In advanced economic systems, firms can play a key role in producing economic goods, specifically private goods.
Economic activities carried out in firms can be grouped into functional areas, that is, subsets of processes characterized by a common function and by the specialized skill sets used in carrying out these processes.
Business areas are sets of processes relate to the same product/market. Business areas have their own costs and revenues. Firms may have one business area (mono-business firms) or more (multi-business or "diversified" firms).
For every firm, functional areas can be classified as follows:
Institutional Structure Design, determines the overall design by which the firm is created, and how it evolves. Activities relating to institutional structure design revolve around the creation, basic configuration, transformation, and termination of the organization.
- Founding the organization.
- Defining or changing its legal status.
- Designing governing bodies.
- Defining shareholder structure.
- Mergers, acquisitions, break-ups.
- Partnerships and alliances.
- Terminating the organization.
Operations, refer to the extensive set of activities by which the firm actually carries out economic production of goods and services, most of the firms' employees are involved in operations.
Operations are made up of five subsets:
- Core operations, purchasing production factors, carrying out physical/technical transformation, selling products). Usually can be broken down into the following functional areas:
- Research & Development, centers on activities which establish product features and production methods.
- Purchasing, buying all production factors and facilities.
- Manufacturing, centers on processing and assembling raw material and parts.
- Sales & Marketing, involves selling the firm's products while optimizing economic profitability.
- Debt and Equity Management, consists of that set of activities undertaken by the firm in order to cover its financial needs, that is, the need for financial resources which serve to establish the firm and support its development. When a firm utilizes debt capital for financing, costs are generated which are primarily associated with interest expenses on loans. Tapping into equity capital also implies a cost: compensation to be granted to shareholders.
- Management of non-core investments, certain situations may arise in which the firm has a surplus of funds, over and above what it requires for core operations. A firm would do well to invest these surplus funds in order to earn supplemental revenues beyond those resulting from core operations.
- Insurance Management, every organization is subject to general economic risk (inherent and non-transferable). Each organization, however, is also exposed to particular risks which can be "covered" by insurance. This type of risk relates to specific unfavourable events that is, a limited set of economic events within the organization. These specific risks are negotiable against payment of an insurance premium. The aim is to provide various forms of coverage for damages resulting from possible negative events within the context of core operations, finance, non-core investments, and in special facets of tax management.
- Tax Management, all firms are required to pay various kind of taxes in exchange for the right to utilize public goods provided by the State. Computing and paying taxes are activities referred to as tax management, which normally involves expenditure and not revenues.
Organization
- Organizational Design, refers to designing the organizational structure of the firm. Tasks are defined and assigned to units that make up the structure of the organization.
- Human Resource Management, all organizational systems pertaining to personnel, such as administering compensation and development.
Information, involves gathering, processing, and disseminating data and information needed to make good decisions and to provide information to all of the firm's stakeholders. Extreme variety and complexity of recipients, purposes, rules, and technologies involved. Many functional areas are becoming very data-intensive. A central component of a firm's information system is given by financial statements, which measure a firm's performance.