CHAPTER 6

ORGANIZATIONAL SYSTEMS
Learning Outcomes
Particularly at the end of this chapter, the students should be able to:
1. Discuss the different types of organizational structures;
2. Cite examples to illustrate each of the different types of organizational structures;
3. Explain the factors that may influence a company's decision to adopt a type of organizational
structure;
4. Assess each of the organizational components in terms of the value they contribute to the
business entity:
5. Demonstrate the role of leadership in an organization; and
6. Show the importance of organizational policies in running an organization.

To successfully implement the strategies of the organization, its structure must support its
unique system while the entire machinery of the company must be aligned to the direction where
it wants to go. The functional strategies of the company should be complementary to the much-
desired goals; hence, there must be a fit between and among organizational elements, including
its departments and small business units.

Organizational Structure
Organizational structure refers to the system or mode by which a group of individuals is
able to achieve its desired goals. The organizational structure of an organization/company is
subject to many factors like technological breakthroughs by competitors, changes in customer
lifestyles, and those that are environmental in nature. Management, employees, suppliers,
customers, government, and society are examples of internal factors that significantly affect
organizations one way or another. Suffice it to say, servicing and product companies need to be
dynamic to stay in the business mainstream. They need to possess a built-in flexibility that will
enable them to adapt readily to unstable conditions.

Types of Organizational Structures

An examination of the different organizational charts of popular and successful
companies will show a variety of organizational structures. Depending on their organizational
goals and specific objectives, these built-to-last companies adopt appropriate organizational
forms that may range from functional to territorial, or from product to market-centered to matrix.

Functional Organizational Structures

Organizations adopt a specific structural arrangement for a reason. Structuring an
organization effectively requires that the management should know the goals of the organization,
the skills of its people, the needs and goals of its subordinates, the available resources, and the
time, cost, and environmental constraints that are existing. Similarly, it requires management to
bring together the human, technical, marketing, and financial resources of the organization.
 Particularly, human resources are brought together in units, teams, or projects so that job
specialization can be optimized while special skills can be best managed. There is a need for the
marketing department to interact and coordinate with personnel in other major functional areas.
The production/operations department follows the requirements set by the marketing department
while the financial department efficiently allocates funds to achieve the organization's set
objectives. All these departments need to act together to accomplish the organization's overall
vision, mission, and goals. Thus, an organization should be structured effectively so that its
human resources, marketing, production/operations, and finance departments can work
collaboratively.

General Manager

Human Production /
Marketing Finance
Resource Operation

Figure 6.1 Functional Organizational Structure

Territorial Organizational Structure

As an organization begins to serve its customers who are spread over a growing
geographical area, a territorial structure becomes a viable design. In this system, the target
market is divided into geographical units according to certain criteria.
Territorial structural arrangements have several advantages. First, personnel familiar with
the history of customers in the area, their culture, their preferences, expectations, and habits of
living can cultivate the local markets. Second, the company and its sales force can respond
quickly to changes in the competitive environment. Third, there is closer contact between
managers familiar with the territory and their subordinates. Finally, because management is
familiar with local conditions, it can make quicker strategic decisions.
Adopting a territorial structure has its downsides. As the product line becomes more
varied, the territory structure becomes more cumbersome. The creation of multiple territory
offices results in duplication of services and possibly the appointment of less qualified
individuals to supervisory positions. Thus, there is the need for competent managers. An increase
in expenses is inevitable. Sometimes, having unprepared or weak managers in territories may
negatively affect sales, may create a damaged public image, and may lower morale among
employees, Figure 6.2 shows the departments territorial structure used by an organization.

General Manager

National
Luzon Visayas Mindanao
Capital Region

Figure 6.2 Territorial Organizational Structure

Product Organizational Structure
Traditionally, organizational divisions follow a product structure. In some companies, the
sub- businesses are assigned to product group managers, each of them is given key operating and
staff functions. As long as the product, markets, and customers are diverse and mutually
exclusive, there is no limit to the number of product management systems used. When different
types of products are involved, divisions are likely to include research and development and
engineering departments. These allow managers to operate independently. They are responsible
for both current and future decisions about the product market since the long-term goal is to
increase and not just to maintain the current market.
Marketing managers follow their products from conception to the time when it is made
available to the consumers. They coordinate all information relating to the products with the
other departments in the company. Marketing managers are likewise involved in various
company operations. Some specific tasks include gathering and centralizing all information
relating to the products, preparing product strategy alternatives, preparing forecasts, defining the
marketing strategies to achieve planned objectives, ensuring the profitability of the product,
monitoring its life cycle, monitoring the accomplishments of programs previously drawn up, and
suggesting ways to improve or create new or improved products.

Marketing Manager

Buyer Products Marketing Production

Food Manufacturing

Clothing Raw Materials

Equipment

Figure 6.3 Product Organizational Structure

There are four courses of action that an organization can implement to improve or replace
any product management structure. They are:
1. conducting training programs in forecasting, interpersonal skills, planning, motivation,
and control to improve the ability of product managers to do the job;
2. switching from a marketing manager to a marketing team that implements activities to
market the product effectively;
3. eliminating product managers of minor brands and consolidating them with other
products. This is feasible when the product line appeals to similar consumers or industrial
users; and
4. establishing divisions around the major company products and using functional structural
arrangements within divisions. Despite the problems involved in the product structure,
this organizational form can be successful.
 The key to good performance is top management support with reasonable budget, planning,
and resource allocation. Without top management support, product/brand managers will
experience difficulty in gaining the cooperation of those from the advertising, marketing
research, and sales divisions.

Market-Centered Organizational Structure

Companies can structure their businesses to fit their markets. A market-centered
organizational structure describes the wide range of structural forms that center on a group of
customer needs rather than a region, product line, or function. A market-centered organization is
decentralized by market. A market center is a profit center. Organizations in the following
situations are suited for the market-centered structure.
 When a competitor threatens market leadership, market centering can restore a
competitive advantage by improving knowledge on customer, distributor, and retailer
needs.
 When a new product is introduced and is affecting a company to a certain extent, a
market-centered approach can stimulate new ideas because the firm's technical specialists
receive more information about market needs.
 When a product manufacturer can achieve high profit by diversifying into services with
larger margins of returns.
 When marketing-related products or services requires the so-called marketing
intelligence by conducting or implementing smart customer strategies.
 When a manufacturer who has been selling product-performance benefits shifts
marketing strategies to feature the financial benefits of customer profit improvement,
market centering makes it easier to gather information on how customers make their
profits.
 When a marketer wants to attract more entrepreneurial managers, market-centering offers
managers wide responsibilities and a variety of supervisory duties.

A market-centered organizational structure groups company activities around important

and relevant criteria and forms SBUS that will formulate marketing strategies, among others.
Each unit is responsible for profits. In many cases, large divisions have their own marketing
departments. Division marketing may also be structured by product, market, customer, or any
combination of these factors. Often, a new division starts with a functional organization, but
changes to one that is structured by product, customer, or market as the business increases.

SBU Organizational Structure

This division structure raises the issue of whether any marketing functions should be
performed at the corporate staff level. Some companies maintain a minimum marketing services
structure at the corporate level. For example, market research, advertising, and media planning
services are provided to each territorial division in Luzon, Visayas, and Mindanao from a
corporate staff group in Manila. The decision, whether to maintain some corporate-level
marketing staff services or otherwise, depends primarily on the size of the division.
 If a division is large enough to afford its own marketing structure, it will usually have
one. Figure 6.4 shows an SBU structural arrangement. A group vice-president who is directly
responsible to the chief executive officer of the company heads each SBU. This type of structure
places emphasis on planning and analysis of company strategies.

General Manager

Small Business Small Business Small Business Small Business

Unit A Unit B Unit C Unit D

Figure 6.4 SBU Organizational Structure

Matrix Organizational Structure

The matrix structure is efficient for establishing specialist resources but is best for
integrating functions.

General Manager

Small Business Small Business Small Business Small Business

Unit A Unit B Unit C Unit D

Functional Input Personnel

Department
Human Resources
Marketing
Research and
Development
Finance
Production

Production Team Production Team Production Team Production Team

Figure 6.5 Matrix Organizational Structure

On the other hand, the creation of SBUS introduces effective integration at the expense of
resources specialization. The matrix organizational structure seeks the best of both. Firms such as
organizational structure. Unilever, Shell, Dow Chemical Company, and Texas Instruments use
various forms of the matrix organizational structure.
A matrix is any organization that employs a multiple "boss" arrangement. For example, a
person can have two bosses, one for functional and the other for product. Matrix structures have
been adopted in manufacturing, service, professional, and non-profit organizations. A marketing
specialist is a member of two units, one of which is more or less a permanent home and the
second is a temporary home. Thus, the matrix structure combines the idea of specialized
departments with the idea of self-sufficient and somewhat autonomous units.
 In an organization that uses a matrix structure, one must cut across departmental
boundaries to get a job done. A team working on a job is comprised of a group of specialists so
that the ability to work together is very important. Figure 6.5 illustrates how teamwork among
production, marketing, and finance specialists is required to complete projects. The key feature is
that both the functional and product lines of authority overlap where both product and functional
managers share managerial authority over the people in each cell.

Choice of an Organizational Structure

Some of the factors which may influence the firm's decision to adopt the type of organizational
structure appropriate to its needs include: size of the firm, product offerings, market of its
products, prevailing competition, and management philosophy.
 Size of the Firm. Generally speaking, the size of the firm will indicate the complexity of its
organization. A firm producing and selling in a restricted territory may find the functional
organization the best form for their purposes, whereas a larger firm which produces several
products and sells to a wider market may opt for a regional form of organization to maximize
selling efforts.

 The Products. The nature of the product or products to be sold is another factor that
influences the choice of an organizational structure. Consumer and industrial goods may
require different types of services from the producer. Some products require extensive after-
sale servicing to customers and the marketing organizational structure can take care of this
task.
Technical products may require a different type of salesmanship and advertising as
compared to non-technical products. This is also true with products requiring wide
distribution reach like soft drinks. These are examples wherein the nature of the product can
influence the choice of a marketing structure.

 The Market. Characteristics of the market like geographic dispersion, income class, and
buyer behavior need to be considered in organizing the marketing unit. If markets are
concentrated, the stakeholders may find it easier to sell directly to the consumers. If markets
are dispersed, or if consumers buy in small quantities which does not justify direct sales, then
the producer may opt to use intermediaries. Thus, the producers' efforts will be concentrated
on selecting middlemen and devising ways to assist them rather than supervising total sales
operation.

 Competition. A firm may find it necessary to organize its marketing efforts following the
requirements of competition. If a major competitor uses an existing pattern of distribution,
the firm may find it necessary to accommodate such a pattern. If brand name merchandising
is an established feature of a particular industry, like ready-to-wear denim jeans, then the
newcomer may have to strive to establish his own brand. If a change in organizational
structure proves to be successful in an already established firm, then other firms may imitate
such change.
 Philosophy of Management. A final factor that affects the structure of an is the management
philosophy prevailing in the company. In each case, the structure of the business unit differs.
Some companies are more business-oriented than others and will have a business unit that is
involved in a wider scope of activities. In addition, if management firmly believes in
centralization rather than in decentralization, then most of the responsibilities will be borne
by the home office rather than by district or regional offices.

Evaluation of an Organizational Structure

A number of criteria may be used in evaluating organizational structures. These criteria
include the ability of the organizational structure to facilitate control, draw coordination among
the employees, provide information, compute for the costs involved, and adopt a culture of
flexibility.
 Facilitating Control. Control in an organization involves a comparison of actual
performance with pre-established standards or plans. If the organization structure enables a
manager to identify problem situations and take necessary corrective actions, then the firm
may be said to have a control mechanism. If each person clearly understands the scope of his
authority and areas of responsibility, and if the organization provides suitable channels for
communication, then the company has a solid framework for management control.

 Coordination. The coordination of individual actions is often called team effort. A firm
employing several specialists and line officers at different levels may still produce ineffective
results if efforts are not properly coordinated. The presence of effective teamwork is usually
indicative of an efficient and well-organized marketing operation.

 Providing Information. Because markets are dynamic and subject to change, it is essential
for managers to gather information in order to anticipate changes and make decisions
accordingly. A good organization should have an adequate information system and proper
channels through which information flows.

 Cost of the System. A firm can choose from the simplest to the 'most complex type of
organization. However, it has to strike a balance among three important factors-the
organizational information it desires, the organizational control it wishes to employ, and the
costs of organizing its personnel. The number of people employed in marketing management
is not a criterion of the efficiency of the organization. Theoretically, an optimum size
produces the greater efficiency for the marketing management team for each firm.
Inefficiency may result from overstaffing, as well as from understaffing. It is the
responsibility of the top management in the company to continually evaluate the performance
of the organization performance of the organization. A basic procedure in this evaluation is to
weigh the performance against its costs.
 Flexibility. To be able to cope with the dynamic and changing environment, the firm should
have an organization that can adjust to changes. Flexibility is necessary to attain good
performance. Peter Drucker (1954) in his book. The Practice of Management identifies
criteria for evaluating organizational strategies. These criteria are clarity which reflects the
individual's needs to understand his tasks and the group's tasks, personal relationships within
the group, and the availability of information. Economy, in the effort to control, supervise,
and motivate people, will minimize the allocation of resources to management activities.

When possible, self-control and self-motivation need to be used. The direction of the
organization needs to be toward the goals of the entire enterprise and not toward the goals of
functional areas. Understanding one's tasks in relation to common tasks requires communication
that helps individuals relate their efforts to common organizational goals.

In summary, organizations provide the mechanism for the implementation and control of
plans. The organizational structure may be organized according to functional, territorial, product,
market-centered, SBU, and matrix structures. Each of these organizational structures has strong
and weak points. However, the actual choice of a company structure will depend on
considerations like size of the firm, nature of products, market, competition, and management
philosophy. The effectiveness of an organizational structure may be assessed according to the
ability of the organizational structure to facilitate control, draw coordination among the
employees, provide information, compute for the costs involved, and adopt a culture of
flexibility. Additional criteria include clarity of tasks and relationships, economy, ability to
provide direction and facilitate decision- making, stability, and adaptability.

Organizational Components
An organization is an entity composed of people that is structured and managed in such a
way that it is able to achieve its set goals and objectives. An organization generally consists of
elements that act and work together through coordinated activities. The organizational
components are the management, employees, facilities and equipment, financial resources, and
organizational policies.
Management refers to the administrative supervision of an organization. It includes
leadership, the organization's vision-mission, goals, and objectives to attain organizational
success.
 Leadership is foremost in the management of any business. A good leader, regardless of
whether he owns or works for the organization, is someone who inspires his employees
and stretches them to their optimum productivity. He is the prime mover and is expected
to lead his employees in the attainment of the organization's set goals.

Tasks of a Leader: planning where he sets the objectives to be attained and the
means to achieve them; organizing where he identifies, divides, groups, and coordinates
various activities to achieve set goals; staffing where he recruits, selects, hires, and
develops human resources; directing where he leads and communicates with his
 employees to attain objectives; controlling where he monitors processes and functions;
and institutes corrective actions when needed.

Roles of a Leader: a strategist, a facilitator, and an administrator; a leader who

inspires and motivates his employees to attain quality and productivity; an information
man who understands critical facts, issues, problems, and other concerns about the
industry and the business environments; a conceptualizer who concretizes the vision,
mission, and plans of the enterprise in accordance to set goals and objectives; a liaison
officer who serves as conduit for the employees who belong to different business units or
groups; a mediator who settles concerns, issues, and other problems between labor and
management; a facilitator who negotiates the allocation of resources; a delegator who
assigns responsibilities, empowers employees, and monitors them periodically and
efficiently; a problem-solver who tackles organizational concerns and provides adequate
solutions; and a decision-maker who makes appropriate decisions, both qualitative and
quantitative, and as needed by the organization.

Skills of a Leader: technical skills or being competent in his respective field to

play his role adequately and to perform his tasks effectively; human relations skills or
being adept in dealing with personal and interpersonal employee relationships; and other
skills required to attain organizational success.

Vision refers to the image that the organization aims to establish and project to
both its employees and the public while mission refers to the purpose of the organization.
This is explicitly stated in the mission statement of the organization.

The mission statement of the organization can include any or all of the following:
it must express the image the organization wants to project to the public; it must clearly
state the objectives of the organization; it must reflect the fundamental values and beliefs
of the organization; it must enumerate the product/service of the organization; it must
describe the customers it serves; and it must explain the technology or the process being
adopted by the organization.

On the other hand, goals and objectives refer to what the organization aims to
attain. Goals are general, macro, and long-term in nature, whereas objectives are specific,
micro, and short-term. More specifically, organizational objectives should possess the
following qualities: immediate or short-term, prioritized, carefully chosen and specific,
the organization, and realistic. attainable, flexible, quantifiable, if possible, consistent,
aligned to the vision-mission of the organization, and realistic

Employees
Aside from the management, employees constitute a significant part of the organizational
milieu. They are the very people who work, support, and earn profits for the organization. They
are found in all levels, performing tasks ranging from the sophisticated to the difficult, practical,
and formally or informally structured. odd ones. They work in the different functional areas of
marketing, finance, and production whether
Employees are expected to give their best in performing their assigned tasks. Several
factors affect their productivity. A simple definition describes productivity as the ratio of the
output with respect to input. Certain variables affect productivity. They include salary, fringe
benefits, work environment, and organizational climate. Generally, management expects
employees to experience satisfaction, employee involvement, and employee commitment. and
graduate through three levels of relationships, as shown in Figure 6.6. They are employee
satisfaction, employee involvement, and employee commitment.
 Employee Satisfaction. It is an emotional state where the employee experiences a feeling
of content in the workplace. Any or all of the following generally bring employee
satisfaction: acceptable salary, fringe benefits and incentives, positive interpersonal job."
relationships between and among management and employees, and acceptable conditions
in the workplace. Thus, an employee is generally said, "to be satisfied with his job”
 Employee Involvement. Satisfied with his work conditions, an employee may graduate to
a higher level of organizational relationship called employee involvement. He becomes
more participative in company activities and essentially aims to contribute to the growth
of the company.
 Employee Commitment. This degree of employee relationship is further heightened when
the employee reaches the highest level that is employee commitment. Here, the employee
cultivates within himself an attitude and a "sense of owning" where he treats the interests
and welfare of the enterprise as if he owns it.

employee
commitment

employee
involvement

employee satisfaction

Figure 6.6 Levels of Organization-Employee Relationship

Facilities and Equipment

Another important component of the organizational environment is the facilities and
equipment. These facilities and equipment may be simple and crude as long as they are
functioning and producing the desired output. On the other hand, organizations with sufficient
capitalization, use the most sophisticated and the latest machinery and technology. Facilities
include management of buildings and site maintenance, management of machinery and facilities,
and application of technology.
  Management of buildings and site maintenance needs to be appropriate for the type of
business the organization is engaged in. Physical structures have to be maintained
properly, secured for safety, and optimized when it comes to layouts.
 Management of machinery means making sure that the right types of equipment or
machinery are in place and including the right quantities as needed by the organization.
This is another important aspect of facility management. Regular maintenance scheduling
and replacement of old and dysfunctional equipment are part of efficiently increasing
productivity.
 Management of facilities means that amenities such as washrooms and canteens need to
be in good and healthy working conditions as these are important to the workforce.
 Application of technology has become the unifying force in facilities and equipment
management. Technology asset management refers to the business processes and enabling
information systems that support the management of both physical and non- physical
assets of the organization. Information technology digitally and efficiently integrates
financial, inventory, purchasing, accounting, marketing, and other aspects of an
organization.

Financial Resources
In addition to facilities and equipment, organizations need sufficient financial resources.
The financial resources of the organization determine the direction the organization will take and
affect its capability to realize its set business goals and objectives. These business goals and
objectives include spending on other promotional strategies, upgrading or purchasing new
facilities and equipment, experimenting and developing new products, hiring additional
manpower, increasing salaries and wages, training employees, and most significantly, ensuring
continued existence of the organization.

Organizational Policies
The organizational milieu includes company policies, which are the lifeblood of an
organization. They put organizational structure and system in place. They ensure order, hierarchy
of authority, clear delineation of functions, efficiency, productivity, and good interpersonal
relationships. They make possible the smooth actualization of operations and functions and
facilitate the attainment of set goals and objectives, whether measurable or otherwise.

In summary, entities include organizational components that collaborately synergize to

achieve desired goals and objectives. Guided by a vision and a mission statement, management
sets the direction of the organization. Employees working together and facilities and equipment
enable organizations to function efficiently and effectively. Policies give direction and structure
to an organization supported by needed financial resources.