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About this lesson

Operating managers are responsible for managing the day to day business operations.  Owners are ultimately responsible for success or failure of the business.  Ideally these two groups are working closely together.

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Operations and Ownership
60.8 KB Operations and Ownership - Solution
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Quick reference

Operations and Ownership

Operating managers are responsible for managing the day to day business operations.  Owners are ultimately responsible for success or failure of the business.  Ideally these two groups are working closely together.

When to Use Operations and Ownership

All businesses have both operating managers and owners.  In some cases, these are the same individual.  Normally owners take a long range strategic view of the business and operating managers are more focused on the short term execution of strategy and tactics.

Instructions

  • Operating managers run the business.  They are responsible for managing the day-to-day business processes.  They are making the decisions on how to implement the strategy and tactics of the operation.  Their decision will usually have an immediate effect on operational performance.
  • Operating managers are normally measured on how well the business is achieving key performance metrics that have been established by or with the owners.  These are normally measured monthly, quarterly, and annually. 
  • Owners are the individual with legal title to the organization’s assets once all liabilities have been paid.   The profit or loss of the business is borne by the owners.
  • Typically owners will take a longer term view of business performance than operating managers.  Although owners will hold the operational managers accountable if they consistently miss performance targets.
  • There are many legal forms of ownership and the details vary depending upon the laws of the country in which the organization operates.  However, they generally fall into one of three broad categories:
    • Publically owned corporation – in this case the owners are shareholders who can buy and sell the company stock to others.  The ownership can quickly change if there is run on the stock.  Shareholder owners normally have very little say in the day-to-day operations of the company.  They often will elect a Board of Directors who are to represent their interest in overseeing the company’s operations.  Publically owned companies typically have rigorous financial reporting requirements so that the public is fully informed about the business.
    • Privately owned corporations normally have fewer owners, often it is a small circle of family and friends.  There are usually less onerous financial reporting requirements since the shares are not traded publically.  In many cases, some of these owners will also be operating managers in the company.
    • Non-profit organizations usually don’t have owners, but they have trustees.  In many countries, non-profit organizations do not have rigorous financial reporting requirements.  The trustee’s role then is to provide oversight and ensure that the organization’s operating managers are acting wisely and not mishandling the assets of the organization. 
  • Many organizations require that senior operating managers have at least a small ownership position in the company.  This is to ensure that their interests stay aligned with the interest of owners, since they are themselves an owner.  Otherwise, the fear is that the operating managers will be short term focused on achieving the metrics and create long term problems for the organization.
  • Active owners can be a valuable asset to the company providing strategic oversight and direction.  Meddling owners can create havoc by constantly over-riding the decisions of the operating managers.
  • Passive owners do not get involved in operational oversight – they just cash the quarterly dividend check.

 

Hints and Tips

  • In publically traded companies, the owners typically exert their control by who they elect to the Board of Directors.  The Board of Directors is supposed to represent the owners in making strategy decisions, setting targets, and ultimately in hiring and firing senior operating managers.
  • Small family owned businesses often have family members in operational management positions.  This works well to balance the long term and short term view.  However, family politics can sometimes override good business decisions.
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  • 00:02 Hi, I'm Ray Sheen.
  • 00:03 Let's talk about the difference between being an operating manager for
  • 00:07 a company or an owner.
  • 00:09 I'll start by looking at things from an operating manger's perspective.
  • 00:15 Business operations managers are responsible for
  • 00:17 day-to-day business processes.
  • 00:19 These are the people who are really running the business.
  • 00:22 They're making the decisions.
  • 00:23 They are hiring,
  • 00:24 firing, promoting and assigning people to the work of the business.
  • 00:27 They usually are involved with strategic planning although they often share this
  • 00:31 responsibility with the board of directors or owners.
  • 00:34 They definitely are involved with tactical planning and
  • 00:36 the execution of business projects and initiatives.
  • 00:39 Operating managers are typically measured by the results of the current
  • 00:42 financial period.
  • 00:44 They have monthly, quarterly, and yearly targets.
  • 00:46 Their compensation, and often their job, depends upon meeting these targets.
  • 00:51 That is not to say they don't care about the long term, they do.
  • 00:54 They want the business to be a success so they will have a job in the future.
  • 00:58 But they're usually measured on what is happening right now.
  • 01:02 Businesses have owners, they can't exist without them.
  • 01:05 Owners are the people who legally have title to the business.
  • 01:08 If the business sold all its assets and
  • 01:10 paid its liabilities, the money left over belongs to the owners.
  • 01:14 Usually, in the proportion of their share of ownership.
  • 01:17 So, if a company makes money or loses money.
  • 01:19 It is the owners who ultimately feel the effect.
  • 01:22 Generally, owners will take a long term view of success or
  • 01:24 failure of the business.
  • 01:26 That isn't always a case for some publicly traded companies, people jump in and
  • 01:30 out of stock ownership to get short term profits, but that's not the common model.
  • 01:35 Most owners are in it for the long haul, and
  • 01:37 they want to see the business have sustained success.
  • 01:40 White there are many variations and nuances in the legal structure of
  • 01:43 business ownership, the practical result is one of these three conditions.
  • 01:47 First is publicly owned companies.
  • 01:49 These companies have stock that is traded on a stock exchange and
  • 01:53 there can literally be thousands of owners.
  • 01:55 Because of the public nature of the ownership,
  • 01:58 these companies have some pretty strict financial reporting requirements.
  • 02:02 Typically, the owners of these companies are represented by a Board of Directors
  • 02:06 that interacts with the Operating Managers to provide oversight and
  • 02:09 to present the owners perspective.
  • 02:12 The second type is privately owned companies, in this case,
  • 02:15 there are usually only a few owners.
  • 02:17 It may be family members or it may be a holding company, either way,
  • 02:21 there's a small body of owners who provide oversight and
  • 02:24 direction to the operating managers.
  • 02:26 The financial reporting requirements for
  • 02:28 these companies are typically less onerous than for publicly owned companies.
  • 02:32 Third type of ownership is for non-profit organizations.
  • 02:35 Incidentally, this has nothing to do with whether an organization realizes a profit
  • 02:39 or loss in their operations.
  • 02:41 These organizations do not have owners in a strict sense although there are trustees
  • 02:45 who serve in that role who provide oversight and strategic direction.
  • 02:49 The difference between a trustee and
  • 02:50 an owner is that non-profit organizations do not pay dividends to owners.
  • 02:54 Rather, they reinvest whatever operational profit they generate
  • 02:58 back into the operations to create improved services.
  • 03:01 Normally, trustees receive no compensation except for the reimbursement of expenses.
  • 03:06 Let's finish this discussion with the consideration of short term
  • 03:09 versus long term financial gain.
  • 03:11 It should go without saying, that operating managers and
  • 03:14 owners want to manage the business in a way that will make money.
  • 03:17 Let's look at what I will call active owners.
  • 03:20 These are owners who participate in managing the business.
  • 03:23 In the case of small family owned businesses,
  • 03:25 it may be the founder of the business or family members and friends.
  • 03:29 But even in large publicly owned businesses, operating managers are often
  • 03:32 encouraged or required to own stock in the company, to be both managers and owners.
  • 03:38 Active owners will likely be involved in strategic planning and
  • 03:42 investment decisions while operating their owner role, and they will be involved in
  • 03:45 day to day business operational decisions as part of their operating manager role.
  • 03:50 The obvious advantage of this is clear communications, but
  • 03:53 the disadvantage is that they sometimes have trouble detaching themselves
  • 03:57 from one role to do the work of the other role.
  • 04:00 So the active manager may be reluctant to make a strategic decision
  • 04:03 to close a facility because they manage the people in that facility, even though,
  • 04:07 as an owner, they can see the financial necessity.
  • 04:10 Active owners receive the quarterly dividend distributions that all
  • 04:13 owners would get.
  • 04:15 In addition, they usually receive compensation for
  • 04:17 their management position.
  • 04:19 Passive owners are not involved in day to day planning and decisions.
  • 04:22 In fact, they often only have limited direct involvement of strategic decisions.
  • 04:26 However, they do have a vote in electing a board of directors.
  • 04:29 Who was to represent the interest of the owners and
  • 04:31 provide oversight of the operating managers.
  • 04:34 The only compensation the passive owners received,
  • 04:37 is a quarterly dividend distribution.
  • 04:39 Operating managers and owners normally work together for
  • 04:43 the success of the company, both long term and short term.

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