Chapter 3

The Organization
and its Environment
Learning Objectives:
 To understand the three options - sole proprietorship, partnership and corporation – 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.
 Nature of Organization
Type & definition Advantages Disadvantages
Sole Proprietorship - is an - Formation, - Liability,
unincorporated business with only one - Tax benefits, - taxes,
owner who pays personal income tax - Decision making - Lack of continuity,
on profits earned - Difficulty in raising capital
Partnership – is a single business with - Easy and Inexpensive, - Joint and Individual Liability,
two or more people sharing its - Shared Financial Commitment, - Disagreement Among Partners,
ownership. - Complementary Skills, - Shared Profits
- Partnership incentives for
employees
Corporation - a type of business that - Separate legal personality, - More time and money spent in
keeps the dealings, assets, and bank - Ease of raising funds, organizing,
accounts separate from his/her personal - Continuity, - more paperwork,
assets. - Ease of Transfer of ownership, - Higher tax,
- Credibility - More costly
 Nature and Role of the Firm
1. Human Resource Management – major functions of recruitment, selection and placement,
training and development, employee relations, and compensation and benefits administration.
2. Marketing Management – management process responsible for identifying, anticipating, and
satisfying customer requirements profitably.
3. Operations Management – involves overseeing, designing, controlling the process of
production, and redesigning business operations in the production of good and services.
4. Financial Management – focus on three goals of finance which are business support service,
lowest costs and effective control of the environment.
5. 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.
 Nature and Role of the Firm
5. 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.
6. Information and Communication Technology Management – includes 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.
TYPES OF ORGANIZATIONAL
STRUCTURE
 Line Structure
The basic organization structure. It has only direct,
vertical relationships between different levels in the
firm.

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 specialist in
planning.
2. Overloads task on key
personnel.
3. It becomes more ineffective
as the organization becomes
bigger.
4. Managers become experts in
too many field or area.
5. Tendency to become overly
dependent on the few key
people who are performing
numerous jobs.
 Functional

It is a set up wherein each department of the organization is grouped according to its function or purpose.

Advantages Disadvantages
1. Specialization 1. Segregation
2. Operational Speed 2. Weakening of common bonds

3. Operational Clarity 3. Lack of Coordination.

4. Territorial Disputes
 Divisional
XYZ COMPANY

Luzon Visayas Mindanao

Division Division Division

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.

Advantages Disadvantages
1. Useful when a company has many regions, markets, products. 1. Can cause a higher total costs, which can result in a number of
small, quarreling fiefdoms within a company that do not
necessarily work together for the good of the entire entity.
 Matrix
It is a hybrid of two structures namely, divisional and
functional structure. Typically used for multi-national
companies.

Advantages Disadvantages
1. Help companies communicate 1. Confusion to reporting
better. process.
2. Share resources between 2. Heavy workload for
departments. employees.
3. Efficiently develop 3. Cost more money
employees.
 Informal Organizational Structure
- The formal organization are usually presented with organizational charts and
with position description. Hence, there is a clear reporting relationship that the
manager is aware of.
- The informal organization is a set of evolving relationships and patterns of
human interaction within an organization that actually exist but are not
officially prescribed.
 Organization Design Principles
- Organizational design is the process of aligning an organization’s structure based on its vision and
mission.
- Good organizational design helps communications smoothly transition from one department to
another. It creates and environment where people can work effectively and efficiently.
Company’s building blocks to be considered before establishing
Organizational structure:
- Recognize how people in the company make decisions
- Determine how people adopt new behaviors
- Create how people are rewarded based on performance
- Agree on what are the commitments
- Manage information and utilize effectively
- Sense of responsibility is allocated and connected with one another
 Organization Analysis and Design (OAD)
- OAD includes careful examination of detail staffing levels and hierarchy, spans of control and
repetitions of roles in the context of the businesses strategy.
Objectives of OAD:
 To develop a structure by which the objective and policies of the company can best be
realized and the supporting plans implemented.
 To develop a structure that is responsive to environmental conditions (competition, regulations
and technology.)
 To develop a structure that clearly delineates duties, responsibilities and working relationships
of people.
 Stages of Development of Organizations
 Organizations like human beings , pass thru several stages of development. A human being’s
life cycle comprises of four stages of development: Childhood, adolescence, maturity and old
age. Similarly, and organization passes thru several stages.

Author Renee O’Farrel identifies three stages:

1. Chaos
2. Stability
3. High Performance
Starting a Business