CHAPTER III

THE ORGANIZATION
AND ITS ENVIRONMENT
Learning Objectives:

a. To understand the three options – sole

proprietorship, partnership and corporation
under which an entrepreneur could organize and
their impact to his/her business.
b. To appreciate the importance of organization
analysis and design in determining the
appropriate hierarchical structure of the
company.
c. To be aware of the stages of development of
organizations.
d. To know the government- required steps in
starting a business.
 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.
Based from the text, 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 proprietorship collect and it can also
be risky because there is no separation
between the owner and the business.
 Advantages:
1. Formation: less complicated in
preparation of the documents and cheaper
compared to starting a formal corporation.
The proprietorship can be named after the
owner, or a fictitious name can be used to
enhance the business.
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.

 Disadvantages:
1. Liability: The business owner will be held
directly responsible for any losses, debts, or
violations coming from the business . For
example, if the business must pay any debts,
these will be satisfied from the owner’s own
personal funds. The owner could be used for
any unlawful acts committed by him/her or
the employees.
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. Since the business and
the owner are treated as one and the same,
upon the owner’s death, the business
maybe liquidated and becomes part of the
owner’s personal estate, to be distributed
to beneficiaries. However, this can result in
heavy tax consequences on beneficiaries
due to inheritance taxes and estate taxes.
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.

 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.
Since partnership is a type of business that
requires more than one person in the
decision-making process, it's important
that potential business partners discuss a
wide variety of issue up front and develop
legal partnership agreement. This
agreement should document how future
business decisions will be made such as
how the business partners will divide
profits ,resolve differences in the
decision-making, change of ownership
(bring in new partners or buy out current
partners),and how to dissolve the
partnership.
 Advantages:
1. Easy and Inexpensive
2. Shared financial Commitment
3. Complementary Skills
4. Partnership Incentives for Employees

 Disadvantages:
1. Joint and Individual Liability
2. Disagreements Among Partners
3. Shared Profits
 Third option: Corporation
Often times, 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.

 Advantages:
1. Separate legal personality
2. Ease of raising funds
3. Continuity
4. Ease of transfer of ownership
5. Credibility

 Disadvantage:
1. More time and money spent in
organizing
2. More paperwork
3. Higher tax
4. More costly
 Nature and Role of the firm
A. Human Resource Management
B. Marketing Management
C. Operations Management
D. Financial Management
E. Material and Procurement
Management
F. Office Management
G. Information and Communication
Technology Management
 Types of Organization Structure
There are different types of
organizational set-up or structure.
These set-up or structure are designed
to accomplish different goals. The
structure of an organization in the
movement toward accomplishing these
goals. Organization, large and small in
scale, can achieve higher sales and
other profits by properly matching their
needs with the structure they use to
operate.
 Advantages:
1. Trends to simplify and clarify authority
2. Promotes responsibility and accountability relationships
3. Promotes fast decision-making
4. Precise and simple to understand

 Disadvantage:
1. Neglects specialist 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, as discussed, 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, however, several variations of
organizational structures. The three
common types: 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 may be a marketing department,
a sales department and a production
department. The functional structure
works very well for a small businesses
in which each department can support
itself by relying on the talent and
knowledge of its workers.
 Divisional
Divisional structure is another type of
organization structure. This is typically
used in larger companies or
organization 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.
 Matrix Structure
A matrix structure is a hybrid of two
structures namely, divisional and functional
structure. Typically used in large
multinational companies, the matrix
structure allows for the benefits of functional
and divisional structures to exist in one
organization. However, this can creates
power struggles because most areas of the
company will have a dual management- a
functional manager and product or divisional
manager working at the same level and
covering some of the same managerial
territory.
 Informal Organizational Structure
Before we leave this topic on
organizational structure, one must bear
in mind that there are two broader
organizational structure identified as :
the formal and then informal
organization.

The formal organization, as discussed

and illustrated earlier, are usually
represented with organizational charts
and with position descriptions.
 The informal organization is a set of
evolving relationships and patterns of human
interaction within an organization that
actually do exist but are not officially
prescribed. Along side with this informal
organization are the informal leaders who
sometimes exert influence to organizational
behavior.

 Organizational Design Principles

Now that we have given you the different
types of organization charts, showing the
advantages of each, let’s take a look at
some organization design principles.
 Organizational design is the process of
aligning an organization’s structure
based on its vision and mission. It is a
careful study at the complex
relationship between tasks, workflows,
responsibilities and authorities, and
making sure these all support the
objectives of the organizational
strategy and mandate.
Beyond solid and broken lines, shifting
lines and boxes in an organization
chart, one has to consider the
company’s fundamental building
blocks, namely:
 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)
Organization analysis and design includes careful
examination of detail staffing levels and hierarchy,
spans of control, and repetitions of roles in the context
of the businesses strategy. This implies that all work is
not created equal-there are some tasks that are more
strategically important to a company than others.
It is important to understand that even if a company
creates an elegant and celebrate organization design
but fails to recruit the right composition of talent and
skill; it would be meaningless.
An organization is a dynamic and constantly changing
force; hence, organization structure should be flexible
and ready to adapt and respond to new and emerging
needs and to the requirements of the present as well as
to the future conditions and demands of business.
According to the “ The Organization of the
future”, a book by the Drucker Foundation
of New York, claims that, “ Redesigns have
poor track record. Many of the companies
that restructure will restructure again a few
years later. Some of these repeated
redesigns are the result of external change;
the first restructuring loses its relevance
and power”.

Organization Analysis and Design (OAD) is

undertaken in the context of changing
situations and conditions. Each study is
done with specific objectives such as:
 To develop a structure by which the
objectives and policies of the company
can best be realized and the
supporting plans implemented;
 To develop a structure that is
responsive to environmental conditions
(competitions, regulations, and
technology);
 To develop a structure that clearly
delineates duties, responsibilities, and
working relationships of people.
We study organization structure for the main
reason that it is innate to an organization
as skeleton is to the human body. If the
structure is weak, disjointed , and poorly
developed, then no amount of planning
will change the “ qualitative and
quantitative”. All the planning for
development will be in vain, for the plans
will remain just as they are-mere plans.
In a “Professional Practice Manual on
Organization Studies”. Authored by
Zorilla, he defined the scope, approach
and methodology involved in the conduct
of an OAD.
 Nature and Scope of Organization
Analysis and Design (OAD)
Organization analysis generally involves the
design of an organization structure including
the delineation of the levels of authority and
responsibility and the definition of the
functions and interrelationships of
organizational units and/or positions.
Organization structure is usually graphically
presented in a basic organization chart, a
functional chart, and a detailed position
chart . The recommended organization is
based on sound concepts and principles
relevant to the unit under study.
In order to design a structure that is highly
adaptive and flexible to the demands of a
dynamic organization, the design must
consider a number of factors:
 Internal company factors such as corporate
objectives, philosophy, strategy, policies,
and procedures;
 Leadership style, individual goals and
objectives of top management; and
 External factors such as developments in
the industry, government policies, and laws
regulating company operations, foreign
markets, and relationships with other
entities.
 Stages of Development of Organizations
Organizations, like human beings, pass
through several stages of development. A
human being’s life cycle comprises of four
stages of development: childhood,
adolescence, maturity, and old age. Similarly,
an organization passes through several
stages. Even the best managed companies
pass through stages of organizational
development, including period of chaos.
Chaos in this context is absolutely necessary
for the growth and survival of a company.
Otherwise, the alternative could be
stagnation.
Author Renee O’Farrel identifies
stages:
 Chaos
 Stability
 High Performance

Stage III: High Performance

(Outstanding, Sustainable Results)
 Clear statement of mission that creates a
sense of esprit de corp
 Well-defined values which result in
distinctive culture. Respect for people that
is deeply ingrained is part of the culture.
 Good communication
 High and active involvement and
empowerment of people. Design ( work flow,
structure, system) supports mission and
values.
Stage II: Stability ( Back to the basic)
 Clarity of goals and direction
 Consistency in priorities
 Well-defined policies and responsibilities
( technical and personnel)
 Agreement on roles and responsibilities
 Basic management processes rewarded and
practiced (goal-setting, performance
reviews,etc.)
 Stage I : ( Fire-Fighting Mentality)
 Crisis/Short-term focus
 Lack of clear direction and goals
 Shifting priorities
 Unclear policies and procedures
 “Us”vs. “them” attitude
 Blame and lack of ownership
 Alienated workforce
 Summary
Every business organization goes through the
stage of chaos. In the case of Mr. Chua’s grocery
business , it’s natural if it goes through a stage of
chaos in its initial stage. The trick is to provide an
environment out of chaos that favors stability. But
given his patience and dogged determination, his
business will go up to the second stage of stability
and ultimately, high performance. There is no
simple formula. Real organizational development
requires commitment and hard work. Also,
initiatives to eliminate waste, improve quality,
provide better customer service, people
empowerment, continued improvement, can lead
to a foundation of organizational stability and
eventually high performance.
Starting a Business
This chapter will not be complete without
giving the reader the basic process of
starting a business. Almost all big
businesses start small. SM, the shopping
mall giant began with a small shoe in
Carriedo Street, Quiapo, Manila . About
99.58 percent of the business in the
Philippines that contributes 32% of the
country’s Gross Domestic Product ( GDP)
and accounts for 61 percent of the local
workforce belong to the Micro, Small,
Medium-size Enterprises (MSMEs).
In case the flow chart is not readable to
some, we are repeating hereunder in
clearer form the steps to be taken by
anyone who wants to start a business.
Step 1
 For single proprietorship, register with the
Department of Trade and Industry (DTI) for
business name
 For Partnership or Corporation, register
with the Securities and Exchange
Commission (SEC) for Certificate of
Partnership or Corporation
 For cooperatives, register with the
Cooperative Development Authority (CDA)
Step 2
 Apply for business permit and license from
the city/municipality where the business is to
be located.
Get sector specific clearances. For example
 Travel Agency- Department of Tourism
 Food and Cosmetics- Food and Drug
Administration (FDA)
 Pawnshop- Bangko Sentral ng Pilipinas (BSP)
 Learning Centers- Department of Education
( DepEd)
 Woos crafts/furniture- Department of
Environment and Natural Resources (DENR)
Step 3
 Register with the Bureau of Internal
Revenue (BIR) District Office where the
business is to be located for Authority to
Print Invoice and Book of Journal .
Step 4
 Other registration requirements
Register your business with the
following offices for compliance to good
employer –employee relationships,
incentives and benefits, and social,
community, and environmental
responsibilities
 Social Security System (SSS)
 Department of Labor and Employment (DOLE)
 PhilHealth
 Pag-ibig
 Department of Environment and Natural
Resources (DENR)
Step 5
Start the business
The BMBE Law exempts MSMEs from income tax
for income arising from operations of the
enterprise. The local Government Units (LGUs) are
also encouraged either to reduce the amount of
local taxes, fees, and charges for MSMEs or
exempt them from these taxes, fees, and charges.
 Furthermore, MSMEs are exempted from the
coverage of the Minimum Wage Law
although their employees are covered by
the Social Security Law and the health care
benefits of PhilHealth.
Government financial institutions such as,
Land Bank of the Philippines
(LBP),Development Bank of the Philippines
(DBP), the Small Business Guarantee and
Finance Corporation (SBGFC),and the
People’s Credit and Finance Corporation
(PCFC) shall set up a special credit window
that will service the financing needs of
MSMEs registered under the law.
GROUP II

ALBOFERA, QUEEN KAREZZA

JERICA VAZ TAMPOY

Cedeño, Willy Jane
 Magulinay, Lovely
Rose

Pael ,Archelo
Thank you for
listening!!!
