UNIT 1:

NATURE AND CONCEPT OF MANAGEMENT

Lesson 1: The Management Concept

Objectives
 Discuss the nature of management;
 Explain the importance and meaning of management;
 Differentiate efficiency from effectiveness;
 Identify factors that influence management practices and trends; and
 Appreciate the importance of management in the success of organizations.

Introduction

Management has always been attributed to the activities of an organization,

specifically its day-to-day operations. It consists of administrative job functions that require
critical thinking and decision making. It also entails responsibilities concerned not only
with the people, resources, and processes within the organization but also with outside
factors such as the environment where the organization operates.

Nature of Management

Management is a science as well as an art. It is a body of knowledge whose ideas

and principles have become the basis of organizational frameworks employed by many
businesses and organizations. It is considered a science because it evolved from a number
of theories that involved extensive studies and experiment.

The management principles practiced by business people and professionals are base
on scientific principles, scholarly studies, and statistical data. The problem-solving nature
of management benefits greatly from methods and practices adopted from scientific
principles.

Meaning and Importance of Management

Management is the process of planning, organizing, leading and controlling the

activities of an organization effectively and efficiently to achieve its goals. It plays a
crucial role in every organization, especially in today’s world that is much more complex
and where constant change is the norm. Organization, therefore, need to keep abreast of all

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this changes and managers need to be dynamic and flexible to address the challenges that
changes bring.

Efficiency and Effectiveness

Efficiency and effectiveness are closely related concepts that managers apply to
render excellent performance. A skillful balance between the two defines the success or
failure of a manager. Some people interchange the concepts of efficiency and effectiveness,
believing that they have the same meaning. However, these two concepts are different from
each other.

Efficiency is the ability to maximize output with minimum input. It is often referred
to as “doing things right,” and seeks to limit the wasted input which is costly for a business.
There is an element of speed in efficiency since it requires things to be done quickly to
avoid wasting time and effort.

Effectiveness, meanwhile, is the capacity to attain an intended objective or result. It

is often called “doing the right thing.” The intention is to meet the desired goal regardless
of the amount of input required. Careful analysis and critical thinking are present in
effectiveness. If there is a goal that needs to be achieved, the things that need to be done are
prioritized to achieve that goal.

Factors Influencing management

There are five factors that influence today’s business environment:

 Globalization
 Technology
 Sustainability and Corporate Social Responsibility
 Psychology
 Ecosystem

Globalization

Globalization refers to the phenomenon of growing interconnectivity and

interdependent relations between nations. This growth has been greatly influenced by
advancements in technology, transportation, communication, and education as well as the
gradual deregulation of trade.

Technology

Technology is one of the main driving forces of business. Advancement in this area
have immensely improved business trends. New technologies have rendered business
functions and related task easier to accomplish, bringing about increased levels of
productivity.

A significant phenomenon brought about by technology is outsourcing, Outsourcing

is defined as the transfer of an organizational function to a third party. When the third party
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is located in another country, the transfer is called offshore outsourcing or simply
“offshoring.” Unlike in the conventional business model where management closely
controls labor, outsourcing transfers management control and decision making of certain
business functions to the external supplier or third party. The relationship between the
business and the external supplier now involves information exchange, close coordination,
and mutual trust that each party will fulfill their respective functions.

Sustainability and Corporate Social Responsibility

Sustainability in business means that companies should plan and conduct long-term
business operations to ensure minimal negative impact on the social, cultural and economic
aspect of their external environment or community. Corporate social responsibility,
meanwhile, is defined as the willingness of companies to run their business operations in a
sustainable and responsible manner.

Example of sustainability in business is the implementation of cost-saving

mechanisms such as recycling, reduction of energy consumption in the workplace, and the
use and production of environmentally friendly products. Corporate social responsibility,
on the other hand, is expressed through social outreach programs, support of significant
causes and other forms of philanthropic activities. Managers are continually challenged to
implement programs and processes that will enable their engage in sustainable and socially
responsible activities while maintaining their level of productivity.

Psychology

The study of psychology is an important facet in management since it focuses on

developing people management skills and analyzing customer satisfaction. A better
understanding of psychological concept such as motivation, behavior, attitude, and
personality is vital for effective management.

Psychology can help managers foster closer relations and better communication
with employees. Improved communication, in turn, enables managers to better assess their
employess, determine their strength and weaknesses, and guide them toward personal and
professional development.

Ecosystems

A business ecosystem consists of a group of firms that provide related products and
services. The emergence of business ecosystems has resulted in improvements and
innovations in industries. A good example is the collaboration between telecommunication
firms, media, and technology to disseminate information to the public.

Having several key players in a business ecosystem presents each company a wider
perspective of their product or services. A particular business can no longer consider its
own particular interests but should also take into account the interest of other players in the
industry.

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Lesson 2: The Evolution of Management
Theories

Objectives
 Trace the evolution of management theories;
 Enumerate and discuss the theories on management; and
 Differentiate management theories.
Introduction

Managers today are wrestling with the same problems and issues that confronted
business people and leaders many years ago. Management skills have been utilized since
ancient times, when tribal leaders organized hunting and gathering groups to acquire
resources from natures. The rise of civilizations have led leaders to organize communities
and implement more complex tasks such as the construction of infrastructure, the
administration of governments and even the conduct of war.

Discussion

The Development of Management

Ancient civilizations practiced management in organizing and implementing

various activities vital to their communities. In 1100 nc, the Chinese used the four basic
management functions of planning, organizing, leading, and controlling to carry out vast
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infrastructure projects and manage various parts of the expanding Chinese empire. The
Greeks developed a scientific approach to work, and the Greek philosophers Socrates and
Plato discussed management concepts such as leadership and job specialization. The
ancient Romans, meanwhile, practiced decentralized management to effectively manage
their vast empire. During the medieval period, Venetians improved production by
standardizing the assembly line, using an inventory system, and building warehouses.
Leaders and managers often utilized trial and error in dealing with management problems
before they could perfect operations.

The Industrial Revolution of the 18th century introduced great changes in

management practices. The emphasis on production brought about by improved
industry generated a demand for new ways of ensuring efficiency and effectiveness in
factories and workplaces. By the 19th century, management has become an established
discipline and many entrepreneurs and academics sought new ideas and approaches in
improving the workplace. Manufacturing and industry soon became a core business in
Europe and the United States, and many individual sought to enter the commercial
world. By the 20th century, educational institutions were established to focus on the
study of business and management. The first business school in the United States, the
Wharton School, was founded in Pennsylvanis in 1881. In 1900, the Amos Tuck School
was founded in New Hampshire and became distinguished as the first school to offer a
master's degree in business administration.

The 20th century saw the development of modern management theories

and innovative methods that transformed production and led to the development of modern
industry and commerce. Various entrepreneurs applied scientific principles in improving
the level of productivity of their respective businesses. Businessmen sought to establish the
most efficient means of utilizing resources and production processes to manufacture the
greatest number of products in the shortest possible time.

Scientific Management Theory

Scientific management is a theory of management which studies the
application of scientific methods and principles for the purpose of redesigning the work
process to increase efficiency. It emphasizes the importance of labor in the production
process and focuses on improving the efficiency of workers in production. Among its
important advocates were Frederick W. Taylor, Henry Gantt, and Frank
and Lillian Gilbreth.

Frederick W. Taylor, an American engineer, was the first to advocate

scientific management. He pioneered several innovations during his tenure as foreman
at Midvale Steel Company in Philadelphia. Taylor discussed in depth the scientific
management theory in his book The Principles of Scientific Management. He
introduced the four principles of scientific management as follows:

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 1. Replace rule-of-thumb methods with those that are scientifically proven.
2. Select, train, and develop each worker based on scientific methods.
3. Cooperate with the workers to ensure that scientific methods are being
observed and implemented in their work.
4. Divide work between managers and workers to ensure that scientific
management principles are applied by the managers in planning tasks and by the
workers in performing their tasks.
Taylor emphasized efficiency in improving the production process. He believed
that analyzing the work process will enable the manager to identify the best way of
doing thing. His work, combined with the research of Frank and Lillian Gilbreth on the
same topic, led to the development of the time and motion study. It is a technique
wherein a job is divided into component parts and the time consumed in performing
each task is measured. Taylor called the "Father of Scientific Management" because of
his contributions to the development
of management. His ideas were also considered an important cornerstone of the
Efficiency Movement, which improved industry and production in Europe and the
United States in the early 20th century.
Another example of scientific management is Henry Ford's improvement of the
assembly line. Henry Ford was an industrialist who established the Ford Motor
Company and sold the first commercially available automobile - the Ford Model T Ford
applied scientific principles
in improving the process of assembling parts for the Model T. He installed a moving
assembly line where workers could concentrate on one task such as the installation of a
specific automobile part. This innovation greatly improved production time and resulted
in increased
production of automobiles. Ford's technique was so effective that it reduced the
assembly time for the Model T from 13 hours to 1½ hours.
Scientific management resulted in great improvements in operations and
production. However, businesspeople and managers soon noticed some limitations of
the model. First, operations became routinary which led to boredom. Second, money
became the sole incentive for workers, ignoring other aspects of worker welfare.
Finally, workers felt that the piece-rate technique, where they were paid only for the
unit they produced regardless of time, might lead managers to abuse power and exploit
them. It became clear that aside from the workers, managers should also be considered
in the implementation of plans and in the overall management of production and other
operations.

Administrative Management Theory

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 Administrative management focuses on the overall management of
an organization, emphasizing the role of managers as administrators of
the organization. This was introduced in the early 20th century by Henri
Fayol, a French industrialist. Fayol identified five functions and fourteen
principles of management.
The five functions are planning, organizing, communicating,
coordinating, and controlling On the other hand, the fourteen principles of
management are as follows:
1. Division of work into specialized tasks, with specific duties
and responsibilities given to individuals
2. Authority of managers to delegate work and tasks to the employees. The
employees, in turn, are expected to comply and exercise their tasks
responsibly.
3. Discipline where expectations should be clearly set and violators of rules
must be punished
4. Unity of command where an employee should only report to one
supervisor
5. Unity of direction which means that the efforts of the employees are
guided toward the
attainment of organizational objectives
6. Predominance of the general interest of the organization over the
individual interests of employee
7. Remuneration of the efforts of the employees which should be
systematically rewarded in line with the organization's vision and
mission
8. Centralization where the roles of all employees are clarified, with
emphasis on the distinction between superior and subordinate roles
9. Scalar chain which means that communication should be open within the
chain of command
10. Order where the organization of jobs and materials must be done in an
orderly fashion
11. Equity which means that fairness and order must be practiced to
maintain employee commitment
12. Stability and tenure of personnel to actively promote employee loyalty
to the organization
13. Initiative to encourage employees to act on their own in support of the
organization's objectives
14. Esprit de corps to promote teamwork and the unity of interest between
the employees and the management
Human Relations Theory

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 The human relations theory grew out of the human relations movement in the
1930s. It focuses on the social element in the workplace and considers the influence of
interpersonal relationships, social conditioning, and group norms in determining the
performance of workers.
The foundations of the human relations movement were established in the 1920s
with the pioneering studies of Elton Mayo, an Australian psychologist who used his
expertise to implement improvements in the workplace. He and his colleagues
embarked on a series of studies on workers in the Hawthorne Works factory of the
Western Electric Company. Among the innovative outcomes of the Hawthorne studies
were the introduction of a set number of work hours, the implementation of break times
for workers, improvements in lighting in work areas, and close supervision by
managers. Managers were encouraged to be supportive of their workers and to actively
involve them in management decisions. Mayo observed that the introduction of these
changes resulted in increased satisfaction among workers which also resulted in their
increased overall productivity.
Quantitative Management Theory
Quantitative management uses quantitative approaches such as statistical analyses
and computer simulations to arrive at a management decision. The two main branches of
quantitative management are management science and operations management.
Management science uses mathematics in problem solving and decision making.
It seeks to create ideal models that will be the basis for improved business operations and
processes. On the other hand, operations management seeks to apply ideas and models
from management science to the actual workplace in dealing with managerial situations.
Management information system, meanwhile, is a subfield of quantitative
management. It gathers past, present, and projected data from external and internal
sources and transforms them into usable information which managers use to select the
best alternatives and make
decisions easily. The information is usually provided in easily accessible formats such as
spreadsheets.
Systems Theory
The systems theory explains how interrelated parts operate
together to achieve a common purpose. With the advent of the Industrial
Revolution and the increasing requirements for increased efficiency and
greater precision in production and operations, the systems approach
became the preferred model of business organization and management. It
defines an organization as a system which is composed of four elements:
1. Inputs (materials/human resources)
2. Transformation processes (technology/managerial operations

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 3. Outputs (products/services)
4. Feedback (reactions from the environment)
The contemporary systems theory analyzes an organization
according to the degree to which it is open or closed. An open system
refers to an organization that interacts closely with its environment and is
fully aware of what is going on in the environment as well as the changes
it experiences. A closed system, on the other hand, does not interact with
its environment and pays little attention to changes in its surroundings.
Contingency Theory
The contingency theory argues that universal theories cannot be applied to
organizations because each the organization has unique characteristics and is confronted by
varied problems or challenges. An organization's performance is also affected by internal
and external factors This perspective was introduced in 1967 by Fred Fiedler, an industrial
and organizational psychologist who studied the relationship between leadership a and
group Fiedler's contingency model states that the leader's personality determines how well
they address situations in the workplace.

Other experts such as Paul Lawrence, Jay Lorsch, and James Thompson studied the
impact of contingency factors on the organizational structure. The structural contingency
theory was the dominant paradigm of organizational structural theories for most of the
1970s.

Furthermore, they suggested that previous theories such as Weber's bureaucracy

and Taylor's scientific management failed because they overlooked the fact that
management style and organizational structure are influenced by various aspects of the
environment, which are the contingency factors that define business situations. Hence, one
cannot determine the best style of leadership for an organization.

Quality Management Theory

Quality management emphasizes consistency in an organization and minimal to no

errors or defects in production. This ensures quality products and services that result in
high customer satisfaction and increased revenue. Managers and employees are both
closely involved in quality management.

The quality management perspective emerged after the Second World War,
primarily through the work of William Edwards Deming, Deming conducted his work
in the 1950s in post-war Japan, as he helped Japanese industries improve production.
His methods involved statistical
process control (SPC) and problem-solving techniques. The significant principles
espoused by Deming include improved product design for improved service, uniform
product quality, improved product testing, and increased market sales. Meanwhile,
Joseph Moses Juran also worked with Japanese businesses and introduced his concept
of quality management which emphasized training for top and middle managers. In

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1979, he established the Juran Institute which guided organizations in improving the
quality of their products and services. These efforts contributed toward making Japan
an industrial power in Asia within a decade after the Second World War.

The Japanese concept of kaign, introduced in 1986, focuses on the continuous

improvement of people, processes, and products. Kaizen is a Japanese word which
means "change for the better," and requires the implementation of gradual changes in
an industry or organization over a certain period. In the implementation of changes all
employees are involved, from the top management down to the office personnel, factory
workers, janitorial staff, and even external stakeholders. The Japanese automotive
manufacturer, Toyota, has been using kaizen to implement small improvements geared
toward overall improvement in
production and operations.

Lesson 3: The Manager

Objectives
 Identify the main functions of management.
 determine the roles of managers
 discuss the key skills of managers; and
 describe and compare the levels of management

Introduction

Managers perform the main managerial functions in the organization and assume
different roles in the performance of their duties. This results in the assignment of diverse
responsibilities to managers which in turn create the different levels of organizational
hierarchy. That is why they should be equipped with the skills needed to manage the
organization well.

Discussion

Different Types of Managers

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 The Problem-solving Manager focuses on providing solutions to
every problem of the company. This manager also concentrates on
achieving the company's goals. However, managers of this type
sometimes tend to overdo the task of solving every problem which affects
his or her overall performance.
The Pitchfork Manager threatens employees to work towards a
goal. This manager employs fear tactics and uses an iron hand to push
employees for results to avoid consequences. He or she is characterized
as tough and rude.
The Pontificating Manager neither follows any strategy nor
prepares for any situation or task and usually ends up with in consistent
results. The strength of this manager is his or her ability to make people
feel at ease when he or she is around since listening to others is second
nature to him or her. However, this over-friendliness usually hinders his or
her leadership decisions and results in a less systematic approach to
problems therefore affecting his or her overall performance.

The Presumptuous Manager thinks only of himself or herself. This type of

manager is not a team player and usually works for personal gain or interest. He or she
breeds unhealthy competition instead of cooperation and teamwork. This type of
manager is characterized as being too proud and overconfident and has the tendency to
compete with the members of the team. More often than not, members of the team
resign or leave the company because of poor management.
The Perfect Manager is open to change and personal growth. However, he or
she can be very mechanical and may lack the interpersonal skills to interact more
closely with his or her team members. He or she just concentrates on facts and figures,
for example, about the product or service being offered.
The Passive Manager wants to please everyone and make the team members
happy. However, being a crowd pleaser becomes a hindrance because of his or her lack
of drive and assertiveness to manage the team. This type of manager is described as
very timid in his or her approach to avoid any confrontation with anyone especially
from the members of his or her team.
The Proactive Manager possesses the good qualities of the other types of
managers. He or she has the drive of the problem-solving manager to spearhead
solutions, the persistence of the pitchfork manager, the enthusiasm of the pontificating
manager, the confidence of the presumptuous manager, the passion of the perfect
manager for continued growth, and the desire of the passive manager to serve.
Every manager should strive to become a proactive manager who embodies the true
traits of an outstanding manager.

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Main Management Functions
Planning is the management function wherein managers identify and select the
company's goals and determine the corresponding courses of action in order to achieve
them. As planners, managers aim to improve the company's overall performance by
formulating strategies to be implemented.
Organizing refers to structuring the business organization in such a way that
employees are grouped together to perform jobs or tasks. The organization ensures that
the employees are able to perform efficiently and coordinate effectively to achieve the
company's goals. Each
group of employees is assigned a manager who oversees the employees as they perform
their assigned tasks.
In leading, managers help the company achieve its objectives by motivating
their subordinates to perform the tasks assigned to them. Managers encourage the
employees to live up to the company's vision in their job performance. They also ensure
the employee's commitment to the organization.
Controlling requires managers to identify any deviations from the strategies and
methods. used in attaining the company's objectives. The manager, then, implements
corrective actions to maintain or improve performance.

Levels of Management
Managers can be classified into different levels of management, Le, lower-level
managers, middle-level managers, and top-level managers .
o Top-level Management
This level is also called "senior management" or "upper management." The
managers in this level have titles such as Managing Director, Chief Executive Officer,
Chief Operating Officer, Executive Vice President, and Chairman of the Board, among
others. These managers must have extensive knowledge in management and must be
multi-skilled and analytical. They must also be aware of the business environment where
their organization operates, especially its target market. Senior managers are responsible
for determining and implementing strategic, long-term decisions for the company.
o Middle-level Management
Middle-level managers are assigned to supervise specific units or departments
within the company and are highly specialized in managing the tasks and operations of
their assigned units. They are also responsible for carrying out the decisions made by the
top-level management and applying them to their units. They also coordinate with lower-
level managers in implementing strategies and meeting the goals of the company.

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Middle-level managers have titles like Department Head, Plant Manager, and Division
Manager, among others.

o Lower-level Managers
Managers in lower-level management are also called "frontline managers" or
"supervisors." These managers usually directly oversee employees or workers and are
tasked with carrying out the decisions communicated by middle managers. They also
oversee the daily operations of their respective areas and handle routine administrative
tasks. These managers are often called Supervisor, Coordinator, and Office managers.
Management Roles
In his book Inside Our Strange World of Organizations, Henry Mintzberg
identified ten managerial roles, which he categorized as interpersonal, informational,
and decisional management roles.
Interpersonal Management Roles
Roles Description
As a figurehead, the manager performs social,
inspirational, legal, and ceremonial duties. The manager
1. Figurehead is a symbol and must be on-hand for people or agencies
that only deal with him or her because of status and
authority.
The leader role is at the heart of the manager subordinate
relationship and managerial power. The leader is a
2. Leader pervasive presence among subordinates, although the
relationship between the leader and other members of the
group tends to be indirect.
As a liaison, the manager is an information and
communication center. A liaison bulida and maintains
relationships with other companies. It is essential,
therefore, that the manager possesses networking aids to
3. Liaison maintain internal and external contacts for information
exchange
Liaisons use these contacts to gain access to information
that is vital for the company, such as facts, requirements,
and probabilities.

Informational Management Roles

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 Roles Description
As a monitor, the manager seeks and receives information
from various sources to evaluate the organization's
performance, well-being, and
situation. The manager performs vital tasks such as
monitoring of internal operations, external events, ideas,
1. Monitor trends, analysis, and possible threats. The monitor gathers
information to detect changes, problems, and
opportunities and to construct decision-making scenarios.
This information can be current or historic, tangible or
soft, and documented
or non-documented.
As a disseminator, the manager communicates external
information to the organization and facilitates
2. Disseminator information exchange between subordinates. The
information being disseminated can either be factual or
value-based.
As a spokesperson, the manager relays information to
other groups and entities outside of the company. Key
influencers and stakeholders are kept informed of
company performance, plans, and policies. The manager
3. Spokesperson is seen as an expert in the field where his or her
organization operates The manager also uses his or her
reputation and profile to influence
outsiders and stakeholders to maintain the stature of the
company.

Decisional Management Roles

Roles Description
As an entrepreneur, the manager designs and initiates new
opportunities for the company. An entrepreneur is a risk-taker
and is often involved in start-ups and new projects. The manager
1. Entrepreneur calculates the risk in such an opportunity and ensures that new
projects are carefully selected and implemented with minimum

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 risks.
Disturbances may arise from certain actions of the staff,
unexpected changes in resources, and external threats. A
disturbance may also arise when workers or managers make
mistakes or when an innovation creates unexpected
2. Disturbance Handler consequences. The manager steps in to deal with these matters,
evaluate the situation, reallocate resources, and provide adequate
support to the company.
As a resource allocator, the manager oversees and controls
resource allocation by evaluating major decisions involving
3. Resource Allocator resources. Managers develop appropriate models and plans for
conducting their evaluation.
As a negotiator, the manager takes charge of communicating
4. Negotiator and negotiating with other organizations, and even among the
members of the company.

Management Skills
Whether at the top, in the middle, or in low-level management, managers
should possess the following key management skills:
1. Conceptual skills refer to the manager's ability to analyze a particular situation, identify
new opportunities and resources, and decide on the best strategies and courses of action.
2 Human skills include the manager's capacity to motivate, lead, and control the behavior
of his or her subordinates. A manager should know how to effectively communicate,
coordinate, and relate with his or her employees.
3. Technical skills are the specific competencies that a manager should have in relation to
the type of task assigned to him or her. It is also related to the specialization of a manager
needed in a particular department, unit, or area where he or she is assigned.

UNIT 2:
THE FIRM AND ITS ENVIRONMENT

Lesson 4: Environmental Scanning: SWOT and

PEST Analysis
Objectives
 define environmental scanning
 identify the various forces in the firm's environment
 discuss SWOT and PEST analyses
 identify common elements and differences between the two techniques; and
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  employ SWOT and PEST analysis in analyzing the business environment of a
firm and in other situations.

Introduction

The external environment is a major factor that influences a company's operations.

It has a significant effect on the operations of the business and is often beyond the control
of the manager. A good understanding of the business environment will enable managers to
identify opportunities and challenges, anticipate changes and developments, and formulate
plans and decisions that will benefit their respective business firms.

Discussion
Nature of Management

Management is a science as well as an art. It is a body of knowledge whose ideas and

principles have become the basis of organizational frameworks employed by many
businesses and organizations. It is considered a science because it evolved from a number
of theories that involved extensive studies and

Major Problems Faced by Businesses

o Uncertainty

Uncertainty strikes fear in company executives because its effects can result in
staggering costs. Uncontrollable external factors like political, economic, technological,
and social forces are always at work. Unexpected future events can derail a company
off the business track if the management is not prepared with a contingency plan. The
common reaction to uncertainty is to stick with manageable short-term goals. However,
this may prove to be less rewarding since it can offset the potential profitability that a
long-term goal may provide.

o Globalization

Globalization is a concern for top company executives because of the changes

it brings. These changes may require costly adjustments to cope with the challenges of
serving new markets and new trends. Companies may need to offer new products and
services to better
serve new markets. Globalization also results in stilt competition among companies
since the business operations shift to the international scene. As such, managers have to
deal with cultural differences and varying government rules and regulations which can
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complicate trade and commerce. All of these changes have to be embraced by
companies since globalization will continually make international operations more
challenging than ever.

o Innovation

Companies should build a more innovative culture in their respective

organizations. Some large companies are afraid that innovation will result in the
relaxation of protocols and practices which leads to loss of control. Top company
executives fear that giving employees more freedom to develop new products or
services without supervision from management may cause them to prioritize individual
goals over company objectives. For "healthy" innovation to happen, there should be a
balance between how much freedom should be given to employees and the level of
control exercised by managers to implement their authority and impose discipline
among employees.

o Government policies
Companies should adhere to government regulations and policies that relate to
the environmental, financial, marketing, and other aspects of a business. Such policies
may compile decisions of top executives but managers should continually improve their
skills to address the effects of these policies.
o Technology

Technological advancements happen fast and companies have to cope by

investing in new technologies to take advantage of their benefits. The competitive
business environment requires companies to stay informed about changes and make
appropriate adjustments in their operations. Investing in new technology enables a
company to take advantage of the next technological developments and smoothly
transition to future innovations.
o Diversity
Diversity adds value to products and services since different ideas and
perspectives are utilized in the process. However, this poses a challenge for companies
to bring together a diverse group of employees and work for a single goal. Thus,
managers need to make the proper adjustments in their communication with employees,
suppliers, customers, investors, and business partners.
o Complexity

Globalization and information technology have led to the emergence of a

complex business environment. Business transactions have become more complex
because of the diverse cultures of people across countries. Managers are challenged to
develop management protocols that minimize the complexity of different tasks.

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 o Information overload
Innovations in Information technology have led to fast-paced communication
and the availability of a large amount of information on the Internet. How to deal with
the vast information available online is something that business executives should
consider. Effective information management is a good investment since the result can
provide valuable insights, especially for marketing and strategic business planning.

The Environment of the Firm

The business firm's environment refers to the conditions and elements that
define its operations and determine its success. There are two types of the firm's
environment. These are the internal and external environments.

External Environment

Microenvironment The Firm Macroenvironment

 Customer Internal Environment  General environment of
 Suppliers the firm
 Employees
 Regulatory agencies
 Board of directors
 Competitors
 Managers

The internal environment consists of elements that have a direct impact on

business operations. These include the employees, the board of directors, and the
managers. The elements of the internal environment are directly controlled and can be
freely modified by the firm itself.

The external environment consists of factors that have an indirect but significant
influence on the operations of the business. These factors, however, cannot be controlled
by the firm. There are two types of the external environment:
1. Microenvironment is also known as the "operating environment." It consists
of the customers, suppliers, regulatory agencies, and competitors. The factors in this
environment have direct relevance to the business operations but are uncontrollable to a
certain extent.
2. Macro-environment is also known as the "general environment." It consists
of the economic, political, social, legal, and technical environment of the business

18
organization. The factors in this environment are beyond the control of the firm but are
important determinants of success.
A successful business understands the changes in its external environment to take
advantage of opportunities provided by these changes. Companies gather information on
the external environment by conducting environmental scanning and strategic analysis.
Environmental Scanning
Environmental scanning is the actual monitoring and evaluation of information
from the external and internal environment of a business organization. The information is
then provided to the key people to guide the organization in its business operations and in
preparing for target market operations. There are three modes of environmental scanning:
1. Ad hoc environmental scanning is not often done and is usually applicable
only during a crisis situation. The firm does ad hoc scanning to determine whether the
problem is either external or internal
2. Regular scanning is usually done at least once a year or at regular intervals.
3. Continuous scanning refers to the continuous collection of data on a broad
range of environmental factors. It is also referred to as continuous learning done to
monitor the components of an organization's internal environment.
Strategic Planning: SWOT and PEST Analyses
To adequately deal with the forces of the external environment, managers, and
decision-makers apply certainly techniques in gathering and analyzing information and
subsequently conducting strategic planning, Strategic planning techniques such as the
SWOT and PEST analyses consider the elements of a firm's internal and external
environment in formulating business plans and decisions SWOT analysis is primarily
used to analyze the microenvironment, while PEST the analysis is conducted to address
the firm's macro-environment.
SWOT Analysis
SWOT analysis is a technique that identifies the Strengths and Weaknesses of a
company, as well as the Opportunities and Threats it faces. In conducting this analysis, it
is imperative to note that strengths and weaknesses are part of the company's internal
environment, while opportunities and threats are part of its external environment.

19
 STRENGTHS (What does your company do better than others?)

WEAKNESSES (What aspects of your company need to be

improved?)

OPPORTUNITIES (What trends/conditions can positively impact your

company?)

THREATS (What trends/conditions negatively impact your company?)

Figure 2. The SWOT Analysis
Strengths include the company's attributes that give it a competitive edge over
others. The strengths of a company contribute to its good performance and a positive
reputation in the business scene. Strengths may include being a market leader, having a
good brand image, providing quality products and services, and having a good reputation
in the business. Other strengths include good credit standing, competent and highly
skilled staff, excellent distribution channels, outstanding communication, and network
systems, and a good number of patents
On the other hand, weaknesses are the attributes of a company that needs to be
improved or changed. These attributes may hinder the company's growth and
performance. Examples of weaknesses are lack of access to technology, limited
distribution channels, poor location, lack of facilities and equipment, and poor
transportation system.
Opportunities are factors or events that can give a positive impact on the
company if properly addressed. Opportunities come in different forms like new markets,
potential profits, additional sources of raw materials, increased purchasing power of
consumers, better location,
and new users or customers.
Threats are external factors that may negatively impact the company. These are
trends, changes, or movements over which the company has no control but should be
addressed to maintain its status in business. Some examples are an increase in the price of
resources, entry of new competitors, and high inflation rates.
After conducting the SWOT analysis, a company can formulate strategies using
the matrix below.

Internal/External Opportunities (External) Threats (External)

Strengths (Internal) Strengths-Opportunities (SO) Strengths-Threats (ST)
strategies strategies

20
 Which of the company’s strengths How can the strengths be used
can be used to take advantage of to minimize the threats that
the opportunities identified? were identified?
Weaknesses (Internal) Weaknesses-Opportunities (WO) Weaknesses-Threats (WT)
Strategies strategies
How can the identified How can the weaknesses be
opportunities be used to addressed minimized to avoid the
the company’s weaknesses impending threats identified?
Figure 3. The SWOT Matrix

SWOT analysis is a quick and easy technique for analyzing business situations. It is
a versatile tool that can be applied at the different levels of the company. One can conduct
SWOT analysis for the entire company, or just focus on one department or business
operation. SWOT analysis is more effective if managers use clear and accurate data and
analyze the factors in an objective manner. Its main advantage is that it enables managers
to understand their business better, particularly in terms of how the company's internal
environment aligns with the external environment. It also helps the company figure out its
advantage in the industry or market. This technique, however, is not very effective when
dealing with more complicated issues and factors that cannot be clearly assigned to only
one category. Such factors may be both considered a strength and a weakness of the
company.
PEST Analysis
PEST analysis is a method used in analyzing the Political, Economic, Social, and
Technological forces affecting the company. This technique focuses on the factors that
define the macro-environment of the business
Political factors
Political factors include laws, regulations, and restrictions that may intervene or
affects the company's business course. Significant political factors include tax policies,
labor laws, environmental laws, trade restrictions, and tariffs.
Businesses must comply with rules and regulations imposed by the government,
and compliance requires managers to adjust their operations accordingly. Companies are
required by the government to comply with the Minimum Wage Law in determining the
wages of their employees. Businesses also have to comply with the required legal
documents, pay fees and secure permits before they begin their operations. Another
significant factor for business are zoning restrictions. For instance, the Makati Business
District does not allow manufacturing plants in its area to prevent pollution. Manufacturers,
therefore, construct their facilities and plants in designated industrial areas away from the
metropolis, such as in Canlubang, Laguna. Additionally, factories in Laguna, especially
those near Laguna Lake, have to comply with regulations imposed by the Laguna Lake
Development Authority to avoid emission of pollutants into the lake.
Economic factors

21
 Economic factors directly affect the capability of business to generate profits.
These include economic growth, interest rates, exchange rates, and inflation rate. For
example, a high inflation rate affects the acquisition of raw materials of a restaurant.
Therefore, if one of the restaurants prime commodities are burgers, an increase in the price
of beef may cause the restaurant to increase its price. The increased price, in turn, will
affect consumer preference and may result in decreased sales
The increase in the prices of raw materials and basic commodities is also an
important factor that affects business. The price of oil in the world market affects the prices
of basic goods in the local market. Increased oil prices also result in increased cost of
transporting goods such as vegetables and fruits from the farms to the urban areas.
Social factors
Social factors include demographic aspects such as age, group affiliation,
religion, civil status, and the economic status of consumers. Companies focus on
information regarding their target market, particularly its buying habits, attitudes, ethics,
personalities, and values.
Firms usually shape their products or services based on their target market. Companies that
sell instant noodles target consumers who are always on the go or have limited time to
prepare home-cooked meals. Services such as laundry shops cater to people who are unable
to do their own laundry or who have no helpers to do their laundry for them.
Analyzing social factors can also help a company implement changes and
improvements in its operations, products, and services. A company selling diapers, for
example, may conduct research focusing on the birth rate within their target area and the
financial capabilities of their potential customers. A company can also look into the
characteristics and behavior of their customers. They may consider looking at the
frequency of using diapers, and the stores where they usually buy diapers. Using these
information, the company may formulate a plan such as introducing a new line of cheaper
diapers that target customers who have limited budgets. They can also improve their
distribution channels to ensure that their product is available in all stores in their area.
Technological factors
Technological factors include research and development activities, automation,
licensing, patenting, technological shifts, and outsourcing decisions. An important
technological factor at present is the Internet, which has greatly improved the way business
functions are done. Social media has introduced new venues for promoting and marketing
products and services. Purchasing, delivery, promotion, and customer service have been
revolutionized by technology Production operations have greatly improved through
automation. Companies, therefore, need to keep track of the latest technologies and
determine ways that these can aid in their business processes.
Since the PEST analysis exclusively focuses on the macroenvironinent of the
firm, it can guide managers to identify the reasons why their business is growing or failing
within a certain environment. It also helps the company identify new directions for growth

22
and expansion A major limitation, though, with PEST analysis is that it does not consider
the internal elements of the company.
The Benefits of Strategic Planning Using SWOT and PEST Analyses
SWOT analysis and PEST analysis help companies in formulating strategies
and aligning their vision and mission to the general direction of the business environment
where they operate. One major similarity between the two techniques is their focus on
aspects of the external environment. SWOT analysis focuses on the external environment
through the threats and opportunities, while all aspects of PEST analysis consider the
external environment of the business firm. It is recommended that the information gained
from PEST analysis be used in identifying the opportunities and threats in SWOT analysis.

Using these techniques, emerging companies may be forewarned about

significant threats and opportunities that may hinder or boost sales. Those who are about
to venture into new projects can have a more objective view of the business environment,
enabling them to make
insightful business decisions that will guarantee the success of their business.

23
 THE LOCAL AND
Lesson 5:
INTERNATIONAL BUSINESS
ENVIRONMENTS
Objectives
 recognize the factors that affect the local business environment
 acknowledge of the locals that affect the International business environment
 discuss the different phases of economic development, and
 explain the rote of business in the economy

Introduction

Business organizations have diversified through the years. Many local companies
have expanded and established branches throughout the country while some have become
international brands. On the other hand, foreign companies have entered and thrived in
our local market. How were they able to achieve these? These companies recognized the
importance of analyzing their potential business environment and coping with the
changing external forces and emerging opportunities in order to succeed and thrive.
Companies operating in the local or international scene should adapt to change and take
advantage of opportunities so they can successfully flourish in any kind of environment

Discussion

The Development of Business Process Outsourcing in the Philippines

The Business Process Outsourcing (BPO) Industry is one of the most profitable
and active Industries in the country. Estimates in 2013 show that the industry employs
about 900 000 Filipinos generate revenue of about US$15.5 of billion, contributing about
5.4% to our country's ODP (Gross Domosic Product). Projections see the industry growth
over the next decade, with companies employing a million Filipinos and generating a
revenue of more than 40 billion dollars.

24
 The emergence of outsourcing as a viable business was brought about by
improvements in communications and information technology during the 1900s
American companies in particular, sought to minimize operating costs and began to move
non-core functions overseas Western companies moved these operations into developing
countries, taking advantage of lower operating costs and cheap labor. Among the first
Asian countries to benefit from the growth of outsourcing was India, gaining distinction
as an important outsourcing hub in the 1990s. In the next few years, outsourcing
companies began to expand into other countries such as the Philippines.

The emergence of the BPO industry in the Philippines was aided by several
developments. In particular, the passing of the Special Economic Zone Act in 1995
lowered area requirements for the establishment and development of businesses and
offered tax incentives to foreign investors. More foreign BPO companies were
encouraged to transfer their operations to the Philippines Beginning in 2000, the BPO
industry expanded and steadily grow end within a decade the Philippines was hailed as
the world's BPO capital, surpassing previous industry leaders such as India. Call centers,
in particular, experienced rapid growth during this period in 2000, there were only four
call center companies in the Philippines but in 2005 that number has risen to 108. Within
a decade, the industry itself began to diversify and engage in additional services such as
medical transcription and software development.

The continued growth of the BPO industry is due to lower labor costs, flexible
operating hours, and availability of well-educated and highly skilled workers. In
particular, BPO companies find hiring Filipinos an advantage because they are highly
proficient in English and their accent
is very similar to that of Americans. Another important trait that set Filipinos apart from
other BPO workers is their patience. This trait is very vital especially in call centers
where agents often deal with inquiries and complaints from irate customers.

The Local Business Environment

In the conduct of their business, companies have to contend with the conditions
and changes in their local business environment. The Philippine business environment is
influenced by a lot of factors both in the microenvironment and macro-environment. These
factors all combine to create a unique business environment to which companies and
organizations must adapt in order to become successful.
One major consideration for Philippine businesses is the weather. It can be very
hot in the summer and very stormy by the last quarter of the year. Intense weather
conditions can have adverse effects especially on businesses engaged in food production
and agriculture. Any adverse weather phenomena, such as typhoons and droughts, may
result in the loss of crops which leads to an increase in food prices. Natural disasters such
as earthquakes can bring about disruptions in businesses and industries due to property
damage and casualties.
Aspects of Philippine culture should also be considered by businesses especially
when they endeavor to provide products and services in the market. Certain local products,
such as native cuisine and handicrafts, may have a strong market in certain areas but may
25
perform weakly in other places in the country. Businesses who wish to bring foreign
products into our local market should also be mindful whether these products are
acceptable in Philippine culture. Filipinos are often inclined to purchase or patronize
Western products, particularly American products and services. Other businesses, however,
appeal to brands, as evidenced by the popularity of American-made local sentiments and
preferences by featuring local products that use local ingredients or materials.
Business opportunities and threats should be considered in the local environment.
Are present seven BPO companies operating in the Philippines take advantage of the cheap
operating and labor costs, as well as the highly skilled workforce among Filipinos. They
have reaped much profit from their operations in the Philippines, about 15 billion dollars as
of 2013. The industry, in turn, has also greatly contributed to the growth of the Philippine
economy as of 2013, BPO companies have contributed about 5% of the Philippine GDP,
and employed almost one million Filipinos.
Recent developments in the country, such as the Marawi crisis and the continued
security threats in Mindanao, have resulted in a slight slowdown in the BPO industry.
Other factors that pose a challenge to the industry include the protectionist economic
policies of the United States and the emergence of artificial intelligence, which is
expected to
replace many jobs in the outsourcing sector.
But despite these challenges, the Information Technology and Business Process
Association of the Philippines (IBPAP) projects continued growth in the Philippine BPO
industry. IBPAP projects growth of about 1.8 million workers in the industry by 2022,
and earnings of about 40 billion dollars.

The International Business Environment

The international environment also consists of political, economic, social, and
technological forces. These must be considered when a company decides to expand in
business overseas, as different countries provide a variety of opportunities and threats for
the business.
A company operating with international branches should take note of the political
environment, particularly the stability of the government of the country where it operates .
Different countries have different trade laws and policies. Taxes, quotas, tariffs, and other
trade regulations can affect a company's operations so it is important to monitor the
changes
in these laws in the country concerned. Copyright laws and patents may also differ from
country to country.
Many international companies take advantage of lax labor laws in certain
countries like China. Other companies take advantage of tax and trade exemptions
offered by certain countries. The Philippines, for instance, has established free trade and
export zones in Clark, Pampanga and Subic, Zambales where many international

26
companies have built their factories and established their operations. International
companies often cultivate and maintain relations with political figures and
administrations and consider political developments in their strategic planning.
Companies should also consider the economic environment of the country such as
the presence of infrastructure that supports economic activities. Railroads, ports, power
plants, schools, commercial establishments, markets, utilities, and communication
systems should be evaluated. A country may offer a huge market, but its infrastructure
may be less than ideal for business operations. Additionally, companies should also
consider the average income of the
population. A product may be popular in a certain country, but the general financial
situation of the people may prevent potential profitability
The social environment includes cultural differences. Companies entering the
international market should learn the proper cultural practices and taboos. Taboos are
social or religious customs that prohibit, for example, discussion of a particular practice
or association with a
particular person, place, or thing. In Japan, the Japanese observe a strong group
orientation while in Arab countries, women are not given management positions. There
are also language differences so mongers should understand the colloquial meanings of
words when translated
in other languages, Misinterpretations may occur if managers are not careful with the use
of language. Rewards and punishments given to employees should be carefully studied
since people across the world have different and particular methods of motivation
depending on
their cultural upbringing.

Lastly, a company should also consider the technological factors in the conduct of
international business. It should ensure the compatibility of the available local technology
with the technologies tropics in its operations. A company should also ensure that the
country has an available workforce that is sufficiently competent to handle the
technologies that the venturing company will introduce. The potential benefits and harm
that might result from the introduction of technologies should also be taken into account.
Phases of Economic Development
Developments in the global economy are influenced by changes in two significant
aspects: (1) the capacity to produce or manufacture and (2) the capacity to distribute or
transport. Beginning in the 16th century, the global economy has experienced five major
phases of economic development:
Economic Phase Time Period Overview
Mercantilism 1500-1780 The rise of major European colonial
powers such as Spain and Portugal brought
about the emergence of the mercantilist
system of trade. In this economic phase,
countries accumulator wealth

27
 Mercantilism 1500-1780 through trade
relations with other countries and colonies
Other empires like India and China were
not as active in global trade and were
restricted to trading within their regional
markets Methods of production remained
unchanged relying on methods and
processes developed during the Middle
Ages.
Industrial Revolution 1780-1880 Production and distribution became
mechanized since many
businessman saw the benefit of investing
in machines and equipment. Large
factories were established and there was so
1780-1880 an increase in employment
Industrial cues emerged and trade
flourished. Transportation was improved
with the construction of canals,
waterways, roads, and railroads and those
enabled the quick and easy transport of
raw materials and finished goods over long
distances.
Fordism 1880-1970 This phase saw the rise of multinational
corporations through the pioneering work
of Henry Ford of Ford Motor Company
Ford introduced a standardized production
process for his Ford Model T automobile
which resulted in increased production and
profit. Ford's innovation led to the
introduction of the assembly line
a production process where the assembly of
an automobile la dons
1880-1970 usually along a moving
conveyor, with workers performing specific
and repetitive tasks in a series. Ford also
introduced the electric motor in his factory
which greatly improved efficiency, leading
to lower production costs. During this
period, the term "Fordize became popular
and this meant to standardize a product and
manufacture it by mass means at a price so
low in the common man can afford to buy
it."
Post-Fordism 1970-2010 In this phase, production was no longer
confined to manufacturing
plants and could be done anywhere in the
world through
improvements in production methods and
information technology. Computer-
controlled tools and efficient techniques
customized and Post-Fordism 1970-2010
tailored the production process to a

28
 particular location. The Internet provided a
more convenient medium for
communication among consumers,
suppliers, investors and employees,
enabling easy access and purchase of
products as well as their quick delivery to
customers.
Globalization 2010-Present The current economic phase is the age of
globalization where companies are
operating within a global marketplace and
economy. This has given rise to the
establishment of regional economic
organizations that enable companies from
different countries to engage in free trade
with each other. This period is also
characterized by stiff competition among
companies and the constant need to
maintain quality in order to attract
customers. Another important concern in
this period is sustainability, which refers to
the conduct of business operations with
due regard to its
effects on the environment.

The Role of Business in the Economy

No economy can survive without a thriving business sector. It fuels the economy of
a country since business organizations engage in transactions that maintain a smooth flow
of trade relations among producers, service providers, and households. These various
business transactions include manufacturing, distribution, delivery, and selling of products
as well as providing different kinds of services to the consumers. These transactions
stimulate the movement of money and resources in and out of a country resulting in overall
economic growth. A robust economy with an active business sector attracts more
investments from other countries which encourages further economic growth.
A thriving economy provides a good environment for more start-up businesses.
They generate new products and services through innovation and extensive research and
development which eventually lead to further improvements in the lives of the people.
These improvements come in the form of better job opportunities and increased assortment
of products and services available to consumers.

29
Lesson 6: THE BUSINESS ORGANIZATION
Objectives
 Identify the forms of business organization;
 enumerate the types of business organized under foreign laws; and
 discuss the types of business.

Introduction
One of the decisions a business owner should carefully assess is the way his or
her business is formed and structured. In selecting the form of business organization, the
owner should consider the size and nature of the business, the level of control, the
expected profit, tax implications, and vulnerability to lawsuits. These considerations will
determine the type of business organization that a company will be shaped into.
Discussion

Forms of Business Organizations

There are three forms of business organizations based on ownership structure.

These are sole proprietorship, partnership, and corporation. A wise manager should
consider the characteristics of the business organization that he or she wishes to
establish in making the business plan as each presents unique advantages, opportunities,
and challenges.

Sole Proprietorship

Sole proprietorships are companies owned by one person who is usually hands-
on in managing the day-to-day activities. Many small businesses start in this type of
business ownership. Sole proprietors own the entire business, including all assets and
profits. Since they own all the assets, sole proprietors are also responsible for all the
liabilities of the business. Assets are resources with economic value that are owned and
controlled by the business owners. Examples of assets are facilities, equipment,
machinery, cash, office supplies, and raw materials. Liabilities are debts or obligations
which arise in the course of the business operations.
Sole proprietors are also considered single taxpayers and are assigned a single
Tax Identification Number (TIN). Owners also apply for a business trade name and
register the business with the Department of Trade and Industry.

Advantages and Disadvantages of a Sole Proprietorship

30
 The main advantage of a sole proprietorship is that it is the most manageable and
least expensive form of ownership. Proprietors have complete control over the business
and can make decisions based on their own judgment. Thus, it is easy to implement
changes in the business setup. Furthermore, if desired by the owner, the business can also
be easily dissolved.
However, the disadvantage is that sole proprietors have unlimited liability since
they assume all the debts of the business. This may put personal assets at risk when the
business experiences losses. Obtaining additional capital is also difficult because of a low
guarantee of profitable returns to lenders. There is also a possibility that highly skilled
employees will not be attracted to work in the business because of the low chance to
advance in their careers and get attractive compensation packages.
Partnership
Partnership is a form of business organization where ownership of the business is
shared by two or more members. The partners mutually agree as to how decisions will be
made and how the profits and losses will be shared. They also agree on how future
partners will be admitted and how disputes will be resolved legally. The amount of
contribution, the type of work to be inputted, and the time to be devoted by each partner
is also outlined to ensure a clear distinction of responsibilities.
Under the Civil Code of the Philippines, a partnership is considered a juridical
person or an entity having a separate legal personality from the partners. A partnership
can either be a general partnership or a limited partnership.
General partnership is a form of partnership wherein the partners have
unlimited liability for the debts and obligations of the partnership.
Limited partnership is a form of partnership wherein one or more general
partners have unlimited liability and the limited partners have liability that is only up to
the amount equal to their capital contributions.
Partnerships with a capital of more than three thousand pesos (P3,000.00) should
register with the SEC. Income tax computations for partnerships are the same with
corporations.

Advantages and Disadvantages of a Partnership

One of the advantages of a partnership is its wider capital base. Having more
partners involved in the business allows for diversification of the contributed monetary
funds, skills, and resources Expansion is also easier since there are more people who
will manage the different branches of the business. In addition, those who would like to
be employed in the partnership may be attracted by the incentive of becoming a partner
later on.

31
 One disadvantage of a partnership is that partners are jointly liable for all the
obligations and effects stemming from the decisions of the other partners. Unless the
individual responsibilities and liabilities are clearly delineated, this may cause
disagreement among the partners. Partnerships have a limited life because of its general
instability. This instability does not refer to business unprofitability but rather to several
internal factors which make the partnership vulnerable to dissolution. These internal
factors include the death, withdrawal, or insolvency of a partner.
Corporation
The third form of business organization is the corporation. A corporation has a
distinct personality separate from its owners. This means that it is treated like an
individual with benefits from certain rights as well as obligations and responsibilities. a
corporation can person enter into contracts, secure loans, sue and be sued, hire
employees, and pay taxes. A private corporation can be established by a minimum of
five and a maximum of fifteen owners who are called shareholders. The process by
which a corporation is legally established and recognized by the government is called
incorporation. Once established the corporation can avail of its benefits and is subject
to obligations based on the law. Also, the corporation can now expand and gain more
shareholders. Each shareholder owns a part of the company and has some authority over
its direction. Shareholders elect a board of directors who oversee the major policies and
decisions of the corporation.
A corporation is owned and established under the Corporation Code of the
Philippines and regulated by the SEC. The shareholders of a corporation are also
registered with the SEC and are assigned at least one share of the company stock. The
total shares of the company stock that shareholders may acquire will depend on the
capital they have invested into the company. Their liability is only up to the extent of
their share capital. The minimum paid-up capital required of corporations in the
Philippines is P5,000.
Corporations are subject to tax, which is separate from the individual taxes of its
shareholders. Corporate taxes are not deductible from the individual taxes of
shareholders. This is because the corporation is a separate entity distinct from its
shareholders.
There are two types of corporation. These are as follows:
A stock corporation has capital stock divided into shares and dividends. Surplus
profits are given to shareholders depending on the number of shares held.
A non-stock corporation does not issue shares of stock and is established
primarily for public interests such as a foundation for charitable, educational, social,
cultural, and other similar purposes.
Advantages and Disadvantages of a Corporation
One of the advantages of a corporation is its limited liability to its shareholders.
They can only be held accountable for their individual investment of shares in the
32
corporation. Another advantage is that a corporation can deduct the benefits it provides
to its employees and consider them as expenses. It also has a general stability since the
death or withdrawal of one shareholder does not result in its dissolution.
The process of incorporation is more complicated than forming a sole
proprietorship and partnership. A corporation is closely monitored by the government
and other local agencies like the SEC. Thus, more paperwork is required of a
corporation to comply with permits and other legal requirements.
Foreign Business Organizations
In the Philippines, the government recognizes four forms of foreign business
organizations. These businesses are incoporated based on foreign laws and considered
representatives of foreign corporations. They are regulated by the government.
The branch office is organized to do the activities of the head office from the
host country. The minimum paid-up capital of a branch office is US$200,000. This can
be lowered to US$100,000 if advanced technology is involved or at least 50 employees
are directly employed.
It is required to register with the SEC.
The representative office is fully supported by the head office and does not
obtain funds from its main office overseas. It deals directly with the clients of the parent
company and engages in business activities such as communication, promotion of
products, and quality control of products for export. The initial minimum inward
remittance is US$30,000 for operating expenses. It should be registered with the SEC.
The regional headquarters only performs activities that primarily involve
supervision, communication, and coordination. It serves as a coordinating center to its
subsidiaries, affiliates, and branches in the region and acts as an administrative branch of
a multinational company. It does not derive income within the Philippines and does not
participate in managing a branch in the Philippines. A capital of US$50,000 is required
as annual operating expenses.
The regional operating headquarters performs the following services to its
affiliates, subsidiaries, and branches in the Philippines: (1) administration and planning,
(2) acquisition of raw materials, (3) marketing, (4) technical support and
communications, and (5) research
and development. It derives its income from its activities in the country. The required
capital is US$200,000 as one-time payment.

Classification of Businesses
Businesses can also be classified based on the type of products or services
rendered.
1. Service business is a type of business that provides labor and other services to
customers. Examples are transportation companies like airlines and shipping lines; professional
services like accounting, legal, engineering, and customer service; entertainment like amusement

33
parks and movie houses; hotels and restaurants; apartments; banks and lending companies; event
planners; telecommunication services; medical services; media; and many others.
2. Merchandising business is type of business that purchases products from other
businesses like manufacturers and sells them to customers at a higher retail price. Examples are
grocery stores, supermarkets, car dealers, real estate dealers, and electronics stores
3. Manufacturing business is a type of business where raw materials are transformed
into finished goods through produce processing, labor, and other manufacturing processes .
Examples include manufacturers of soap and detergent, canned goods, automobiles, and medical
drugs.
There are other businesses that cannot be classified into any of the three types like
agriculture, aquaculture, and mining companies.

Lesson 7: THE ETHICAL ENVIRONMENT OF

THE FIRM
Objectives
 determine ethical issues in business:
 identify the five perspectives in ethics;
 explain the relevance of corporate social responsibility in an organization:
 discuss corporate Integrity and its dimensions:
 differentiate social obligation from social responsiveness; and
 describe how organizations apply social responsibility in their activities.

Introduction

Ethics is a set of principles that guide people's behavior and judgment. In

business, ethical standards are created so that managers can uphold certain values by
making meaningful and just decisions in their business activities and various
transactions.
Discussion

Business Ethics and Management

An ethical issue refers to a concern on which an individual must decide based on

several alternatives of what is morally right or wrong. In business, these issues play a
crucial role in decision making. Any manager should be guided by a set of business ethics
which are moral principles and standards that guide businesspeople in their transactions.
Generally, business ethics set the moral standards for any kind of business function.
However, the line separating these standards sometimes overlaps which makes decision-
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making difficult, with certain decisions or actions often having both positive and negative
effects. That is why it is important for managers to still have their own set of moral
standards and values in ultimately deciding which decision or action is most ethical for
their company.

Perspectives on Ethics

In deciding on ethical issues, five guiding principles may be used.

1. Universalism - This is the principle which states that all people should have
certain values like honesty, respect, and cooperation. Universalism requires
every person to enact these values in the same way under all circumstances and
at all times.

2. Egoism-This is the principle which promotes the greatest

good to oneself. It is focused on the perspective that people
ultimately act for self-advancement, no matter how good
their intentions are. Based on this view, it is permissible for
a person to cooperate with others as long as this will serve
his or her own interest.

3. Utilitarianism- This is the principle which focuses on the greatest good for the
greatest number of people. In this perspective, the ultimate concern of managers
is to make decisions that are beneficial to the greatest number of people.

4. Relativism-This is the principle which states that ethical behavior is based on a

person's own and other relevant people's opinions and viewpoints. It
acknowledges that there are different standards for each culture. Therefore,
business transactions may proceed
differently from one culture to another.

5. Virtue ethics - This is the principle which states that morality depends on the
maturity of a person with good moral character. Based on society's moral
standards, a moral person can interpret these as the application of personal
virtues like faith, honesty, and others. Thus, what is right is based on the level
of one's moral judgment.

Corporate Integrity

Corporate integrity refers to that sense of "wholeness" created by the right

relationships among members of the corporation. It has five dimensions: cultural,
interpersonal, organizational, social, and natural.

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 Of all the dimensions, the cultural dimension has the most impact on the internal
relationships in the company. Culture is what unites employees, and cultural aspects such
as language, rituals, behavioral patterns, and beliefs form the framework that determines
the manner by which people relate with one another and engage with experiences and
situations. Managers are encouraged to establish an open atmosphere that will facilitate
communication among people with different cultures and backgrounds. The interpersonal
dimension focuses on the relationships among people. Important relationships that impact
the organization include family relations, civic life, and work relations. The
organizational dimension considers the main purposes of the business, particularly the
economic and financial purposes, managerial purposes, and civic purposes. Corporations
are agents whose actions are in line with these purposes, as embedded in their
mission/vision statements. The social dimension views the organization as actively
engaging with society. The business must be seen not only as a business leader but also
as a significant social element in its community. The natural dimension looks into how
the organization relates to nature. Managers should consider how their business
operations and activities impact the environment. These five dimensions are interrelated
and interdependent. Thus, it is a challenge for companies to integrate all of these with
company decisions to achieve corporate integrity.

On the cultural level, one of the challenges is to recognize various cultures and the
differences among them, which may include conflicts and disagreements. On the
interpersonal level, the challenge is to recognize relationships and cultivate them
according to interactions established by people with consideration of different identities.
The different family and social backgrounds of people determine their relationships at
work. People's belongingness to a family, civic society, and workplace requires that each
person's need for security in the family,
their right to participate in civic activities, and their inclination to establish relationships
at work are acknowledged.

On the organizational level, there is a constant challenge to ensure consistency in

achieving the mission of the organization and in the conduct of its members. On the
social level, the company is challenged to establish cooperation and mutual relationships
with other companies
and agents.

The natural dimension calls for corporations to exercise concern for the natural
environment. To have corporate integrity, a company should not gain profit at the
expense of nature. All business functions should be performed while giving principal
consideration to their effect on the environment.

Corporate Social Responsibility

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 The age of globalization brought about an increasing need for companies around
the world to comply with certain corporate practices. For the most part, these corporate
practices are homogeneous despite the differences in cultures of nations.

One business practice that is considered vital to current international standards of

business operations is corporate social responsibility. This refers to business
operations and activities that have the welfare of society in mind. A firm should aim to
pursue long-term goals which will benefit society. Business operations, therefore, should
be strategized to pursue economic goals while upholding the welfare of society.

Corporate social responsibility is closely related to the concepts of social

obligation and social responsiveness. These define the extent to which a company is able
to exercise social responsibility in its operations and activities.

Social obligation refers to complying with legal and ethical standards to uphold
social welfare. Social responsiveness, on the other hand, goes beyond prescribed
standards and implements actions that aim to make an impact on society. It also means
that the firm adapts
to social conditions and engages in activities that will respond to pressing social needs.
Take for example a company's actions in addressing the need to protect the environment.
If the company produces products that do not harm or pollute the environment, it is
meeting its social obligation. However, if the same organization uses fully recycled
paper in packaging its products, organizes yearly tree-planting activities for its
employees, and supports campaigns and advocacies against illegal logging and pollution,
then it is socially responsive.

Corporate social responsibility enhances a company's image. Companies should

always observe good and responsible practices to maintain a positive image in the
public. Fast-food chains, for example, have to maintain the required nutritional quality
of their food. Telecommunication companies, meanwhile, have to maintain reliable
phone service for the public.

All companies strive to incorporate elements of social responsibility in their

operations. In terms of economic responsibility, the company should produce goods and
services with reasonable prices. The goods and services should also satisfy the needs of
its customers, stakeholders, and other members of society even as they ensure
sustainability and growth. For its legal responsibility, the organization should comply
with local and international laws that apply to its business operations.

A company's ethical responsibilities include establishing norms, standards, mores,

and practices that reflect fairness to the consumers, employees, shareholders, and the
community. Lastly, its philanthropic responsibilities include the initiation of voluntary
activities such as establishing corporate programs, donating to charitable institutions, and
other similar charitable causes.

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