geographic area, it would be useful to have at least one board member with significant business experience in the area as well as contacts with local businesses and government agencies.

OWNERS’ NAMES AND OWNERSHIP STRUCTURE Certainly when the business plan is being prepared for prospective investors, it should include information on the current owners of the company and the ownership structure, including the economic and voting rights of the owners. For a corporation, this information would include the shareholders of the corporation and a description of the respective rights, preferences and privileges of their shares.

If there are a number of shareholders, it is probably sufficient to simply list the major shareholders unless a small shareholder has significant voting rights under a separate agreement. Obviously, the ownership structure of the company is important in negotiating the terms of any new investment. If the company has already received outside financing, new investors will look to the shareholder summary as a means for understanding the investment history of the company. For example, investors will look at the timing and pricing of the most recent round of equity financing and compare it to price per share (i.e., valuation) that the company is seeking in the current financing round. Investors will also be interested in the background and experience of prior investors, including their track record in backing successful companies in the same industry. Another thing to keep in mind is the possibility that one or more of the existing owners might have rights that impact the company’s entry strategies in a particular geographic area. For example, a company might receive investment funding from an Asian company in exchange for a right of first refusal in favor of the investor’s affiliates to distribute the company’s products in specified countries within Asia. ADVISORY: If the planners are considering using stock options as a form of compensation for employees it should be noted that this is not universally considered a legitimate form of compensation. Many countries have laws forbidding “deferred payroll” while others have complex rules for taxing the options. Planners need to seek out both accounting and legal counsel on this matter before proposing compensation and ownership structures.

Organizational Structure

Organizational structure can be a complex subject. This means there is no single best method that should be used to organize a company’s various functions and activities. Moreover, it is likely that the optimal organizational structure for the firm will change over time, as the company evolves, develops new products and moves into different areas and as changes begin to occur at the senior management level. Nonetheless, the business plan should describe how the company’s employees are organized and how the chain of responsibility for particular functions has been laid out.

A software development company, for instance, may organize itself

“horizontally” based on distinct business activities, such as research, product development, systems integration, production, marketing and sales, system management, service and support. Another company might organize itself around a particular product, drawing on functional specialists in each of the required areas (e.g., engineering, marketing, production, etc.).

Whatever structure you chose, it is important that the business plan: ■ Describe reporting responsibilities ■ Demonstrate how goals and objectives will be set ■ Indicate how performance will be monitored ■ Give guidance on how customers, suppliers and distributors will interface with the company ■ Explain how the company’s financial and budget planning systems will be connected so that senior managers can track allocation and utilization of funds for a particular project or activity

EVOLUTIONARY ORGANIZATIONAL ISSUES

New and small companies will likely have a very simple organizational structure. Most of their resources will be devoted to new product development, perhaps supervised by persons serving in other management positions. In such cases, a focus on product development means less attention is paid to the details of day-to-day operations and distribution.

As a result, the business plan must be evolutionary. It must set out the company’s plans for fully developing its organizational structure, first by bringing in experienced senior managers, and then recruiting the necessary human resources. If the company’s future depends on hiring talent in high demand (e.g., software engineers), the plan should also describe why the company believes it will be able to recruit whomever it needs.

The inevitable evolution of the organization means that the roles of various persons may change substantially over time. For example, the general manager of administration who additionally handles accounting, finance and human resources may have his or her duties split among three or four people. Similarly, the scientist who founded and managed the company in its earliest stages may ultimately return to the role of researcher and “technological guru” as new people are brought in to handle management tasks.

GLOBAL ORGANIZATIONAL ISSUES In developing the business plan for launching global operations, crucial decisions must be made regarding the overall organization of the company.

Similarly, the procedures that need to be implemented to facilitate the circulation of information within the company must be formulated. The organization structure for a global business must be strong enough to ensure that managerial authority is vested in those persons with the requisite skills and information to make the required strategic decisions. At the same time, the structure should be flexible enough to deal with unique problems that might arise in a specific region or country. This will make it necessary to allow for the assembly of functional teams to deal with new products and projects.

■ THE GEOGRAPHICAL STRUCTURE Although any one of a variety of organizational forms might be adopted by an organization as it builds global operations, one common choice is a hierarchical structure marked at the highest levels by segmentation based on geographic regions. For example, the chief executive officer of the company may designate a separate senior manager to head up each division for operations in the Americas (North and South), Europe and

Asia. The main reason for such a structure is the need for decisions to be made during the business day of the region in which they are applicable. In addition, of course, regional differentiation is the most reliable way to bundle markets with similar cultures, languages and environmental problems and solutions.

Each of the “top level” regions might be further divided into smaller and more natural geographic areas based on country boundaries, geopolitical links, language, social and cultural background or infrastructure. For example, the operations in the Americas might be divided into North and South (or English,

Spanish, Portuguese), each of which would have its own general manager with reporting responsibility to the senior manager of the Americas. In some cases, further layers of management might be added to the mix (e.g., United States,

Canada, Mexico, etc.). Too many levels of management, however, involve too many decision makers and slow the decision-making process.

Wherever geographic lines are finally drawn, the next step is for the manager of that region to select managers and staff who will have primary responsibility for the direction of specific products. The number of teams should approximate the major global product and service offerings of the company, thereby allowing communication among managers of the same product operating in different regions. Of course, it may be necessary to appoint additional managers to handle region-specific products that are not offered globally. In any event, each of the teams should have representatives from each of the functional areas relevant to the product, including accounting, finance, operations and marketing. Once the product is discontinued, members of the team can be reassigned to new projects within the same geographic area. ■ GLOBAL ROLE OF THE CEO Another organizational issue to consider is the changing role of the chief executive officer of the company as business expands into foreign markets and the structure of the company changes along the lines outlined above. The role of the chief executive officer will change significantly as authority and responsibility are passed to the senior managers in each of the geographic regions. As the organization grows, the chief executive officer will be spending more time allocating resources among the geographic regions and making sure that any decisions regarding global products are made and communicated in an efficient manner. Among other things, this means constructing a solid communications network that links product managers in different countries. Another key role for the chief executive officer is making sure that the board of directors is informed about the recommendations of senior management relating to the long-term strategy of the company. A well selected and highly informed board can provide the support necessary to manage the required resources.