CATEEL VOCATIONAL HIGH SCHOOL

SENIOR HIGH SCHOOL

Chapter 2
THE ORGANIZATION AND
ITS ENVIRONMENT

Organization and Management 12

 LEARNING OBJECTIVES:
To understand the three options – sole proprietorship,
partnership and cooperation – under which an
entrepreneur could organize and their impact to his/her
business.
To appreciate the importance of organization analysis
and design in determining the appropriate hierarchical
structure of the company
To be aware of the stages of development of
organizations
To know the government-required steps in starting a
business
 IMPORTANT TERMS
• Proprietor – a person having the exclusive title to anything; owner
• Stocks – is a type of security that signifies ownership in a corporation and
represents a claim on part of the corporations assets and earnings.
• Credit – is a contractual agreement in which a borrower receives something
of value now and agrees to repay the lender at some date in the future,
generally with interest.
• Liability – is a company’s financial debt or obligations that arise during the
course of its business operation.
• Firm – is a business organization, such as a corporation, limited liability
company or partnership that sells goods or services to make a profit.
 2.1 NATURE OF ORGANIZATIONS
Illustration:
Let us assume that Mr. Chua’s grocery business has grown by leaps and
bounds. He’s planning to open up a branch in a more strategic place near
busy Cubao. This will be handled by his son whom he has already trained in
running his grocery business.
Mr. Chua has reached the crossroad of his business. Like any
entrepreneur who started small but suddenly saw the growth of his business, he
began to wonder how he should get organized to face the challenge of the
future.
Shall he remain as a single proprietor-owner or dilute his ownership by
asking some of his trusted relatives and friends to be part owners and
contribute more money for his expansion plan?
 2.1 NATURE OF ORGANIZATIONS
• To put up a branch, Mr. Chua needs more CAPITAL to buy a commercial lot
and to construct a building for his second grocery.
• He has to improve his credit standing by buying grocery goods payable in 60
days or more.
• To get a loan from the bank, his present assets are not enough to serve as
guaranty
So, he needs associates in his expanding business. What’s the best
approach in organizing and what are the advantages? He consulted a lawyer-
friend and he was given three options.
 2.1 NATURE OF ORGANIZATIONS
First option: is to remain as single proprietor.
• in this form, Mr. chua as a single person holds the entire operation as
his personal property, managing it on a day-to-day basis. Most
businesses are of this type.
• Steps in starting up a business, sole proprietorships are attractive to
small investors because they are relatively easy to start up.
• also, the owner is entitled to all the profits that the sole proprietorships
collects. On the other hand, sole proprietorships can be risky because
there is no separation between the owner and the business.
 2.1 NATURE OF ORGANIZATIONS
Advantages:
1. Formation: less complicated in preparation of documents and
cheaper compared to starting a formal corporation.
2. Tax benefits: no requirement to file a separate business report. One
will list the business information and figures within his/her
individual tax return.
- the business will be taxed at the rates applied to personal
income, not corporate taxes.
3. Decision making: business decision remains the responsibility of the
owner. The owner can also fully transfer the sole
proprietorship at any time as he/she deems
necessary.
 2.1 NATURE OF ORGANIZATIONS
Disadvantages:
1. Liability- the business owner will be held directly responsible for any
losses, debts, or violations coming from the business.
2. Taxes- while there are many tax benefits to sole proprietorships, a
main drawback is that the owner must pay self-employment taxes.
3. Lack of “continuity”- the business may discontinue if the owner
becomes deceased or incapacitated.
4. Difficulty in raising capital – generating the capital or the initial funds
is usually provided by the owner. Sole proprietorships do not issue
stocks or other money-generating investments unlike corporations.
 2.1 NATURE OF ORGANIZATIONS
Second option: Partnership
• A partnership is a single business with two or more people sharing its
ownership.
• Each partner contributes to all aspects of the business, including
money, property, labor or skill.
• In return, each partner shares in the profits and losses of the business.
• It is important that potential business partners discuss a wide variety of
issues up front and develop a legal partnership agreement.
 2.1 NATURE OF ORGANIZATIONS
This agreement should:
• Document how future business decisions will be made such as how
the business partners will divide profits
• Resolve differences in decision-making
• Change of ownership (bring in new partners or buy out current
partners) and;
• How to dissolve the partnership
 2.1 NATURE OF ORGANIZATIONS
Advantages:
1. Easy and Inexpensive- partnerships are generally an inexpensive
and easily formed type of business structure.
2. Shared financial commitment- each business partner has equally
invested in the success of the business.
- Partnerships have the advantage of pooling resources to obtain
significant capital.
- This could be beneficial in terms of securing credit, or by simply
doubling your initial money or capital in the business.
 2.1 NATURE OF ORGANIZATIONS
3. Complementary skills- a good partnership should be able to utilize
the strengths, resources, and expertise of each partner.
4. Partnership Incentives for Employees- partnerships have an
employment advantage over other entities if they offer employees
the opportunity to become a partner.
- Partnership incentives often attract highly motivated and
qualified employees.
 2.1 NATURE OF ORGANIZATIONS
Disadvantages:
1. Joint and Individual Liability
similar to sole proprietorships, partnerships retain full, shared
liability among the owners. Partners are not only liable for their own
actions, but also for the business debts and decisions made by other
partners.
2. Disagreements Among Partners
with multiple partners, in the business, there can disagreements
like management styles, salary schemes, etc. That is why it is important
to consult each other on all decision making having to compromise
and resolve disputes.
 2.1 NATURE OF ORGANIZATIONS
Disadvantages:
3. Shared profits
because partnerships are jointly owned, each partner must share
the success and profits of their business with the other partners. An
unequal contribution of time, effort, or resources can cause dispute
among partners.
 2.1 NATURE OF ORGANIZATIONS
Third option: Corporation
• Business owners opt to form corporations to protect themselves
against financial and legal liabilities.
• A corporation is a type of business that keeps the dealings, assets, and
bank accounts separate from his/her personal assets.
• The investors are only shareholders of the corporation. However,
investors will elect a set of board of directors responsible for the
different policies and vision for the corporation.
• Usually a corporation has the following key personnel: a president, a
secretary, and a treasure, although there can be other officers, such
as vice presidents.
 2.1 NATURE OF ORGANIZATIONS
Advantages:
1. Separate legal personality- a corporation, once registered with the
Securities and Exchange Commission and is issued a certificate, has
acquired a legal personality separate and distinct from its
stockholders. It can sue and be sued.
• Shareholders of the corporation are not liable to
obligations the corporations contracts into like debts,
negligence or wrongful acts of the corporation.
 2.1 NATURE OF ORGANIZATIONS
Advantages:
2. Ease of raising funds- in a corporation, it is easy to raise additional
funds since it has the option to sell shares of the corporation.

3. Continuity- it can have a perpetual existence, which means it can

outlive its owner because it is a separate person in the eyes of the
law. This means investors don’t have to worry about the untimely
demise of the owners. It also allows the corporation to plan for the
long term.
 2.1 NATURE OF ORGANIZATIONS
Advantages:
4. Ease of transfer of ownership- it’s easy to transfer ownership interests
in a corporation. The board of directors can authorize the issue of
shares of stock in exchange for investor’s capital infusion into the
company.
5. Credibility- a business with an incorporation or ‘Inc.’ sign after its
name often sounds more credible in the business context. One most
likely attracts more partners, customers, and attention from the
community.
 2.1 NATURE OF ORGANIZATIONS
Disadvantages:
1. More time and money spent in organizing- in a corporation, it will require
more time and money than forming other sole and partnership business
type.
2. More paperwork- several documentations and paper works required by
governmental agencies monitor corporations. The state also requires the
filling of the annual reports. And they have to file corporate income tax
returns as well.
3. Higher tax- corporate profits may be subject to higher overall taxes since
the government imposes taxes on profits at the corporate level and again
at the individual level, if such profits are distributed to the shareholders.
4. More costly- there are required number of board meetings and annual
shareholder meetings/sessions. All of these meetings will incur expenses.
 NATURE AND ROLE OF THE FIRM
a. HUMAN RESOURCE MANAGEMENT
 human resource management is the entire spectrum of
management of people that serves to maximize their performance in
order to meet the organization’s strategic objectives.
 it covers, among others, the major functions of recruitment, selection
and placement, training and development, employee relations, and
compensation and benefits administrations.
 NATURE AND ROLE OF THE FIRM
b. MARKETING MANAGEMENT
 according to Business Case Studies, “Marketing is the management process
responsible for identifying, anticipating, and satisfying consumer
requirements profitably”.
 is the process of developing strategies and planning for product or services,
advertising, promotions, sales to each desired customer segments
(Wikipedia, 2017).
 NATURE AND ROLE OF THE FIRM
c. OPERATIONS MANAGEMENT
 operations management involves overseeing, designing, controlling the
process of production, and redesigning business operations in the
production of good and services (source: eNotes).
 in a manufacturing setting, the company has to ensure the design of
effective and efficient production process, timely acquisition of raw
materials needed for production, deployment or adequate number of
trained workers, and the proper maintenance of equipment and other
resources required.
 in a service-oriented setting, on the other hand, the company has to ensure
the availability of trained and costumer-oriented personnel, presence of
costumer service locations, and excellent provisions of customer services.
 NATURE AND ROLE OF THE FIRM
d. FINANCIAL MANAGEMENT
 the goal of any finance function is to achieve three benefits: business
support service, lowest costs, and effective control of the environment.
 toward the end, the firm has to ensure that it sets up effective and efficient
internal process designed to achieve all these, while maintaining the values
of being vision-oriented, growth-focused, intuitive, and risk-taking (Role of
Finance in a Business, by Dana Griffin, Demand Media).
 NATURE AND ROLE OF THE FIRM
e. MATERIAL and PROCUREMENT MANAGEMENT
 it is the responsibility of the firm to ensure that it manages the procurement
process and the supply base effectively and efficiently.
 this includes buying high quality products and services at the right price
from the right, reliable source, based on the right specifications, in the right
quality for delivery, at the right time to the right customers.
 NATURE AND ROLE OF THE FIRM
f. OFFICE MANAGEMENT
 office management involves the design, implementation, evaluation, and
maintenance of the process of work within an organization, in order to
maintain and improve efficiency and productivity (BusinessDictionary.com).
 it is the responsibility of the firm to monitor and review systems that would
yield expected outcomes like improved turnover, output, sales, etc.
 it is like the backroom support that will ensure the effective discharge of
functions of revenue-generating units of the organization.
 NATURE AND ROLE OF THE FIRM
g. INFORMATION AND COMMUNICATION TECHNOLOGY MANAGEMENT
 This includes a related form of communication or application that
encompasses radio, television, cellular phones, computer and network
hardware and software, satellite system, and so on, as well as the various
services and applications associated with them such as videoconferencing
and distance learning (Margaret Rouse, WhatIs.com).
 it is the responsibility of the firm to provide the necessary information and
communication facilities to all its business units in order to ensure that they
are able to perform their functions more effectively and efficiently.
 3.2 TYPES OF ORGANIZATION
STRUCTURE
• Set-up or structure are designed to accomplish different goals.
• The structure of an organization is a crucial part in the progress of
an organization since it can help or hinder the organization in
the movement toward accomplishing these goals.
• They come in different shapes and sizes. They can be “tall,”
those that have many tiers between the common worker and
the owner of the company, or they can be “flat”, meaning there
are very few levels between the common worker and the owner.
• A basic organization framework is called the Line Structure.
• A line structure organization has only direct, vertical
relationships between different levels in the firm. Take note
that there are line departments inside a line structure.
• Line Departments are directly involved in accomplishing the
primary goals of the organization.
• For example, in a typical firm, line departments include
production and marketing. In a line organization authority
follows the chain of command.
 ADVANTAGES
1. Tends to simplify and clarify authority
2. Promotes responsibility and accountability relationships
3. Promotes fast decision making
4. Precise and simple to understand
 DISADVANTAGES
1. Neglects specialists in planning
2. Overloads tasks on key personnel
3. It becomes more ineffective as the organization becomes
bigger
4. Managers become experts in too many fields or area
5. Tendency to become overly dependent on the few key
people who are performing numerous jobs
• A line function is a position that has a direct chain of
command that is responsible for the achievement of an
organization’s goals.
• A staff function, on the other hand, is intended to provide
expertise, advice, and support for the line positions. An
example of staff functions are HR, Quality Assurance, and
Corporate Planning.
• There are several variations of organizational structures. The
three common types are: functional, divisional, and matrix
structure.
 FUNCTIONAL
• It is a set up wherein each department of the organization is grouped
according to its function or purpose.
• For example, there nay be a marketing department, a sales department
and a production department.
• The functional structure works very well for small businesses in which each
department can support itself by relying on the talent and knowledge of its
workers.
FUNCTIONAL
 DIVISIONAL
• Divisional Structure is another type of organization structure.
• This is typically used in larger companies or organizations with several
branches or outlets that operate in a wide geographic area or that
have separate smaller organizations within the umbrella group to
cover different types of products or market areas.
DIVISIONAL
 MATRIX STRUCTURE
• A matrix structure is a hybrid of two structures namely, divisional and
functional structure.
• Typically used in large multinational companies, the matrix allows for he
benefits of functional and divisional structures to exist in one organization.
• However, this can create power struggles because most areas of the
company will have a dual management.
 CEO MATRIX STRUCTURE

MARKETING SALES SERVICES

Electronics
Division

Home Good
Division

Yummy Snacks
Division
 CATEEL VOCATIONAL HIGH SCHOOL
SENIOR HIGH SCHOOL

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Organization and Management
CHAPTER 2: THE ORGANIZATION AND ITS ENVIRONMENT