CHAPTER 5

DECISION MAKING
INTRODUCTION
Managers of all kinds and types are primarily tasked to provide leadership in the quest of
the attainment of the organization’s objectives. If he is to become effective, he must lean the
intricacies of decision making. Many times, he will be confronted by situations where he will
have to choose from among various options. Whatever option he chooses, it will have effects,
good or bad, immediate or long term, in the operation of his organization.
The manager’s decision making skills are very crucial to his success as a professional. A
major blunder in his decision making may be sufficient to cause the destruction of his
organization. On the other hand, when good decisions are made, the right environment is
provided for continuous growth and success of any organized effort.
DECISION MAKING AS A MANGEMENT RESPONSIBILITY
Decisions must be made at various levels in workplace. They are also made at various
stages in the management process. If the certain resources must be used, someone must make a
decision authorizing certain persons to appropriate such resources
Decision making is a responsibility of the manager. It will understandable for managers
to make wrong decisions at times. The wise manager will correct them as soon as they are
identified. The bigger problem is the manager who cannot or do not want make decisions. This
type of managers is dangerous to the organization and should be replaced immediate with
qualified ones.
Management must strive to learn how to choose decision option as correctly as possible.
Since managers have that power to decide, they are responsible for whatever outcomes their
decision bring. The higher the management level is, the bigger and more complicated decision
making becomes. An example is the manager of a retailing firm has decided to open a branch in
one of the provinces within his area of assignment. After considering various towns, the manager
came to a conclusion that his choice must be one of the three potential sites identified. Each of
the sited has advantages and disadvantages. The manager must a decision quickly. His choice,
however, must be based on sound criteria. The manager will be held responsible later on, if he
made the wrong decision.
WHAT IS DECISION MAKING?
Decision making is the process of defining the problem and identifying and choosing
alternative courses of action in manner appropriate to the demands of the situation. The
definition indicates that the manager must adapt a certain procedure designed to determine the
best option available to solve certain problems.
 Decisions are made at various management levels (e.g., top, middle, and lower levels)
and at various management functions (e.g., planning, organizing, directing, and controlling).
Because of this, decision making is regarded as “the heart” of all the management functions.
THE DECISION MAKING PROCESS
Rational decision making is a process involving the following steps:
1. Diagnosing the Problem. If the manager wants to make an intelligent decision, his first
move must to be identify the problem. If the manager fails in this aspect, his next moves
will be useless. If the manager is not able to identify the real problem, the solution he will
offer will be irrelevant and may be even costly and destructive. Being able to identify the
real problem is tantamount to having the problem half-solved.
A problem exists when there is a difference between the actual situation and the
desired situation. For instance, the management of a construction company entered into a
contract with another party for the construction of a 25-storey building on certain site.
The actual situation (or the existing situations) is that the firm has not yet constructed the
building. The desired situation is the finished 25-storey building. In this case, the actual
situation is different from the desired situation. The company, therefore, has problem and
that is, the construction of the 25-storey building.
2. Analyzing the Environment. The environment where the organization is situated plays a
very significant role in the success or failure of such an organization. It is, therefore, very
important that an analysis of the analysis of the environment is undertaken.
The objective of environmental analysis is the identification of constraints,
which may be internal or external limitations. Examples of internal limitations are as
follows:
a. Limited funds available for the purchase of equipment
b. Limited training on the part of the employees;
c. Ill designed facilities; and
d. Irrelevant organization structure.
Examples of external limitations are as follows:
a. Product patents are controlled by the other organizations;
b. A very limited market for the company‘s products and services exists: and
c. Strict enforcement of local zoning regulations
When decisions are to be made, the internal and external limitations must be
considered. It may be costly later on, to alter a decision because of constrain that has
not been previously identified. The following is an illustration of failure to analyze
the environment.
The president of a new chemical manufacturing company made a decision to
locate his factory in a place adjacent to a thickly populated area. Construction of the
buildings were made with precision that they were finished in a short period. When
the clearance for the commencement of operation was sought from local authorities,
 this could not be given. It turned out that the residents oppose the operation of the
firm and they took steps to make sure that no clearance is given.
The president decided to relocate the factory but not after much time and
money have been lost. This is a clearance example of the cost associated with
management decisions disregarding the environment. In this case, the president did
not consider or anticipate opposition from local residents.
The internal environment consists of organizational activities within firm that
surround decision making. Shown in Figure 12 are the important aspects of the
internal environment.
The external environment refers to variables that are outside the organization and
not typically within the short-run control of top management. Figure 13 shows the
forces comprising the external environment of the firm.
3. Develop Viable Alternatives. Oftentimes, a problem may be solved by any of the
solutions offered. In solving a problem, however, the best among the alternative solutions
must be considered by management. This is made possible by using a procedure with the
following steps:
a. Prepare a list of alternative solutions;
b. Determine the viability of each solution; and
c. Revise the list by striking out those which are not viable.
To illustrate:
An engineer firm has a problem of increasing its output by thirty percent. This is
the result of a new agreement between the firm and one of its client. The list pf solution
prepared by the manager shows the following alternative courses of action:
a. Improve the capacity of the firm by hiring more workers and building additional
facilities;
b. Secure the services of subcontractors;
c. Buy the needed additional output from another firm;
d. Delay servicing some clients
The list was revised and only the first three were deemed to be viable. The last two
were deleted because of adverse effects in the long-run profitability of the firm.
4. Evaluate Alternatives. After determining the viability of the alternatives and a revised list
is made, an evaluation of the remaining alternatives is necessary. This is important
because the next step involves making a choice. Proper evaluation makes choosing the
right solution less difficult.
How the alternatives will be evaluated will depend on the nature of the problem,
the objective of the firm, and the nature of the alternatives presented. Each alternative
must be analyzed and evaluated in term of value, cost and risk characteristics.
 The value of an alternative refers to benefits that can be expected from it. An
example may be described as follows: a net profit of P10 million per year if the
alternative is chosen.
The cost of the alternatives refers to out-of-pocket costs, opportunity costs, and
follow-on costs.
The risk characteristics refer to the likelihood pf achieving the goals of the
alternatives. I f the probability of a net profit of P10 million is only 10 percent, the
decision-maker may opt to consider an alternative with a P5 million profit, but with an 80
percent probability of success.
Another example of an evaluation of alternatives is shown below:
A manager is faced with the problem of choosing between three
applications to fill a lone vacancy for Sales Supervisor. He will have to set up certain
criteria for evaluating the applicants. If a professional human resources officer does not
do evaluation, the manager will be forced to use a predetermined criterion. The following
is a typical evaluation of job applicants.

EVALUATION SHEET
Title of Vacant Position: SALES SUPERVISOR

Application Education Training Experience Age Total Points

1.Jose Sibayan Jr. 40 35 4 10 89

2.Menandro Rillon 40 36 5 9 90
3.Dante dela Cruz 40 38 6 7 91

5. Make a Choice. After the alternatives have been evaluated, the decision-maker must not
be ready to make a choice. This is the point where he must be convinced that all the
previous steps were correctly undertaken.
Choice-making refers to process of selecting among alternatives representing
potential solutions to a problem. At this point, specific effort should be made to identify
all significant consequences of each choice.
To make the selection process easier, the alternatives can be ranked from best to
worst on the basis of some factors like benefit, cost, and risk.
6. Implement Decision. After a decision has been made, implementation follows. This is
necessary or decision making will be an exercise in futility. Implementation refers to
carrying out the decision so that the objectives sought will be achieved. To make
implementation effective, a plan must be devised.

At this stage, the resources must be made available so that the decision may be
properly implemented. Those who will be involved in implementation must understand and
accept the solution; otherwise, the execution of the plan will be a failure.
 7. Evaluate and Adapt Decision Results. In implementing the decision, the results expected
may or may not happen. It is, therefore, important for the manager to use control and
feedback mechanisms to ensure results and to provide information for future decisions.

Feedback refers to the process which requires checking each stage of the process
to assure that the alternatives generated the criteria used in evaluation, and the solution
selected for implementation are in keeping with the original goals and objectives.

Control refers to actions made to ensure that activities performed match the desired
activities or goals that have been set.

In this last stage of the decision making process, the manager will find out whether
or not the desired result is achieved. If the result was positive, one may assume that the
decision made was good. Otherwise further analysis is necessary.

APPROACHES IN DECISION MAKING

In decision making, the manager is faced with problems, which may either be
simple or complex. To provide him with some guide, he must familiar with the following
approaches:

1. Qualitative Evaluation. This term refers to evaluation of alternatives using intuition and
subjective judgement. Managers tend to use the qualitative approach when:
a. The problem is fairly simple;
b. The problem is familiar;
c. The costs involved are not great; and
d. Immediate decisions are needed.
An example of an evaluation using qualitative approach follows:
A factory operates on the three shifts the following schedule:
First shift - 6:00 A.M. to 2:00 P.M.
Second shift - 2:00 P.M. to 10:00 P.M.
Third shift - 10:00 P.M. to 6:00 A.M.

Each shift consists of 20 workers manning 200 medicines. One day, the
operations were going smoothly until the factory manager was notified at 1:00 P.M. that five
workers assigned to the second shift could not report for work because of injuries sustained in a
traffic accident while they were on their way to the factory. Because of time constraints, the
manager made an instant decision on who among the first workers would work overtime to man
the five machines.

2. Quantitative Evaluation. This term refers to the evaluation of alternatives using any
technique in a group classified as rational an analytical. The types of quantitative
techniques, which may be useful in decision-making are as follows:
a. Inventory Models. Inventory models consist of several types all designed to help the
manager make decisions regarding inventory. They are as follows:
 Economic Order Quantity Model- is used to calculate number of items that should be
ordered at one time to minimize the total yearly cost of placing orders and carrying
the items in inventory.
 Production Order Quantity Model- is an economic order quantity technique applied
to production orders.
 Back Order Inventory Model- is an inventory model used for planned shortage.
 Quantity Discount Model- is an inventory model used to minimize the total cost when
suppliers offer quantity discounts
b. Queuing Theory. The queuing theory is one that describes how to determine the
number of service units that will minimize both customers waiting time and cost of
service.
The queuing theory is applicable to companies while waiting lines are a
common situation. Examples are cars waiting for a service at a car service center, ships
and barges waiting at the harbor for loading and unloading by dockworkers, programs to
be run in a computer system that processes jobs, and so on.
c. Network Models. These are models where large complex tasks are broken into
smaller segments that can be managed independently. The two most prominent
network models are:
 Program Evaluation Review Technique (PERT) – is a technique which enables
managers to schedule, monitor, and control large and complex projects by
employing PERT times which are estimated times for the completion of
activities. PERT times may be derived by calculating the weighted averages of
three separate time estimates, namely:
 Optimistic Time Estimate – refers to the time an activity may be
completed under the best conditions.
 Most Likely Time Estimate – refers to the time an activity may be
completed under normal conditions.
 Pessimistic Time Estimate – refers to the time an activity may be
completed under worst possible conditions
 Critical Path Method (CPM) – is a network technique using only one time factor
per activity that enables managers to schedule, monitor, and control large and
complex projects. The critical path is that potential path to completion of a
project, which is indicated in a CPM diagram. The critical path is the longest path
and any activity in that path must not be delayed or it will jeopardize the total
time allotted to the project.

d. Forecasting. There are instances when managers make decisions that will have
implications in the future. A manufacturing firm, for example, must put up a
capacity, which is sufficient to produce the demand requirements of customers
within the next 12 months. As such, manpower and facilities must be procured before
the start operations. To make decisions on capacity more effective, the manager must
be provided with data on demand requirements for the next 12 months. This type of
 information may be derived through forecasting. Forecasting is actually collecting
past and current information to make predictions about the future.
e. Regression Analysis. It is a furcating method that examines the association between
two or more variable. It uses data from the past to predict future events. Regression
analysis may be simple or multiple depending on the number of independent variable
present. When one independent variables present. When one independent variable is
involved, it is called simple regression; when two or more independent variables are
involved, it is called multiple regression.
f. Simulation. It is a model constructed to represent reality, on which conclusions about
real-life problems can be based. It is a highly sophisticated tool by means of which
the decision maker develops a mathematical model of the system under
consideration. Simulation does not guarantee an optimum solution, nut it can
evaluate the alternative fed into the process by the decision maker.
g. Linear Programming. It is a quantitative technique that is used to produce an
optimum solution within the bounds imposed by constraints upon the decision.
Linear programming is very useful as a decision –maker tool when supply and
demand limitations at plants, warehouses, or market areas are constraints upon the
system.
h. Sampling Theory. It is a quantitative technique where samples of populations are
statistically determined to be used for a number of processes, such as quality control
and marketing research. When data gathering is expensive, sampling provides an
alternative. Sampling in effect, saves time and money.
i. Statistical Decision Theory. It is the rational way to conceptualize, analyze, and solve
problems in situations involving limited, or partial, information about the decision
environment. A more elaborate explanation of the decision-making process is
presented at the beginning of this chapter. On the evaluation of alternatives, it is very
important to subject the alternatives to Bayesian analysis.
The sample of Bayesian analysis is to revise and update the initial
assessments of the event probabilities generated by the alternative solutions. This I
achieved by the use of additional information. When the decision-maker is able to
assigned probabilities to the various events, the use probabilistic decision rule, called
the Bayes criterion, becomes possible. The Bayes criterion selects the decision
alternative having the maximum expected payoff, or the minimum expected loss if he
is working with loss table.
 CHAPTER 6
PLANNING
INTRODUCTION
If managing an organization is to be pursued vigorously, planning will be an important
and necessary activity. Managers who plan are afforded with the opportunity to carefully analyze
situations, which directly contribute to effective decision making. Plans provide the manager
with the opportunity to concentrate on implementation.
The managers, regardless of his management level, will have to devote some of his time
to planning. The higher the management level, the more sophisticated his planning activity
becomes. Why and how this is so is the subject of this chapter.
PLANNING DEFINED
Planning may be defined as selecting the best course of action in anticipation of future
trends so that the desired result may be achieved. It must be stressed that the desired result takes
first priority and the course of action chosen is the mean to realize the goal.
THE NATURE OF PLANNING
There are many instances when managers are overwhelmed by various activities, which
at times cloud his judgement. This is must be expected since anybody who is confronted by
several situations happening simultaneously will lose sight of the more important concerns of
managing. To minimize mistakes in decision making, planning is undertaken.
A plan, which is the output of planning, provides a methodical way of achieving desired
results. In the implementation of activities, the plan serves as a useful guide. Without the plan,
some minor tasks may be afforded major attention, which may, later on, hinder accomplishment
of objectives. An example of the difficulty of not having a plan illustrated on the next page.
The management of a firm was able to identify the need to hire three additional
employees. The manager proceeded to invite applicants, screen them, and finally hired three of
them. When hiring expense report was analyzed, it was found out that the hiring expense was
more than double the amount spent by other firms in hiring the same number of people. When an
inquiry was made, it was determined that the manager committed some errors of judgement. For
instance, he used an expensive advertising layout in a newspaper when a simple message will do.
It was also revealed that the absence of a hiring plan contributed to the high cost of hiring.
PLANNING AT VARIOUS MANAGEMENT LEVELS
Since managers could be occupying position in any of the various management levels, it
will be useful for them to know some aspects of planning undertake at different management
levels. As indicated in Figure 15 and 16, planning activities undertaken at various levels are as
follows:
1. Strategic Planning for Top Management. Strategic planning refers to the process of
determining the major goals of the organization and the policies and strategies in
obtaining and using resources to achieve those goals. Strategic planning is the concern of
the top management.
In strategic planning, the whole company is considered, specifically in its
objectives and current resources. The output of strategic planning is the strategic plan,
which spells out the decision about long-range goals and the course of action to achieve
those goals.
2. Intermediate Planning for Middle Management. Intermediate planning refers to the
process of determining the contributions the subunits can make with allocated resources.
This type of planning is the concern of the middle management.
Under intermediate planning, the goals of a subunit are determined and a plan is a
prepared to provide a guide for the realization of the goals. The intermediate plan is
designed to support the strategic plan.
3. Operational Planning for Lower Management. Operational planning is the process of
determining how specific tasks can best be accomplished on time with available
resources. This type of planning is the responsibility of lower management. It must be
performed in support of the strategic and intermediate plans.

THE PLANNING PROCESS

The process of planning consists of various steps depending on the management level
that performs the planning task. Generally, however, planning involves the following:

1. Setting Organizational, Divisional, or Unit Goals. The first task of the manager is to
provide a sense of direction to his firm (if he is the chief executive), to his division (if he
heads a division), or to his unit (if he is a supervisor). The setting of goals provides an
answer to the said concern. If everybody in the firm is aware of the goals, there is a big
chance that everybody will contribute his share in the realization of such goals.
Goals are precise statements of result sought, quantified in time and magnitude,
where possible. According to Davis the Weckler (1997) goals are “concrete results that
the organization intends to achieve within a specified period.”
2. Developing Strategies or Tactics to Reach Goals. After determining goals, the next task
is to devise some means to realize them. The ways chosen to realize the goals are called
strategies and these will be the concern of top management. The middle are called
strategies ad these will be the concern of top management. The middle and lower
management will adapt their own tactics to implement their plans.
Strategy may be defined as a course of action aimed at ensuring that the
organization will achieve its objectives. The decision of a construction firm’s
management to diversify its business by also engaging in the trading of construction
materials and supplies is an example of strategy. When this is implemented, it may help
the construction firm realize substantial savings in the material and supply requirements
of their construction activities. The firm will also have greater control in the timing of
deliveries of materials and supplies.
 A tactic is a short-term action by management to adjust to negative or external
influences. They are formulated and implemented in support of the firm’s strategies. The
decision about short-term goals and the courses of action re indicated in the tactical plan.
An example of tactic is the hiring of contractual workers to augment to company’s
current workforce.
3. Determining Resources Needed. When particular sets of strategies or tactics have been
devised, the manager will then determine the human and non-human resources required
by such strategies or tactics. Even if the resources requirements are currently available,
they must be specified.
The quality and quantity or resources needed must be correctly determined. Too
many resources in terms either quality or quantity will be wasteful; too little will mean
loss of opportunities for maximizing income.
To satisfy strategic requirements, a general statement of needed resources will
suffice. The different units of the company will determine the specific requirements.
To illustrate:
Suppose the management of a construction firm has decided, in addition to its
current undertakings, to engage in the trading of construction materials and supplies. A
general statement of required resources will be as follows:
“A new business unit will be organized to deal with buying and selling of
construction materials and supplies. The amount of P55 million shall be set aside to
finance the activity. Qualified persons shall be recruited for the purpose”.
4. Setting Standards. The standards of measuring performance may be set at the planning
stage. When actual performance does not match with the planned performance,
corrections may be made or reinforcements given.
A standard may be defined as a quantitative or qualitative measuring device
designed to help monitor the performance of people, capital, goods, or processes. An
example of a standard is the minimum number of units that must be produced by a
worker per day in a given work situation.
TYPES OF PLAN
Plans are of different types. They may classified in terms of functional areas, time
horizon, and frequency of use.
1. Functional Area Plans. Plans may be prepared according to the needs of the different
functional areas. Among the types of functional area plans are the following:
a. Marketing Plan- is the written document or blueprint for implementing and
controlling an organization’s marketing activities related to a particular marketing
strategy.
b. Production Plan- is a written document that states the quantity of output a
company must produce in broad terms and by product family.
c. Financial Plan- is a document that summarizes the current financial situation of
the firm, analyzes financial needs, and recommends a direction for financial
activities.
d. Human Resources Plan- is a document that indicates the human resource needs of
a company detailed in terms of quantity and quality of a company detailed in
 terms of quantity and quality and based on the requirements of the company‘s
strategic plan.
2. Plans with Time Horizon. Plans with time horizon consist of following:
a. Short-range Plans – are plans intended to cover a period of less than the year. First
line supervisor are mostly concerned with these plans.
b. Long-range Plans – are plans covering a time span of more than one year. Middle
and top management mostly undertake these.
3. Plan with Varied Frequency of Use. According the frequency of use, plans may be
classified as:
a. Standing Plans. These are plans that are used again and again, and they focus on
managerial situations that recur repeatedly. Standing plans may be further
classified as follows:
I. Policies- refer to broad guidelines used by managers to help make decisions
and take actions on specific circumstances.
II. Procedures- are plans that describe the exact series of actions to be taken in a
given situation.
III. Rules- are statements that either require or forbid a certain action.
b. Single-Use Plans. These plans are specifically developed to implement courses of
action that are relatively unique and unlikely to be repeated. Single-use plans may
further classified as follows:
I. Budget plan- sets forth the projected expenditures for a certain activity and
explains where the required funds will come from.
II. Program Plan- is designed to coordinate a large set of activities.
III. Project Plan- is usually more limited in scope than a program plan and is
sometimes prepared to support a program.

PARTS OF THE VARIOUS FUNCTIONAL AREA PLANS

The manager may be familiar with plans, knowing the details from beginning to
end. However, the ever present possibility of moving from management level to the
next and from one functional area to another makes it important for the manager to
be familiar with other functional area plans.

1. Marketing Plan. The structure and content of marketing plans vary depending the
nature of the organizations adapting them. The typical marketing plan includes
the following:
a. Executive summary – which presents an overall view of the marketing project
and its potential;
b. Table of contents;
c. Situational analysis and target market;
d. Marketing objectives and goals;
e. Marketing strategies;
f. Marketing tactics;
g. Schedule and budgets; and
 h. Financial data and control.

An example of marketing plan is shown in Figure 19.

ARGREEJAY MANUFACTURING COMPANY

Marketing Plan Schedule

For CY 2012

TARGET SALES UNITS AMOUNT

ELECTRIC FAN

January 8,000 P3,200,000

February 9,000 3,600,00

March 10,000 4,000,000

TOTAL

1st Quarter 27,000 10,800,000

2nd Quarter 35,000 14,000,000

3rd Quarter 48,000 19,200,000

4rth Quarter 60,000 24,000,000

TOTAL ELCETRIC FAN 170,000 P68,000,000

GAS STOVE

January 8,000 P3,200,000

February 9,000 3,600,000

March 10,000 4,000,000

Total

1st Quarter 27,000 13,500,000

2nd Quarter 35,000 17,500,000

3rd Quarter 48,000 24,000,000

 4th Quarter 60,000 30,000,000

TOTAL GAS STOVE 170,000 85,000,000

TOTAL ELECTRIC FAN AND GASTOVE P153,000,000

2. Production Plan. The production plan must contain the following:

a. Production capacity the company must have;
b. Number of employees required; and
c. Quantity of materials which must be purchased.
3. Financial Plan. The components of the financial plan are as follows:
a. an evaluation of the firm’s current financial condition as indicated by an
analysis of the most recent financial statements;
b. a sales forecast;
c. the capital budget;
d. the cash budget;
e. a set of pro forma (or projected) financial statements; and
f. the external financing.
4. Human Resource Plan. The human resource plan must contain the following:
a. personnel requirements of the company;
b. Plans of recruitment and selection;
c. Training plan;
d. Retiring plan.
5. Strategic Plan. The strategic plan must contain the following:
a. Company or corporate mission;
b. Objectives or goal; and
c. Strategies.

MAKING PLANNING EFFECTIVE

Planning is done so that some desired results may be achieved. At times, however, failure
in planning occurs. Planning may be made by recognizing the planning barriers, and by using the
aids to planning.

The planning barriers consist of the following:

1. Manager’s inability to plan

2. Improper planning process;
3. Lack of commitment to the planning process;
4. Improper information;
5. Focusing on the present at the expense of the future;
6. Too much reliance on the planning department; and
7. Concentrating on only the controllable variables.
 Among the aids to planning that may be used are:
1. Gathering as much information as possible;
2. Developing multiple sources of information; and
3. Involving others in the planning process.

Chapter 7
Organizing business activities
INTRODUCTION
The managers needs to acquire various skills in management, including those for
organizing business activities. In this highly competitive environment, the unskilled manager
may not able to bring his unit, or his company, as the case may be, to success.
The value of a superior organizational structure has been proven dramatically during the
Second World War when a smaller American naval force confronted the formidable Japanese
navy at Midway. Military historians indicated that the Americans emerged victorious largely
because of the superior organizational skills of their leaders.
Even today, skill in organizing is a very critical factor in the accomplishment of the
objectives of many organizations, whether they are private business or otherwise. The positive
effects of business success become more pronounced when they come as a result pf international
operations. International business, however, cannot hope to be effective unless they are properly
organized.
The benefits of superior organizing skills are too important for the manager to ignore.
This chapter is intended to provide him with some background and insights on organizing.

ORGANIZING DEFINED
Organizing is a management function which relates to the structuring of resources and
activities to accomplish objectives in an efficient and effective manner. The aim of organizing
activities is to have a collection of people in the organization who perform activities for specific
purpose.
REASONS FOR ORGANIZING
Organizing is undertaken to facilitate the implementation of plans. In effective organizing
steps are undertaken to break up the total job into more manageable man-size jobs. Doing these
will make it possible to assign particular tasks to particular persons. In turn, these will help
facilitate the assignment of authority, responsibility and accountability for certain functions and
tasks. Efforts expended in organizing may also result to easier coordination among the various
activities.
THE ORGANIZATIONAL STRUCTURE AND ITS DETERMINANTS
The structure is the means by which the organization will attain its objectives and goals.
Apart from the organization’s goals and objectives, the structure must be one that considers/ its
resources, and its environment, both internal and external.
The determinants of an organization structure are:
1. Strategy or plans for achieving the organization’s objectives;
 2. Technology that will be used in carrying out the strategy;
3. People employed at all levels and their functions; and
4. Size of the organization.
As the structure is the tool used in achieving the organization’s objectives, it must follow
a strategy, which defines the specific means of realizing goals. Strategy determines the lines of
authority and channels of communication that will have to be set up between the managers and
their respective units.
The nature of technology that will be used will determine to certain extent type of
structure that the organization will have to adapt.
The structure, which is also determined by people in the organization’s internal and
external environment, must be designed to serve the needs of the managers and their
subordinates.
The size pf the entire organization and its various units will also determine the kind of
structure that will have to be adapted.
THE FORMAL ORGANIZATION
After the business plan is adapted, management will proceed to form an organization to a
carry out the activities indicated in the plan.
The formal organization, as described by Nelson and Quick “is the part of the system that
has legitimacy and official recognition.” What is depicted in the organization chart is the formal
organization. It is the planned structure representing the intended configuration of positions, job
duties, and line of authority among the component parts of the organization.
The formal structure is described by management through:
1. Organizational Chart – is a diagram of the organization’s official positions and formal
lines of authority.
2. Organization Manual – provides a written descriptions of authority relationships, details
the functions of major organizational units, and describes job procedure.
3. Policy Manual – describes personnel activities and company policies.

INFORMAL GROUPS
Formal organization require the formation of formal groups, which will be assigned to
perform specific tasks aimed at achieving organizational objectives. The formal group is a part of
the organizational structure.
There are instances, however, when members of an organization spontaneously form a
group with friendship as a principal reason for belonging. This group is referred to as an
informal group. It is not a part of the formal organization and it does not have a formal
performance purpose.

Propels people to form or join AN INFORMAL

FRIENDSHIP GROUP

COMMON
Propels people to form or join AN INFORMAL
INTEREST GROUP

AN INFORMAL
PROXIMITY Propels people to form or join GROUP
 NEED AN INFORMAL
SATISFACTION
Propels people to form or join
GROUP

Informal groups are oftentimes very useful in the accomplishment of major tasks,
especially if these tasks conform to the expectations of the members of the informal group.
Valentine, however, stresses caution,” informal groups re vulnerable to expediency,
manipulation, and opportunism.”
Its low visibility makes it difficult for management to detect those perversions, and
considerable harm can be done to the organization.
The manager is, therefore, warned that he must be on the lookout for any possible harm
that the informal groups may do. It will be to his best interest if he can make the informal groups
work for the organization.
LEVELS OF MANAGEMENT AND SUPERVISION
The management and supervision of an organization may be done through levels of
hierarchy, which may be flat or tall.
1. Flat Structure
The flat organization has few levels of management. This characteristics provides it with
the following advantages:
a. Communication is generally faster and less distorted;
b. Decisions can be made quickly; and
c. Supervisors’ salaries are eliminated.
Flat structure, however, have the following distinct disadvantages:
a. They require managers with experience in the various tasks;
b. A manager may have little time for all subordinates;
c. When the manager is out, the group is without a leader; and
d. Managers may have little time to anticipate problems.
2. Tall Structure
The tall structure has many levels of management. It has the following advantages:
a. Since the average span of control is narrower, the supervisory load is less for each
manager;
b. There are more opportunities for promotion because there are more levels of
positions;
c. Managers re provided with opportunities to specialize
d. There is less demand for managers with multiple skills; and
e. Managers are afforded with more time to attend to other important problems’
Tall structures are also saddled with disadvantages such as the following:
a. Communication tends to be slower and distorted because of the number of levels
it has to pass through;
 b. The numbers of management levels also hinders effective decision making
rendering
c. It is more expensive to maintain as there are more managers to compensate.
BASIC ELEMENTS OF ORGANIZATIONAL STRUCTURE
In designing the organizational structure, certain basic elements are considered. These are
as follows:
1. Work specialization;
2. Departmentation;
3. Pattern of authority
4. Span of control; and
5. Coordination of activities.
WORK SPECIALIZATION
The degree to which tasks are divided in the organization is referred to as work
specialization. A decision must be made regarding this element and it should be reflected in the
organizational structure.
DEPARTMENTATION
Departmentation refers to the grouping of jobs based on criteria that managers believe
help in the coordination and control of activities. A decision must also be made on whether the
organization would be departmentalized or not.
PATTERN OF AUTHORITY
The pattern of authority as an element in designing organizational structure refers to the
extent by which organization members are allowed to make decisions without getting the
approval of another member.
Authority patterns may either be centralized or decentralized. It is centralized when
decision making is concentrated in the hands of higher-level managers. It is decentralized when
decision making authority is granted to middle and lower level management positions.
The Appropriate Pattern of Authority. The environments of organizations differ and
so no single pattern of authority is appropriate for all. Instead, the pattern of authority must
match the organization’s environment. Centralized authority is better suited for stable
environments, while decentralized authority is for complex and changing environments.
Decentralized authority offers the following advantages:
1. Efficiency. Red tapes and bottlenecks are reduced.
2. Flexibility. Managers can cope with situations as they come.
3. Initiative. Managers are highly motivated by the challenge.
4. Development. Managers are provided with opportunity for training.
Decentralized authority has some disadvantages. These are as follows:
 1. Control. Coordinating overall activities is more difficult.
2. Duplication. There is a great chance of duplication of efforts between departments.
3. Centralized Expertise. Home office experts may be overlooked or disregarded.
4. Competency. The organization may not be able to produce competent managers at all
levels.
SPAN OF CONTROL
Span of control is another consideration in designing the organizational structure. It refers
to the number of subordinates reporting to a single supervisor.
The span of control may either be narrow or wide. It is narrow when there are few
subordinates reporting to a supervisor. The narrow span of control is characterized by the
following;
1. There is closer relationship between manager and subordinates;
2. There is less delegation of authority;
3. Controlling activities is more tight; and
4. There is more time for rewarding behavior.
Span of control is wide when there are many subordinates reporting to a supervisor. The
following characteristics are inherent to an organization with wide span of control.
1. Employees work with little supervision;
2. There is a high level of delegation of authority;
3. There is less time for rewarding behavior.
Neither the narrow span nor wide spam of control is applicable to all types of situations.
Just as there are situations appropriate for the narrow span of control, there are also situations
appropriate for the wide span of control.
COORDINATION
Another basic element considered in designing the organizational structure is
coordination. This term refers to the linking of activities in the organization that serve to achieve
a common goal or objective.
As the top global job is divided into several tasks and each task is assigned to
corresponding unit, there is a risk that one task may be done too well or too early to the detriment
of the other tasks. For instance, a company’s aggressive sales force may not be matched by the
ability of the manufacturing unit to produce what can be sold. This kind of problem can be
minimized if the activities if the various units are properly coordinated. Such requirement must
be incorporated in the design of the organizational structure.
BASIC ORGANIZATIONAL DESIGNS
There are four basic organizational designs. These are the following:
Functional Design
 An organization may be designed basically according to function. In organizations with
functional design, employees are grouped together in separate departments on the basis of
common tasks, skills or activities.

Strength of the Functional Design. Using the functional design offers some advantages
consisting of the following:
1. Efficient use of resources;
2. In-depth skill development;
3. Clear career paths;
4. Unity of direction; and
5. Enhanced coordination within functions.
Weaknesses of the Functional Designs. There are certain weaknesses inherent to the functional
design. These are as follows:
1. Slow decision making
2. Less innovation;
3. Unclear performance responsibility;
4. Limited management training; and
5. Poor coordination across functions.
Divisional Design
The organization with divisional design is that type where all activities needed to produce
a good or service are grouped together into independent units.
Strength of the Divisional Design. The divisional design is strong on certain points pertaining
to the following:
1. Adaption to unstable environment;
2. High customer satisfaction;
3. High task coordination;
4. Clear performance responsibility; and
5. General management training.
Weaknesses of the Divisional Design. The weaknesses of the divisional design are as follows;
1. Inefficient use of resources;
2. Low in-depth training for personnel;
3. Focus is on division objectives; and
4. Loss of control.
Hybrid Design
The hybrid design, also called the matrix structure, is a combination of divisional units
and functional departments.
Strength of the Hybrid Design. The hybrid designed organizational is strong in term of the
following:
1. Simultaneous coordination;
2. Integration of goals with objectives; and
3. Efficient and highly adaptable.
Weakness of the Hybrid Design. The organization with a hybrid design is weak on the
following points:
1. Slow responses to exceptional situations;
2. Conflict between headquarters and divisions; and
3. Administrative overhead.
Matrix Design
An organization with a matrix design is one that implements functional and divisional
structures simultaneously in each department. The employee is supervised by the functional
manager in his work as a specialist. The divisional manager integrates the activities of the
specialists.
The following conditions favor the use of matrix design:
1. Environmental pressures exist for a dual focus, such as innovation and quality;
2. Large quantities of information must be processed; and
3. Efficiency is needed in the use of resources.
Strengths of the Matrix Design. The matrix-designed organization has an array of strengths,
which are as follows:
1. Allows demands from the environment to be met simultaneously;
2. Provides flexibility;
3. Encourages resource efficiency;
4. Enhances skill development;
5. Increases motivation and commitment among employees; and
6. Aids top management in planning.
Weaknesses of the Matrix Design. Robbins and Judge indicate the following weaknesses of the
matrix-designed organization:
1. Creates confusion;
2. Power struggles within the group are potential problems; and
3. Places stress on individuals.