Math-12-ABM-Org_Managemnt-Q1-Week-8_.pptx

Discussion about Organization Management

1. NATURE OF ORGANIZATION AND TYPES OF ORGANIZATION STRUCTURES f or Organization and Management Senior High School ( ABM ) Quarter 1 / Week 8

2. OBJECTIVE S : K : Identify the nature of organization and types of organizational structures. S: Analyze the nature of organization and explain the three common types of organizational structure. A: Appreciate the importance of organization analysis and design in determining the appropriate hierarchical structure of the company.

3. PRE- TE ST: Below are three examples of businesses. For each, determine the optimal type of business organization by applying the knowledge from your previous lesson. Be sure to support your answer by integrating case facts with the lesson material. 1. Lebron and Davis are long - time friends who plan to open a consulting service in Chicago next year. Lebron specializes in personal finance, whereas Davis specializes credit management, making them a great team. Both wish to keep their tax filing requirements as simple as possible.

4. 2. Kuzma is a 52-year old teacher who has no children and is not married. He plans to start a business this summer to mow people’s lawns in the neighborhood to earn some extra income while school is on summer break. His clients sign a legal waiver claiming that Kuzma has no liability for any mishaps on the lawn. 3. Ronda and Green are a married couple who wish to begin operating a chemical plant since they are both chemists. The couple would be working with highly toxic substances, but they are comfortable with this given their experience and the profit opportunity is great. Ronda and Green also own an 8-floor apartment building in Manhattan.

5. Nature of Organizations Definition of an Organization An organization is a collection of people who work together and coordinate their actions to achieve a wide variety of goals. Nature of Organizations An organization is a social arrangement which pursues collective goals, which controls its own performance, and which has a boundary separating it from its environment.

6. To illustrate: Let us assume now that Mr. Tiongco’s grocery business has grown by leaps and bounds. He is planning to open a branch in more strategic place near busy Cubao. This will be handled by his son whom he has already trained in running his grocery business. Mr. Tiongco 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 challenges 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 plans ?

7. To put up a branch, Mr. Tiongco needs more capital to buy a commercial lot and to construct a building for his second grocery. He must improve his credit standing by buying grocery goods payable in 60 days or more. To get a loan from a bank, his present assets are not enough to serve as guaranty. So, he needs associates in his expanding business. What is the best approach in organizing and what are the advantages ? He consulted a lawyer-friend and

8. First option: Single Proprietor . In this form, Mr. Tiongco as a single person holds the entire operations as his personal property, managing it on a day- to-day basis. Most businesses are of this type. Sole proprietorships are attractive to small investors because they are relatively easy to start up. Also, the owner entitled to all the profits that the sole proprietorship collects. On the other hand, sole proprietorships.

9. Advantages : 1. Formation : Less complicated in preparation of 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.

10. Disad vantages: 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 sued for any unlawful acts committed by him/her or the employees. Taxes : While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes.

11. 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 to 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.

12. 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 is important that potential business partners discuss a wide variety of issues up front and develop a 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 decision making, change of ownership, and how to dissolve the partnership.

13. Adva ntages: 1. Easy and Inexpensive: Partnerships are generally an inex pensive and easily formed type of business structure. Most of the time spent starting a partnership often focuses on developing the partnership agreement between or among few people and its shared ownership will expresses. 2. Shared Financial Commitment: Each business partner has equally invested in the success of the busines . 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.

14. Complementary Skills: A good partnership should be able to utilize the strengths, resources, and expertise of each partner. 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.

15. Partnership arrangements are mostly formed in Law, auditing, and some consultancy firms. Disadvantages : 1. Joint and Individual Liability: Like 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. In addition, the personal assets

16. 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. 3. Shared Profits: Because partnerships are jointly owned, each partner must share the successes and profits of their business with other partners. An unequal contribution of time, effort, or resources can cause dispute among partners.

17. Third Option: Corporation Often, 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. This is especially true if a business owner, like Mr. Tiongco, needs more money to fund his business expansion. He wants to take a bank loan, but his assets are not enough to mortgage. Besides, if qualified to get a loan, he may not be able to pay the loan and he will lose his mortgaged properties if they are foreclosed. In short, he wants to protect his own personal wealth. So, he may decide to look for investors.

18. 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. The board of directors will also appoint corporate officers for a day-to-day operation of the corporation. Usually a corporation has the following key personnel: a president, a secretary, and a treasurer, although there can be other officers, such as vice presidents.

19. Adva ntages: 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 a corporation are not liable to obligations the corpor ation’s contracts into like debts, negligence, or wrongful acts of the corporation. The maximum lost of money a shareholder can incur is just the amount of his/her investment in the corporation-the value of his/her stock. 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.

20. 3. Continuity: It can have perpetual existence, which means it can outlive its owner because it is a separate person in the eyes of the law. This means investors do not have to worry about untimely demise of the owners. It is also allowing the corporation to plan for the long term. 4. Ease of transfer of ownership: It is easy to transfer ownership interests in a corporation. The board of directors can a uthorize the issue of shares of stock in exchange for investor’s capital infusion into the com pany. 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 comm unity.

21. Disad vantages: 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 filing of annual reports. And they must file corporate income tax returns as well. 3. Higher Tax: Corporate profits may be the 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 these meetings/sessions will incur expenses. Most corporations will retain the services of an attorney and accountant to help them with drafting legal documents

22. 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 is crucial part in the progress of an organization since it can help or hinder the organization in the movement toward accomplishing these goals. Organizations, large and small in scale, can achieve higher sales and other profits by properly matching their needs with the structure they use to operate.

23. TYPES OF ORGANIZATION STRUCTURE 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. Chart 1 shows a single line organizational structure.

24. Chart 1. Sample of Line Structure

25. Adva ntages: 1. Tends to simplify and clarify authority 2. Promotes responsibility and accountability relationships 3. Promotes fast decision-making 4. Precise and simple to understand Disad vantages: 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

26. Before we proceed further, we should distinguish between line and staff f unctions. 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 goa ls. 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 are: Functional , Divisional , and Matrix Structure .

27. FUNCTIONAL STRUCTURE 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. ( See Chart 2 ) 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. However, one of the drawbacks in a functional structure is the restriction in coordination and communication between and among other departments by the boundaries of the organization in which having the various departments working separately and independently.

28. Chart 2. Sample of Functional Chart

29. DIVISIO NAL 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. Study Chart 3. This type of structure provides significant benefit which addresses needs more rapidly and more specifically; however, communication is inhibited because employees in different divisions are not working together. Divisional structure could also be costly because of its size and scope.

30. Chart 3 . Sample of Divisional Chart

31. MATRIX STRUCTURE A matrix structure is a hybrid of two structures namely, divisional, and functional structure. Typically used in a large multinational company, the matrix structure allows for the benefits of functional and divisional structures to exist in one organizatio n. However, this can create power struggles because most areas of the company will have a dual management - a functional manager and a product or divisional manager working at the same level and covering some of the same managerial territory. Study Chart 4 as indicated. Unlike the other structures, it does not follow the traditional hierarchical model. Instead, all employees (represented by the green boxes) have dual reporting relationships. Typically, there is a functional reporting line (shown in blue) as well as a product-based reporting line (shown in yellow). When studying a matrix structure organization chart, the solid lines represent strong and direct reporting relationships; on the contrary, dotted

32. Chart 4 . Sample of Matrix Structure One advantage point of the matrix structure is the flexibility and the balanced decision-making (as there are two chains of command instead of just one). However, its disadvantage would be complexity which can lead to confusion among employees. The conflicting orders from multiple sources may lead to confusion and increase ineffectiveness and conflict. Some staff specialists or personnel may exert direct authority over the line personnel, rather than exert advice authority.

33. Informal Organizational Structure Before we leave this topic organizational structure, one must bear in mind that there are two broader organizational structure identified as: the formal and the informal organization. The formal organization , as discussed and illustrated earlier, are usually represented with organizational charts and with position descriptions. There is a clear reporting relationship that the manager is aware of. On the other hand, the informal organization is a set of evolving relationships and patterns of human interaction within organization that do exist but are not officially prescribed. Alongside with this informal organization are the informal leaders who sometimes exert influence on organizational behavior.

34. IMPORTANCE OF ORGANIZATIONAL ANALYSIS AND DESIGN Organizational Design Principles Now that we have given you the different types of organization charts, showing the advantages and disadvantages of each, let’s look at some Organizational Design Principles. Firstly, let us be realistic to recognize that there is never a single best structure for any company or function. Any structure is no silver bullet. There will never be a “perfect” structure. All structures carry significant strengths and weaknesses, advantages, and disadvantages, and all the companies have different capabilities and strategic positions. 14

35. 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 task, workflows, responsib ilities, and authorities, and making sure these all support the objectives of the organizational strategy and mandate. Good organizational design helps communications smoothly transition from one department to another. It creates an environment where people can work effectively and efficiently. It fosters productivity leading to innovation. It is tailored to deliver the company’s competitive strategy. The design can be evaluated by specific criteria, such as technology, corporate culture, etc.

36. Beyond soli d and broken, shifting lines and boxes in an organization chart, one must consider the company’s fundamental building blocks, na mely: • 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. Under these considerations, therefore, the structure can never be permanent. It is subject to review and change, if necessary. Changes may be triggered by heightened competition, changes in customer behavior, people movements, restructuring, re-engineering streamlining, g and other reasons

37. Organizational Analysis and Design (OAD) O rganization analysis and design includes careful examination of detail staffing levels and hierarchy, spans of control, and repetitions of roles in the context of the business’s 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 elaborate organizational design but fails to recruit the right composition of talent and skill; it would be meaningless. In an organization diagnostic study, its states on the focus on the ability of the current talent to do the critical work and the effect of the current structure (job design) on engaging that talent.

38. An organization is a dynamic and constantly changing force; hence, organization structure should be flexible and ready to adapt and respond to a 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 “T he 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.”

39. Organizational 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 realized, and the supporting plans impl emented. 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.

40. 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 to quantitative.” All the planning for development will be in vain, for the plans will remain just as they are – mere pl ans.