CHAPTER – 01

NATURE AND SIGNIFICANCE OF MANAGEMENT

Introduction:
The basic unit of a society is the individual. But no individual can
satisfy all his desires himself. Therefore, he unites with his fellow
beings and work in organized group to achieve what he cannot achieve
individually. Examples: Family, School, Business firm etc.,
Management is essential for all organizations, big or small, profit
or non-profit, manufacturing or service oriented industries.
Meaning of Management:
The word manage is derived from the Italian word, Maneggiare,
which means “to handle, especially tools”.
Management is an art of getting things done through and with
the help of others in order to achieve the specific organizational
objectives.
Definitions of Management:
According to Harold Koontz and Heinz Weihrich “Management
is the process of designing and maintaining an environment in which
individuals, working together in groups, efficiently to accomplish
selected aims”.
According to Robert L. Trewelly and M. Gene Newport
defines “Management is the process of planning, organizing, actuating
and controlling an organization’s operations in order to achieve
coordination of human and material resources in the effective and
efficient attainment of objectives”.
Meaning of Effectiveness:
Effectiveness means achieving the goals by completing the given
task within the expected time.
Meaning of Efficiency:
Efficiency means doing the task correctly by using minimum
quantity of resources and with minimum cost.
Features of Management:
Following are some basic features of Management: ………..
1) Management is a goal oriented process:
Every organization is established to achieve certain goals. Each
and every organization has different set of goals depending upon the
nature of organization. These goals should be simple and clear.
2) Management is all pervasive:
Management activities are not only applicable to business units
alone. They are universally applicable to all organizations, whether,
it may be economic, social, charitable, religious or political.
Therefore, management is all pervasive and a universal in nature.
3) Management is Multidimensional:
Management is a complex activity and involves three
dimensions viz.., a) Management of work b) Management of people
c) Management of operations.
a) Management of Work:
Each and every organization exists for performing
some work. This is done in terms of problems to be solved,
decisions to be made plans to be prepared, budgets to be
prepared, responsibilities to be assigned and authority to be
delegated.
b) Management of People:
Management is concerned with “getting things done
through people”. It is a major task of manager, it consists of
dealing with all the employees of organization having different
personalities, needs, backgrounds and methods of work.
c) Management of Operations:
Every organization has to deliver certain goods or services
for its survival. Through management, the operational inputs
are transformed into desired output.
4) Management is a continuous process:
Management is a continuous process, consisting of series of
functions like, Planning, organizing, staffing, directing & controlling.
All the managers perform these functions regularly. It does not stop
anywhere. These are all ongoing series of functions of management.
5) Management is a group activity:
Each and every organization consists of number of persons
with different needs. Every member of the group has different
purpose to join the organization. As members of the organization,
they have to initiative, communicate, coordinate and join their
hands for attaining the common organizational goals.
6) Management is a dynamic function:
Every organization works in an environment, which keeps on
changing. Management has to adopt itself to changing environment.
Therefore, management is a dynamic function.
7) Management is an intangible force:
Management cannot be seen and touch but its presence can
be felt in the operations of the organization. Effects of management
are noticeable in terms of attainment of production targets,
employees’ satisfaction etc.
Objectives of Management:
Every organization must established is to achieve certain
objectives. Different organizations are having different objectives and
management has to achieve those objectives effectively and efficiently.
Objectives can be classified into three categories: ……………
1. Organizational objectives:
The main objective of management in any organization is to
fulfill the economic objectives of organization. It is concerned with
better utilization of human and material resources.
The main organizational objectives are as follows: ……….
a) Survival:
The basic objective of every business is to survive for a
longer period of time in the market. The management must
strive to ensure the survival of the organization by earning
enough revenue to cover its costs.
b) Profit:
Mere survival is not enough for business. Earning of profit
is essential for meeting the expenses and for successful
continuity of business.
c) Growth:
For the existence of business organization for a long
period, management should explore all its prospects of
growth and development to remain in industry. The growth
can be measured in terms of increased sales, increased in
production and increased in employees, etc.
2. Social objectives:
Every organization is a part of society, whether it is a business
or non-business unit. It is has certain obligation towards society.
Some of the social objectives includes: ………………
a) Using environmental friendly methods of production.
b) Creating employment opportunities particularly to the poor
sections of society.
c) Providing amenities to the society, like schools and colleges
to employee children.
d) Providing financial support to society for noble causes.
e) Participating in social service projects of government and
non-governmental organizations.
 3. Personal or Individual objectives:
Personal objectives are concerned with the employees of the
organization.
People in organization having different personalities, background
and experiences. They include: ……………………….
a) Financial needs like salaries, incentives and other benefits.
b) Social needs like recognition in the organization.
c) Higher level needs like personal growth and development.

Importance of Management:
Management is a universal activity and it is an integral part of an
organization. It is important to all the organizations because of the
following reasons: ………………………
A. Management helps to achieving group goals:
Management helps to achieve group goals. It integrates and
gives common direction to individual efforts for achievement of
organizational goals.
B. Management increases efficiency:
The main aim of every manager is to increase efficiency to
maximize output with minimum cost. This is to be done through
better planning, organizing, staffing, directing and controlling the
activities of the organization.
C. Management creates dynamic organization:
It is generally observed that every individuals may adopt
some of the changes in an organization. An effective management
helps people to adopt that changes, so that an organization is able
to maintain competitive advantage in the society.
D. Management helps in achieving personal objectives:
Management also helps to achieve individual or personal
objectives of an employees within an organization. Management
helps to achieve individual goals through motivation, it leads to
develop the employee spirit of co-operation, commitment and
team spirit.
E. Management helps in the development of society:
An effective management accepts its commitment to workers,
investors, customers and general public. It fulfils all the objectives
for the growth and development of society. It provides better
quality products and services, generates employment avenues,
adopt new technology for the welfare of the people and leads the
path towards growth and development.
Management as Art, Science and Profession:
Management is as old as civilization. Over a period of time, it has
grown into dynamic subject having its own importance.
Management as an Art:
Art is the skillful and personalized application of existing knowledge
to achieve desired results.
An Art has the following characteristics or features: ………..
a. Existence of theoretical knowledge:
Every art requires theoretical as well as practical knowledge.
It is very important to know practical application of theoretical
principles. A manager must also know how to apply various
theoretical principles in real situations to function as manager.
b. Personal skill:
Every art requires some personal skills relating to the job.
Because, the level of success and quality of performance differ
from one person to another.
c. Personalized application:
The use of this knowledge varies from individual to
individual. Art, therefore, is a very personalized concept.
d. Based on practice and creativity:
All art is practical. Art involves the creative practice of
existing theoretical knowledge. We know that all music is based
on seven basic notes.
Therefore, we can say that management is an art.

Management as a science:
Science is a systematized body of knowledge that explains certain
general truths or the operation of general laws.
Following are the basic features of science: …………………………..
a. Systematized body of knowledge:
Science is a systematized body of knowledge. Its principles
are based on a cause and effect relationship. For example: the
phenomenon of an apple falling from a tree towards the ground
is explained by the law of gravity power.
b. Principles based on experimentation:
Scientific principles have been developed through observation
and experimentation under controlled conditions. Management
principles are also developed through experiments and practical
experiences of many managerial personnel.
 c. Universal validity:
Scientific principles have universal validity and application.
d. Cause and effect relationship:
Principles of science lay down cause and effect relationship
between various variables. Management also establishes cause
and effect relationship in dealing with various situations in the
organization.
Therefore, we can say that management is a science.

Management as both science and art:

Management has the features of both art and science. The
practice of management is an art. When practice of manager is based
on the principles, it is a science. Management as an art and a science
are therefore not mutually exclusive, but complement to each other.
Science teaches to know but art teaches to do it.
Finally, we can concluded that management is both a science
and an art.
Management as a profession:
A profession may be defines as “it is an occupation that requires
special knowledge and specific skills”.
A profession has the following features: ………….
1. Well defined body of knowledge:
All professions are based on well-defined body of knowledge
that can be used acquired through instruction.
2. Restricted entry:
The entry to a profession is restricted through an examination
or through acquiring educational degree. For example, to become
a charted accountant in India a candidate has to clear the exam
conducted by ICAI.
3. Professional association:
All professions are affiliated to a professional association
which regulates entry, grants certificate of practice and formulate
and enforces a code of conduct. If any person he want to become
a lawyer, he must and should get the membership from Bar
Council.
4. Ethical code of conduct:
All professionals are bound by a code of conduct which
guides the behaviour of its members. A code of conduct enforced
by a representative association to ensure self-discipline among its
members. The AIMA (All India Management Association) has
prescribed a code of conduct for managers.
 5. Service motive:
The basic motive of a profession is to serve their client’s
interests by rendering dedicated and committed service. The task
of a lawyer is to ensure that his client gets justice.
Finally we can declared that management as a Profession.

Levels of Management:
The term levels of management refers to a demarcation between
various managerial positions in an organization.
The levels of management determine a chain of command, the
amount of authority and status enjoyed by any managerial position.

The levels of management can be classified into three broad

categories as under: …………………
1. Top level / Administrative level
2. Middle / Executory level
3. Low level / Supervisory / Operative / First line mgt.

BOD, CEO, MD,

Chairman, president
Top etc..,
Level

Finance, Production,
Middle Level sales manager etc..,

Lower Level Supervisor, foreman,

inspector etc..,

Levels of Management:
1. Top level management:
It consists of board of directors, chief executive officer, managing
directors and president. The top management is the ultimate source of
authority. The main duty of top level management is to preparation of
plans & policies or rules and regulations of the organization.
2. Middle level management:
It consists of all types of departmental managers i.e. production,
marketing, sales, finance and human resource manager. These people
are responsible for the top level management for the functioning of
their department. The main duty of middle level management is to be
executing the rules and regulations, which can be prepared by top level
management.
3. Lower level management:
Lower level is also known as supervisory / operative level of mgt.
It consists of supervisors, foremen, section officers, Inspectors etc., The
main duty of low level management is adoption and implementation of
rules and regulations which can be executed by middle level mgt.,

Functions of Management:
Management has been described as a social process. It involves
the responsibility for making economical, effective planning and
regulation of operations of an organization to fulfil the given purposes.
According to Luther Gullick has given a keyword “POSDCORD”
where ‘P’ stands for Planning, ‘O’ for Organizing, ‘S’ for Staffing, ‘D’
for Directing, ‘Co’ for Co-ordination, ‘R’ for Reporting, and ‘B’ stands
for Budgeting.
But, the most widely accepted classification of management functions
is given by Koontz and O’Donnell. It includes planning, organizing,
staffing, directing, and controlling.

Planning

Controlling Organizing

Directing Staffing

1. Planning:
According to Koontz and O’Donnell, “Planning is deciding
in advance – what to do, when to do and how to do. It bridges the
gap from where we are and where we want to be”.
 A plan is a future course of action. It is an exercise in
problem solving and decision making. It also helps in avoiding
confusion, uncertainties, risks, wastages etc.

2. Organizing:
It is the process of bringing together physical, financial and
human resources. It develops productive relationship amongst
them for achievement of organizational goals.
According to Henry Fayol, “to organize a business is to
provide it with everything useful for its functioning i.e., raw
material, tools, capital and personnel”.
Organizing process involves the following steps:
 Identification of activities.
 Classification / grouping of activities.
 Assignment of duties.
 Delegation of authority and creation of responsibility.
 Coordination of authority and responsibility relationship.

3. Staffing:
It is the function of manning the organization structure. It
will provide required human resources to the organization. The
main purpose of staffing is to put a right person to a right job.
According to Koontz and O’Donnell, “Managerial function
of staffing involves manning the organization structure through
proper and effective selection, appraisal and development of
personnel to fill the roles designed the structure”.

Process of Staffing involves the following steps: ……………

a) Manpower planning
b) Recruitment, Selection and Placement
c) Training and development
d) Remuneration
e) Performance appraisal
f) Promotions and Transfer.

4. Directing:
It is that part of managerial function which actuates the
organizational methods to work efficiently for achievement of
organizational objectives.
Direction is that inter-personnel aspect of management. It
has the following elements: ……….
 Supervision
 Motivation
 Leadership
 Communication
 5. Controlling:
It is the process of measurement of actual performance
against the standards set and correction of deviations, if any, to
ensure achievement of organizational goals.
Process of Controlling involves following steps:
 Establishment of standard performance
 Measurement of actual performance
 Comparison of actual performance with the standards and
 Finding out deviations if any and take Corrective action.

Co-ordination:
Co-ordination is the unification, integration, synchronization of
the efforts of members to provide unity of action in the pursuit of
common goals.
Meaning and definition of Co-ordination:
Co-ordination is the process by which a manager integrates and
units the activities of different departments.
According to McFarland defines as, “Co-ordination is the process
whereby as executive develops an orderly pattern of group efforts
among his subordinates and secures unity of action in the pursuit of
common purpose”.

Features of Co-ordination:
Co-ordination has the following features: ………………
1. Co-ordination integrates group efforts:
It unifies diverse interests in group and gives common
direction to ensure the work to be performed in accordance with
the plans and schedules.
2. Co-ordination ensures unity of action:
The main intention of co-ordination is to bind and secure
unity in different departmental activities to achieve common
organizational objectives.
3. Co-ordination is a continuous process:
It is a continuous ongoing process. It begins with planning
and ends with controlling, in order to maintain efficiency within
the organization.
4. Co-ordination is all pervasive function:
Co-ordination is a pervasive function, because it requires at
levels of management as there is interdependence among various
activities performed by various departments. It integrates the
efforts of different departments at different levels.
 5. Co-ordination is the responsibility of all managers:
It is the responsibility of every manager in the organization
to work in co-ordination. Top level managers need to co-ordinate
with subordinates to ensure that overall policies to be carried out.
6. Co-ordination is a deliberate function:
All managers are required to co-ordinate deliberately, the
efforts of different people to achieve common objectives of the
organization.
Co-ordination is an integral part of management. Therefore,
co-ordination is necessary for the smooth functioning of all other
functions of management in achieving the organizational
objectives.

Importance of Co-ordination:
Co-ordination is important as it integrates the efforts of
individuals, departments and specialists.
Following are the importance of Co-ordination: …………….
1) Growth in size:
As organisations grow in size, the number of people employed by
the organisation also increase. At that time, it may become difficult
to integrate their efforts and activities. All individuals differ in their
habits of work, background, approaches to situations and
relationships with others. Therefore, for organisational efficiency, it
is important to harmonize individual goals and organisational goals
through coordination.

2) Functional differentiation:
Functions of an organisation are divided into number of
departments, divisions and sections. In an organisation there may
be separate departments of finance, production, marketing, sales
and human resource department. All these departments have their
own objectives, policies and their own style of working.

3) Specialization:
Modern organisations are characterized by a high degree of
specialization. Organisations therefore, need to employ a number of
specialists. Specialists usually think that they only are qualified to
evaluate, judge and decide according to their professional criteria.
Therefore, some coordination is required by an independent person
to reconcile the differences in approach, interest or opinion of the
specialists.
 CHAPTER – 02
PRINCIPLES OF MANAGEMENT
Introduction:
Management has now been recognized as a separate discipline. It
is as systematized body of knowledge, studied in the specialized
institutions and practiced in the real situations of the business. The
application of management principles shows concrete and constructive
results in the matter of production, sales and profit. There are number
of management thinkers have contributed a lot to the development of
principles of management. Among them Henry Fayol and F.W. Taylor
are more important.
These principles have helped in increasing managerial efficiency
and taking scientific decisions. Both of them contributed immensely
towards the study of management as a discipline. Taylor gives the
concept of ‘Scientific management’ whereas Fayol emphasized
‘Administrative Principles’.
Meaning of Principles of Management:
“Principles are the statements of fundamental truths about some
phenomena that provide guidelines for decision making and actions”.
These principles enable the managers to manage enterprises
economically, effectively and efficiently (3E’s).

Features of principles of management:

Following are the important principles of management: ……….
1. Universal applicability:
Principles of management are applicable to all types of
organizations, business as well as non-business, small as well as
big, public as well as private sector, manufacturing as well as
service sectors. But, the extent of their applicability depends upon
the nature of the organization, scale of operation and so on.

2. General guidelines:
The principles are guidelines to action but do not provide
readymade solutions to all managerial problems. Because real
business situations are very complex and dynamic and are a
result of many factors. These play advisory role in solving the
problems.
 3. Formed by practice and experimentation:
The principles of management are formed by experience and
collective opinions, wisdoms of managers and as well as
experimentation.

4. Flexible:
The principles of management are not rigid. They are flexible
and can be modified by the managers according to the situation.
They give manager enough power to change when the situations
demands.
5. Mainly behavioral nature:
The main aim of principles of management is to influencing
the human behaviour. These help to understand the relationship
between human and material resources in accomplishing
organizational goals.
6. Cause and effect relationships:
Principles of management establish a relationship between
cause and effect as they tell us as to what would be the result if
a particular principle is applied in a given situation.
7. Contingent:
The application of management principles is contingent. It
depends upon the prevailing situations at a particular point of
time. These can be changed as per the requirements. These
cannot be applied blindly in all situations and in all the
organizations equally.

Importance or Significance of principles of management:

Principles of management guide managers in taking and
implementing decisions.
The significance of principles of management can be discussed in
terms of the following points: …………….
1) Providing managers with useful insights into reality:
The principles of management provide the managers with useful
insights into real world situations. They add to their knowledge,
ability and understanding of managerial situations and
circumstances. It will also enable managers to learn from past
mistakes and conserve time by solving recurring problems quickly.
As such management principles increase managerial efficiency.
2) Optimum utilisation of resources and effective administration:
Principles of management equip the managers to reduce wastages
of all kinds such as wastage of material, wastage of labour time etc.
Thus, management principles enable the managers to make
optimum utilisation of resources and leads to the production of
quality products with minimum cost.
3) Scientific decisions:
Management principles help in thoughtful decision making.
They must be timely, realistic and subject to measurement and
evaluation. Management decisions taken on the basis of principles
are free from bias and prejudice. They are based on the objective
assessment of the situation.
4) Meeting changing environment requirements:
Management principles are in the nature of general guidelines but
they are modified and as such help managers to meet changing
requirements of the environment. Because, the management
principles are flexible to adapt to dynamic business environment.
For example, management principles emphasize division of work
and specialisation.
5) Fulfilling social responsibility:
Management principles help the manager to fulfill the social
responsibility of business. For example, the principle of ‘equity’
assures fair wages to employees, value to the customer, care for
environment and so on.
6) Management training, education and research:
Management principles are used as a basis for management
training, education and research. These principles provide basic
groundwork for the development of management as a discipline. For
example, entrance to management institutes is preceded by
management aptitude test. Professional courses like MBA, BBA etc.

Taylor’s Scientific Management:

Fredrick Winslow Taylor (1856-1915) was an engineer in a steel
mill in the U.S. He published an article called the “Principles of
Management” in 1911 which is a mile stone in the growth of
management theory. After this he wrote a book “Shop Floor Work”
using time study and motion study with a view to increase the output.
He introduced Differential Piece Rate Wage system. He proposed
scientific management as opposed to “rule of thumb”. So F.W. Taylor
emerged as a Father of Scientific Management. Rule of thumb means
solving industrial problems by personal judgment of owners or
managers instead of scientific method.
Meaning and Definition of Scientific Management:
According to F.W. Taylor, “Scientific management means
knowing exactly what you want men to do and seeing that do it in the
best and cheapest way”.
Principles of Scientific Management:
Following are the important principles of scientific management
contributed by F.W. Taylor: ……………………
1. Science, not Rule of thumb:
Taylor believed that there was only one best method to
maximize efficiency i.e. scientific management. This reduces the
practice of rule of thumb. This principle includes scientific
selection of workers, placement and training gradation of
equipment’s and machinery, payment of wages according to work.
2. Harmony, not discord:
There should be a harmonious relationship between
management and workers. Both should realize that each one is
important. To achieve this Taylor introduced mental revolution.
Both management and workers should transfer their thoughts in
order to achieve harmonious relationship among them.
3. Co-operation, not individualism:
There should be a complete co-operation between the labour
and the management instead of individualism. According to
Taylor, there should be an almost equal division of work and
responsibility between management and workers.
4. Development of each and every person to his/her greatest
efficiency and prosperity:
Industrial efficiency largely depends on personnel
competencies. So scientific management also stood for workers
development. According to Taylor efficiency could be achieved
from the beginning of employees’ selection.
Techniques of scientific management:
Following are the techniques of scientific management. These are
based on the various experiments he conducted during his career.
1) Functional foremanship:
Functional foremanship is an extension of the principle of division
of work and specialisation to the shop floor wherein each worker will
get orders and guidelines from 8 foremen in the related process or
function of production.
According to F.W. Taylor, there should be planning incharge and
production incharge.
 Under planning incharge, there must be: ….
a) Instruction card clerk: He draft instruction for the workers.
b) Route clerk: He specify the route of production.
c) Time and cost clerk: He can prepare time and cost sheet.
d) Disciplinarian: He ensures the discipline among the workers.

Under production incharge, there must be: ….

a) Speed boss: He ensures timely and accurate completion of work.
b) Gang boss: He should keep machines and tools ready for
operation by workers.
c) Repair boss: He ensures proper working condition of machines
and tools.
d) Inspector: This person checks the quality of work.

2) Standardization and simplification:

According to F.W. Taylor, standards must be set for every
business activity, it can be standardization of process, raw material,
time, product, machinery, methods and working conditions.
Simplification means elimination of unnecessary varieties, sizes,
dimensions and unnecessary diversity of products.

3) Method study:
The main objective of method study is to find out one best way of
doing the job. It involves the study of all activities starting from
procurement of raw materials till the delivery of final product to the
customer. For this purpose, many techniques like process charts
and operations research are used.

4) Motion study:
Motion study refers to the study of movements like lifting, putting
objects, sitting and changing positons etc., which are undertaken
while doing a typical job.
This motion study is conducted to eliminate unnecessary
movements so that a job can be completed efficiently by taking less
time.
5) Time study:
Time study is the study conducted to determine the standard time
to be taken to perform a well-defined job.
Time measuring devices such as stop watch are used to measure
the time required for each element of task and standard time fixed
for whole of the task by taking several readings.

6) Fatigue study:
Fatigue study is the study conducted to determine the amount
and frequency of rest intervals in completing a specific task.
 A worker has to be given some rest intervals. If the work involves
heavy manual labour, then workers cannot perform their activities
perfectly. But, when we provide some rest intervals to the workers,
they will recharge their energy level for optimum production.
7) Differential piece wage system:
According to F.W. Taylor, he differentiates the workers into
efficient and inefficient workers whereby efficient workers are given
high wage rate and inefficient workers are given low wage rate per
piece is called as differential piece wage system.

Henry Fayol’s Principles of Management:

Henry Fayol, (1841-1925), a French management theorist, is
considered as the “Father of General Management”, as one of the
most influential contributors to the modern concepts of management.
He started his profession as an engineer in 1860 in French Coal
Mining. In the same company, he was promoted to the post of
Managing director from 1888 to 1918. In 1917 he published a book
called “General and Industrial Management” which was translated
and published in English in 1949. In this book, he developed the
concept of administration based largely on his own experience.
Henry Fayol’s 14 principles are given below: ……………………
1. Division of Work:
In each and every organization, it is possible to divide any
into small jobs. Each job should be performed by a specialist. So
division of work leads to specialization. The main aim this is to
produce more and better work for the same effort. It increases the
efficiency of human beings. He opined that, if a person goes on
doing a particular work, he becomes specialist and able to
discharge his duties more effectively and efficiently.
2. Authority and responsibility:
According to Fayol, authority is the right to give orders and
obtain obedience. Responsibility means accountability which is
the result of authority. There should be a balance between these
two. Excess authority leads to misuse of power. Responsibility
may leads to slaverism and may not work effectively.
3. Discipline:
It means obedience to the organizational rules and
employment agreements. One should relationship with others,
following rules and regulations, performing of assigned tasks
honestly with interest, all come under discipline. A well-
disciplined working force is essential for improving the quality
and quantity of production.
4. Unity of Command:
There should be only one boss for every individual employee.
If an employee gets orders from two or more superiors at a time,
the principle of unity of command is violated. This principle helps
to avoid confusion regarding tasks to be done. If it is violated it
leads to escapism from work and creates irresponsibility and
entire system becomes hazardous.
5. Unity of Direction:
Each group should be led by only one leader. It ensures
unity of action and co-ordination. It helps to conduct all the
activities smoothly and resources can be utilized to the maximum
extent effectively. If this principle is violated it leads to wastage of
resources, increase in cost and unhealthy competition.
6. Subordination of individual interest to general interest:
The interest of the organization should take priority over the
interest of any one individual employee. Every worker should
show interest towards the achievement of organizational goals.
Individual interest of workers / employees should not
disturb the organization’s interest. This is because larger interest
of the stakeholders is more important than the interest of any one
person.
7. Remuneration of employees:
This will ensure congenial atmosphere and good relationship
between workers and management. It also helps for smooth
working of the organization. The remuneration payable should
lead the workers to maintain a minimum standard of living and
at the same time, it should be within the paying capacity of the
organization.
8. Centralization and decentralization:
The decision making power in the hands of one or few is
called Centralization. The dispersal of decision making power
among more persons is called decentralization. The degree of
centralization or decentralization will depend upon the
circumstances in which the organization is working. Fayol does
not favour centralization or decentralization of authorities but
suggests that there should be a proper adjustment between
centralization and decentralization in order to achieve maximum
objectives of the business.
9. Scalar principle:
The formal lines of authority from highest to the lowest ranks
are known as scalar chain.
 According to Fayol, “Organization should have a chain of
authority and communication from top to bottom and should be
followed by managers and subordinates”. This can be violated
only in case of emergency to facilitate rapid and easy
communication without delay. This is called ‘gang plank’.
Gang Plank is a shorter route of scalar chain which allows
employees at the same level to communicate with each other
directly. It should be used only in case of emergency to prevent
any likely distortion of message and to facilitate speedy co-
ordination.
10. Order:
According to Fayol, “People and materials must be in
suitable places at appropriate time for maximum efficiency”. This
principle state that “there is a place for everything and everything
must be in its place”. This will leads to increase productivity and
efficiency.
11. Equity:
Fayol emphasizes kindliness and justice in the behaviour of
managers towards workers. This will ensure loyalty and devotion.
There should not be any discrimination against any one on
account sex, religion, region, language, caste, belief or nationality
etc.
12. Stability of personnel:
“Employees turnover should be minimized to maintain
organizational efficiency”. So employees should be selected and
appointed through various procedure. Organization should
recognize and reward efficiency. It should assure employment
security. Any negligence in this regard will create instability /
insecurity among employees.
13. Initiative:
Initiative refers to the steps taken by the employees towards
their self-motivation. This principle states that employees at all
levels should be given freedom to some extent, so they come
forward and use their skills to achieve expected goals. It helps to
bring out hidden efficiency of the staff.
14. Esprit de corps:
Management should take necessary steps to promote team
spirit among the employees. It has to develop the mentality of one
family members. There should be a mutual confidence and
understanding. It will help to reduce the wastage of resources,
misuse and careless use of resources and in turn leads to
increase in production.
 CHAPTER – 03
BUSINESS ENVIRONMENT
Introduction:
The success of any business organization mainly depends not
only on its internal management but also on many external factors
such as economic, social, political, technological and other forces
which operate outside the business organization are the part of its
environment. It also includes individual consumers, competitors, the
governments, courts, media and other institutions working outside an
enterprise constitute its environment. Therefore, the manager should
understand about the business environment.
Meaning of Business Environment:
Business environment refers to the sum total of all individuals,
institutions and other forces that are outside the control of a business
enterprise but that may affect its performance.
Features of Business Environment:
The business environment has the following features: ……………….
1) Totality of external forces:
Business environment is the sum total of all things external to
business firms and, as such, is aggregative in nature.
2) Specific and general forces:
Business environment includes both specific and general forces.
Specific forces such as investors, customers, competitors and
suppliers affect individual enterprises directly. General forces such
as social, political, legal and technological conditions have impact
on all business enterprises indirectly.
3) Inter-relatedness:
Different elements or parts of business environment are closely
interrelated. For example, increased life expectancy of people and
increased awareness for health care have increased the demand for
many health products.
4) Dynamic nature:
Business environment is dynamic in nature. So, that it keeps on
changing whether in terms of technological improvement, shifts in
consumer preferences or entry of new competition in the market.
5) Uncertainty:
Business environment is largely uncertain as it is very difficult to
predict future happenings, especially when environment changes
are taking place too frequently as in the case of information
technology or fashion industries.
6) Complexity:
Since business environment consists of numerous interrelated
and dynamic conditions which arises from different sources, it
becomes difficult to comprehend at once what exactly constitutes a
given environment.
7) Relativity:
Business environment is a relative concept since it differs from
country to country and even region to region. The demand for sarees
may be very high in India whereas, but there is no demand for
sarees in France.

Importance / Significance of Business Environment:

A good understanding of business environment by business
managers helps in the following ways: …………….
1) It enables the firm to identify opportunities and getting the
first mover advantage:
Opportunities refer to the positive external changes that will help
a firm to improve its performance. Environment provides numerous
opportunities for business success. But, the Early identification of
opportunities helps an enterprise to be the first to exploit them
instead of losing them to competitors.
2) It helps the firm to identify threats and early warning signals:
Threats refer to the external environment changes that will
hinder a firm’s performance. Besides opportunities, an environment
has many threats. Environmental awareness can help managers to
identify various threats on time and serve as an early warning
signal.
3) It helps in tapping useful resources:
Environment is a source of various resources for running a
business. To engage in any type of activity, a business enterprise
assembles various resources called inputs like finance, machines,
raw materials, power and water, labour, etc., from its environment
including financiers, government and suppliers.

4) It helps in coping with rapid changes:

Today’s business environment is getting increasingly dynamic
where changes are taking place at a fast pace. For example:
Turbulent market conditions, less brand loyalty, divisions and sub-
divisions of markets, more demanding customers, rapid changes in
technology and intense global competition etc.
5) It helps in assisting in planning and policy formulation:
Since environment is a source of both opportunities and threats
for a business enterprise, its understanding and analysis can be the
basis for deciding the future course of action and training guidelines
for decision making.
6) It helps in improving performance:
Continuous monitoring and understanding of biz., environment
helps the managers to adopt suitable business practices which
improves their present as well as future performance.

Dimensions of business environment:

Dimensions or the factors constituting the business environment

include economic, social, technological, political and legal conditions
which are considered relevant for decision-making and improving the
performance of an enterprise.
1) Economic Environment:
Interest rates, inflation rates, changes in disposable income of
people, stock market indices and the value of rupee are some of the
economic factors that can affect management practices in a
business enterprise. Short and long term interest rates significantly
affect the demand for product and services.
2) Social Environment:
The social environment of business includes the social forces like
customs and traditions, values, social trends, society’s expectations
from business, etc. For example, the celebration of Diwali, Id,
Christmas, and Guru Parv in India provides significant financial
opportunities for greetings card companies, sweets manufacturers,
tailoring outlets and many other related businesses.
3) Technological Environment:
Technological environment includes forces relating to scientific
improvements and innovations which provide new ways of
producing goods and services and new methods and techniques of
operating a business. For example, recent technological, advances
in computers and electronics have modified the ways in which
companies advertise their products.

4) Political Environment:
Political environment includes political conditions such as
general stability and peace in the country and specific attitudes that
elected government representatives hold towards business. The
significance of political conditions in business success lies in the
predictability of business activities under stable political conditions.
5) Legal Environment:
Legal environment includes various legislations passed by the
administrative orders issued by government authorities, court
judgments as well as decisions rendered by various commissions
and agencies at every level of the government- central, state or local.

Economic Environment in India:

It consists of various macro level factors related to the means of
population and distribution of wealth which have an impact on
business and industry. The economic environment in India has been
steadily changing since independence mainly due to govt., policies.
As a part of economic reforms the govt., of India announced a
new Industrial Policy in July, 1991, which sought to liberate the
industry from licensing system (Liberalization), drastically reduce the
role of public sector (Privatisation) and encouraging the foreign private
participation in industrial development (Globalization).

Liberalization:
Liberalizing the Indian business and industry from all unnecessary
controls and restrictions is called as Liberalization.
Privatisation:
Privatisation is the process of transfer of ownership and
management of public sector enterprises to private sector through the
process of disinvestment.
Globalization:
Globalization means the integration of the various economies of
the world leading towards the emergence of a global economy.
Impact of Government policy changes on Business and Industry:
The policy of LPG of the Government has made a significant
impact on the working of enterprises in business and industry. The
Indian corporate sector has to face several challenges due to
government policy changes. These challenges can be explained as
follows: …………
a) Increasing competition:
As a result of changes in the rules of industrial licensing
and entry of foreign firms, competition for Indian firms has
increased especially in service industries like airlines, banking,
telecommunications, insurance, etc.
b) More demanding customers:
Customers today have become more demanding because
they are well-informed. Increased competition in the market gives
the customers wider choice in purchasing better quality of goods
and services.
c) Rapidly changing technological environment:
Increased com-petition forces the firms to develop new ways
to survive and grow in the market. The rapidly changing
technological environment creates tough challenges before
smaller firms.
d) Necessity for change:
After 1991, the market forces have become turbulent as a
result of which the enterprises have to continuously modify their
operations.
e) Need for developing human resource:
Indian enterprises have suffered for long with inadequately
trained personnel. The new market conditions require people
with higher competence and greater commitment. Hence there is
a need for developing human resources.
f) Market orientation:
Earlier firms used to produce first and go to the market for
sale later. In a fast changing world, there is a shift to market
orientation in as much as the firms have to study and analyze
the market first and produce goods accordingly.
g) Loss of budgetary support to the public sector:
The central government’s budgetary support for financing
the public sector outlays has declined over the years. The public
sector undertakings have realised that, in order to survive and
grow, they will have to be more efficient and generate their own
resources for the purpose.
 CHAPTER – 04
PLANNING
Introduction:
Planning is the first function to be performed in the process of
management. A manager must plan before he organizes, directs and
controls. As planning is the base for all other functions of management.
Without proper planning other functions become ineffective.
Panning concentrates on setting objectives of an organization and
determines the future course of operations to be adopted for
accomplishment of objectives in the best possible manner. Planning is
an intellectual process, which requires a manager to think, imagine
and judge before doing anything. It is a continuous and never ending
process, performed by managers at all levels.

Meaning and Definition of Planning:

According to Koontz and O’ Donnell, “Planning is deciding in
advance what to do, when to do, and how to do it. Planning bridges the
gap from where we are and where we want to be”.

Features of Planning:
The planning function of the management has certain special
features. These are as follows: …………
1) Planning focuses on achieving objectives:
Organizations are set up with a general purpose in view. Specific
goals are set out in the plans along with the activities to be
undertaken to achieve the goals.

2) Planning is a primary function of management:

Planning lays down the base for other functions of management.
All other managerial functions are performed within the framework
of the plans drawn. Thus, planning precedes other functions.

3) Planning is pervasive:
Planning is required at all levels of management as well as in all
departments of the organisation. For example, the top management
undertakes planning for the organisation as a whole. Middle
management does the departmental planning. At the lowest level,
day-to-day operational planning is done by supervisors.
4) Planning is continuous:
Plans are prepared for a specific period of time, may be for a
month, a quarter, or a year. At the end of that period there is need
for a new plan to be drawn on the basis of new requirements and
future conditions. Hence, planning is a continuous process.
5) Planning is futuristic:
Planning essentially involves looking ahead and preparing for the
future. The purpose of planning is to meet future events effectively
to the best advantage of an organisation. It implies peeping into the
future, analyzing it and predicting it. Planning is, therefore,
regarded as a forward looking function based on forecasting.
6) Planning involves decision making:
Planning essentially involves choice from among various
alternatives and activities. If there is only one possible goal or a
possible course of action, there is no need for planning because
there is no choice.
7) Planning is a mental exercise:
Planning requires application of the mind involving foresight,
intelligent imagination and sound judgement. It is basically an
intellectual activity of thinking rather than doing. However, a plan
requires logical and systematic thinking rather than guess work or
wishful thinking.

Importance / Benefits of planning:

Planning is the basic of all management functions. It is necessary
for all the functions i.e., organizing, staffing, directing and controlling.
It provides directions and reduces the uncertainty by determining the
future course of actions.
The importance of Planning are as follows: ……………….
1. Planning provides direction:
Planning provides direction for action by stating in advance
how a work is to be done. Planning ensures that the goals or
objectives be clearly stated so that the employees of the
organization are aware of what the organization has to do.
2. Planning reduces the risks of uncertainty:
A business organization has to work in an environment
which is uncertain and ever changing. So, we cannot able to
eliminate all changes and uncertainties but we can anticipate
future things as early as possible, which helps us to predict
through by adopting some remedial measures.
 3. Planning reduces overlapping and wasting activities:
Planning serves as the basis for coordinating the activities
and efforts of the different individuals and departments of the
organization. It helps in avoiding confusions and
misunderstandings. It helps to detect the inefficiency and to take
corrective measures to minimize the wasteful activities.

4. Planning promotes innovative ideas:

Planning is basically the thinking function of management.
It encourages the managers for innovative and creative thinking.
Many new ideas come in the minds of managers when they can
plan. Planning helps to innovate new ideas to shape concrete
plans to determine the new course of action to be adopted in
future.

5. Planning facilitates decision making:

Decision making is a process of selecting best course of
action form various available alternatives after evaluating each
one of them. Planning helps the manager in order to take any
decision through by considering the objectives, policies, methods
and procedures.

6. Planning establishes standards for controlling:

Planning determines goals and standards for each and every
individuals and departments of the organization. It helps to
compare the actual performance of the individuals through by
fixing the standards. If any deviations, corrective measures are to
be taken to remove them.

Limitations/disadvantages/demerits of Planning:
Planning is very essential for a business organization. It is very
difficult to manage the activities required to achieve the goals without
proper planning. But, in practice, unforeseen events and changes such
as rise cost of production and rise in price of raw materials,
environmental changes, govt. and legal regulations may affect the
business plans.
Planning has the following limitations: …………….
1. Planning leads to rigidity:
In any organization, a well-defined plan drawn up with
specific goals to be achieved with a time limit. This plan decided
to achieve these goals within the specific time limit. So, it leads to
rigidity and also it restricts the individuals’ freedom, initiative and
creativity.
 2. Planning many not work in a dynamic environment:
The business environment is dynamic in nature, nothing is
constant. It anticipates the future course of actions like changes
in economic, political, legal and social dimensions. But, it
becomes very difficult to determine the exact future trends. If any
unexpected changes take place in technology of production,
marketing, economic policy etc. the business plans may become
inactive.

3. Planning reduces creativity:

In any organization plans will prepared by top management.
But subordinates just implement that plans. If any deviations can
be arising in that particular plan, the middle management and
other decision makers are not allowed to take on their own. Thus,
planning reduces the creativity of the subordinates.

4. Planning involves huge cost:

Planning is a costly process. Because, collection and
analysis of information, determination and evaluation of best
course of action involves huge expenses. Some times the cost
incurred on planning May exceeds its benefits.
5. Planning is a time consuming process:
Planning process is time consuming. Collection and analysis
of facts and figures, determination and evaluation of various
courses of action involves so much of time.
6. Planning does not guarantee success:
The success of an enterprise is possible only when the plans
are properly drawn up and implemented. Managers have the
tendency to depend on the previously tested and successful
plans. But, these plans cannot be succeeded again and again.
Therefore, planning does not guarantee success but provides a
base for analysis of future course of action.

Planning process or Steps involved in planning process:

The success of any business largely depends on effective planning.
Planning is decision making process, which is concerned with deciding
in advance what is to be done and how it is to be done.
Steps involved in planning process are as follows: ……………….

Setting Objectives

Developing Premises

Identification of alternative courses of

action

Evaluating alternative courses

Selecting an alternative

Implement the plan

Follow up Action

1. Setting Objectives:
Setting objectives is a first function in the process of
planning. Objectives are the goals which determine what the
organization wants to achieve. They must be specific, realistic and
measurable as far as possible. Every business organization must
have certain objectives. These objectives should be stated clearly
too all departments and employees.
2. Developing Premises:
In any organization plans are to be formulated based on
certain assumptions. Planning premises are the assumptions
about the future conditions and events like trends in population,
changes in political and economic environment, changes in
production cost and prices, government and legal regulations etc.,
3. Identification of alternative courses of action:
Once objectives are set and assumptions are to be made,
then manager can identify the alternative courses of actions to
achieve organizational goals. There may be many ways to act and
achieve the objectives.
 4. Evaluating alternative courses:
This is very important step under planning process. In this
step we have to analyses the strengths and weakness of each
alternative. Because, each alternative course of action has their
own merits and limitations. So, there is a need to evaluate each
and every course of action in light of objectives to achieve.
5. Selecting an alternative:
After examining each and every possible courses of action,
the best one will be selected in this step in order to accomplish
the organization goals so, we can called as decision making stage.
The ideal course of action must be feasible, profitable and with
minimum negative consequences.
6. Implementing the plan:
This step is concerned with putting the plan into action to
achieve the objectives. Implementation of plan requires the
formulation of policies, procedures and programmes. It also
requires the co-operation, participation and commitment of the
subordinates for efficient implementation of the plan.
7. Follow up Action:
After implementation of the plan, it is necessary to see
whether plans are performing the activities as per the plans
adopted in our organization or not. Because, monitoring the plan
is very important to ensure that objectives are achieved.
Types of plans:
The management has to prepare number of plans to achieve the
organizational goals.
On the basis of usage and planning period, the plans will be
classified into two types. They are as follows: ……
a) Single – use plan:
A single – use plan is a plan which to be developed for a one-
time event or project. For example: Budget, programmes etc.,
b) Standing plans:
A Standing plan is used for activities that occur regularly
over a period of time. For example: Policies, Rules, Procedures etc.
On the basis of achieving the objectives, plans will be classified into 8
types. They are as follows: ………
1) Objectives 5) Methods
2) Strategies 6) Rules
3) Policies 7) Programmes
4) Procedures 8) Budget
1. Objectives:
Objectives are the goals which an organization wants to
achieve by its operations.
Objectives are set by the top management. They lay down
guidelines for the activities and serves as a bench mark for
measuring the performance of the organization.

For example: Increasing monthly sales by 10% or earning

20% return on investment. Usually objectives are put in the form
of written statements of the desired results to be achieved in a
given period of time.

2. Strategies:
Strategies are the specific programmes of action for
achieving the objectives of the organization by employing the
organization’s resources efficiently and economically.
Formulation of strategies involves three aspects, namely:
1) Determination of the long term objectives
2) Adopting a course of action to achieve the objectives
3) Allocation resources necessary to achieve the objectives.
Example: i) Strike while the iron is hot.
ii) Divide and rule.
3. Policies:
Policies are the general statements which serve as a
guide to take any decision within the organization.
For Example: Purchase policy, Pricing policy, recruitment
policy etc. An established policy helps to resolve the problems and
issues easily. Decision makers can take decisions without any
confusion.

4. Procedures:
Procedures are the plans prescribing the exact time
sequence of the work to be done.
Procedures are the guidelines to action and they are usually
intended to the works which are repetitive in nature. Example:
i) Procedure for the admission of students in a college.
ii) Procedure for the execution of the customer’s order for
supply of goods.
5. Methods:
The prescribed way or the manner of doing each planned
task for accomplishing the objectives is known as methods.
The method may differ from step to step. Selection of proper
method saves time, money and effort and increases the efficiency.
For example:
i) Training employees under on the job training method.
ii) Remunerating sales personnel under commission method.

6. Rules:
Rules are the established principles for carrying out the
activities in a systematic manner.
Rules are rigid. They do not permit any deviations and
demands strict compliance. Their violation attracts disciplinary
action or penalty.
For example:
a) Wear identity cards compulsorily at the work place.
b) No smoking.
c) No admission without permission.
7. Programmes:
A programme is a precise plan which lays down the
operations to be carried out to accomplish a given task within
a specific period of time.
They are framed for the works which are non-repetitive in
nature. For example:
 Programme for production of 10,000 tonnes of products in
the month of November 2016.
 Programme for production of 2,000 cars in the month of
December 2016.
8. Budgets:
Budget is a statement of expected results expressed in
numerical terms.
It is a plan which expresses the future facts and figures in
quantitative terms for a specific period. For example: A sales
budget, which helps in forecasting the sale of a particular product
during a particular month.
As budget is expressed in numbers, it becomes very easy to
compare the actual performance with the estimated figures and
corrective actions can be taken subsequently. Thus, budget is
also considered as a control device.
 CHAPTER – 05
ORGANISING
Introduction:
Once the plans have been laid down, the next step is to organize
the resources in well-defined manner in order to the accomplishment
of the organizational objectives. The activities of an enterprise must be
organized in such a manner at that time plans can be successfully
implemented.
Meaning and Definition of Organizing:
It is the process of bringing together physical, financial and
human resources. It develops productive relationship amongst them
for achievement of organizational goals.
According to Theo Haimman, “organizing is the process of
defining and grouping the activities of an enterprise and establishing
authority relationships”.
Organizing Process:
Organizing is concerned with arranging in a logical and orderly
manner the activities of all the employees. It specifies how the duties
are to be divided among the departments and the employees.
Organizing process involves the following steps: ………..
1. Identification and Division of work:
The process of organizing starts with identification and
division of work. The whole work is to be divided into manageable
activities so that duplication is avoided and work can be
completed as per predetermined goals.
2. Departmentalization:
Departmentalization refers to the process of grouping
the activities of similar nature under same departments. This
facilitates specialization and co-ordination.
Following are the ways of departmentalization: …………
a. On the basis of function:
The activities are grouped into different departments
on the basis of various functions. E.g. Purchase department
for purchase activity, finance department for finance
activities etc.,
b. On the basis of type of product manufactured:
The activities are grouped into different departments
on the basis of products manufactured. E.g. Textile division,
food division, foot wear division, cosmetics division etc.,
 c. On the basis of territory:
The activities are grouped on the basis of different
territory. E.g. East, West, North, South etc.,
3. Assignment of duties:
After the departmentalization, it is necessary to assign the
work to the employees according to their skill, ability, knowledge,
interest and experience. It helps to ensure effective performance
in an organization. It also helps to reducing the performing of
repeated tasks.
4. Establishing reporting relationships:
After assignment of duties to employees, we should analyze
the reporting relationships among the employees. It helps an
individual to know from whom he has to take orders and to whom
he is accountable. And to whom he has report about the activities.
It also helps in co-ordination among the various departments.
Importance of Organizing:
Organizing helps in the smooth functioning of a business in
accordance with the business environment. It helps in the survival and
growth of an enterprise and enables it to meet various challenges.
Following are the important points to be considered: ………..
1. Benefits of specialization:
Organizing leads to a systematic allocation of jobs amongst the
work force. This reduces the workload as well as enhances
productivity because of the specific workers performing a specific
job on a regular basis. Repetitive performance of a particular task
allows a worker to gain experience in that area and leads to
specialization.
2. Clarity in working relationships:
Organizing helps in establishing working relationships and
clearly defines the lines of communication and also specifies who is
to report to whom. It helps to remove ambiguity in transfer of
information and instructions. It helps in fixation of responsibility
and specification of the extent of authority to be exercised by an
individual.
3. Optimum utilization of resources:
Organizing leads to the proper usage of all material, financial
and human resources. The proper assignment of jobs avoids
overlapping of work and also makes possible the best use of
resources. Avoidance of duplication of work helps in preventing
confusion and minimizing the wastage of resources and efforts.
4. Adaptation to change:
The process of organizing allows a business enterprise to
accommodate changes in the business environment. It allows the
organization structure to be suitably modified and the revision of
inter-relationships amongst managerial levels to pave the way for a
smooth transition.
5. Effective administration:
Organizing provides a clear description of jobs and related
duties. This helps to avoid confusion and duplication. Clarity in
working relationships enables proper execution of work. Thus,
management of an enterprise becomes easy and this brings
effectiveness in administration.
6. Development of personnel:
Organizing stimulates creativity amongst the managers.
Effective delegation allows the managers to reduce their workload
by assigning routine jobs to their subordinates. Delegation develops
the ability among the subordinates in order to performing the task
effectively and efficiently. It helps to the development of personnel.
7. Expansion and growth:
Organizing helps in the growth and diversification of an
enterprise. It enables an enterprise to take up new challenges. It
allows a business enterprise to add more job positions, departments
and even diversify their product lines and also new geographical
territories helps to increase sales and profit.

Organization structure:
A well-defined organization structure enables an enterprise to
work as an integrated unit. A proper organizational structure is
essential to ensure smooth flow of communication and better control.
Meaning and Definition of Organization structure:
It is a system which defines the frame work within which managerial
and operating functions are performed in an enterprise.
According to Theo Haimann “organization is the structural frame
work within which the various efforts are coordinated and related to
each other”.

Types of Organization structure:

Following are the important types of organization structure: ……
1. Functional structure 2. Divisional Structure
 I. Functional structure:
Grouping the jobs of similar nature and organizing these
major functions as separate departments is called as functional
structure.
Chart showing the Functional organization structure
Managing Director

Human resources Marketing Research and Purchasing

development
Suitability: Functional structure is suitable when:
 Size of the organization is large.
 When the Authority is decentralized.

Advantages of Functional Structure:

Following are the important advantage of functional structure: ….
a) It leads to occupational specialization.
b) It promotes control and co-ordination within a department.
c) It helps to increase the efficiency, results in increase in profits.
d) It helps to reduces the cost.
e) It helps to provide training of employees easier.

Dis-advantages of Functional Structure:

Following are the disadvantage of functional structure: ….
a) It gives more importance to the objectives of manager, but it can’t
emphasis on overall objectives of an enterprise.
b) It may lead to problems in co-ordination.
c) A conflict of interest may arise due to there is co-ordination
between different department.
d) It may lead to inflexibility.

II. Divisional structure:

Grouping the activities on the basis of product is called as
divisional structure.
Under this structure the top level management delegates
extensive authorities to the divisional heads. The divisional head
is incharge of manufacturing, purchase, sales and other
departments of division.
Suitability: divisional structure suitable when:
 When the authority is centralized.
 Organization needs product specialization.
 Organization plans to produce more line of products
 Chart showing Divisional Structure
Managing Director

Cosmetics Garments Footwear Skin Care

Human resources Marketing Research and Purchasing

development
Advantages of Divisional structure:
Advantages of divisional structure are as follows: ………
a) It leads to product specialisation.
b) It makes divisional heads accountable for profits.
c) It facilitates expansion and growth.
d) It promotes flexibility and initiative.
Dis-Advantages of Divisional structure:
Dis-advantages of divisional structure are as follows: ……
a) Conflicts may arise among different divisions.
b) It may lead to increase in costs.
c) Divisional manager may ignore organizational interests.

Formal and Informal Organization:

Formal organization is built based on principles of organization
but, informal organization is not preplanned it develops automatically
when people working together.
Meaning and Definition of Formal Organization:
Formal organisation refers to the organisation structure which is
designed by the management to accomplish a particular task. It clearly
specifies the authority and responsibility.
According to Louis Allen, “The formal organisation is a system
of well-defined jobs, each bearing a definite measure of authority,
responsibility and accountability”.
Features of Formal Organisation:
Following are the important features of formal organisation: …….
a) It specifies the relationships among various job positions.
b) It is a means to achieve the objectives specified in the plans.
c) Efforts of various departments are coordinated.
d) It is deliberately designed by top management.
Advantages of Formal Organisation:
Advantages of formal organisation are as follows: ……..
1) It is easier to fix the responsibility since mutual relationships are
clearly defined.
2) There is no ambiguity in the role of each member.
3) Unity of command is maintained.
4) It leads to effective accomplishment of goals.
5) It provides stability to the organisation.

Disadvantages of Formal Organisation:

Dis-advantages of formal organisation are as follows: …….
1) The formal communication may lead to procedural delays.
2) Poor organisation practices may not provide adequate recognition
to creative talent.
3) It is very difficult to understand all human relationships in an
organisation.

Meaning and Definition of Informal Organization:

Informal organization refers to the personal relationships which
develop automatically when people work together.
According to Keith Devis, “Informal organization refers to the
relationship between the people in the organization based on the
personal attitudes, prejudices, likes and dislikes etc.”

Features of Informal organisation:

Following are the important features of informal organisation: …
1) It originates from within the formal organisation as a result of
personal interaction among employees.
2) It emerges spontaneously and it is not deliberately created by the
management.
3) The standards behaviour evolve from group norms rather than
officially laid down rules and regulations.
4) It has no definite structure or form.
5) It follows independent channels of communication.

Advantages of Informal Organisation:

Advantages of informal organisation are as follows: ……
1) It leads to faster spread of communication. Since it should not
follow prescribed lines of communication.
2) It helps to fulfill the social needs of the members.
3) It enhances their job satisfaction.
4) It contributes towards fulfillment of organizational objectives.
Disadvantages of Informal Organisation:
Dis-advantages of informal organisation are as follows: ……
1) It acts as a disruptive force against the interest of the formal
organisation.
2) The management may not be successful in implementing the
changes.
3) It pressurizes the members to conform to group expectations.

Differences between Formal and Informal Organization

No. Basis Formal Organization Informal Organization
1. It is structure of It is a structure of
authority relationships personal relationship
Meaning created by which develops
management. automatically when
people work together
2. It arises as a result of It arises as a result of
Origin company rules and social interaction.
policies.
3. It arise by virtue of It arises out of personal
Authority position in qualities.
management.
4. Behaviour It is directed by rules. There is no set of
behaviour pattern in it.
5. Communication takes Flow of communication
Flow of place through the is not through a
communicati scalar chain. planned route.
on
6. Nature It is rigid. It is flexible.
7. Leadership Managers are leaders Leaders may or may not
in it. be managers. They are
chosen by the group.
8. Flow of Authority flows from Authority flows
authority top to bottom vertically as well as
horizontally. horizontally.

Meaning and Definition of Delegation:

Delegation is the process of transferring of authority from a
superior to his subordinate.
According to Theo Haimman defines as, “delegation of authority
refers to the granting of authority to subordinates to operate within
prescribed limits”.
Elements of Delegation:
There are three elements of delegation as follows: ………….
1. Authority 2. Responsibility 3. Accountability
1. Authority:
Authority is the power to command employees and instruct
them to perform a job.
Authority determines the superior subordinates’ relationship.
It flows from top to bottom, i.e., the superior has authority over
the subordinate. The subordinate executes the decision as per
guidelines of the superior. It must be noted that authority is
restricted by laws, rules and regulations of the organization.
2. Responsibility:
Responsibility is an obligation of a subordinate to perform the
assigned duty.
Thus, responsibility flows upwards i.e., subordinate is
always responsible to his superior.
3. Accountability:
Accountability means being responsible for the final results.
It is an obligation to carry out responsibility and to give
reports about ones performance to the superior. Authority can be
delegated by a superior to his subordinate but accountability can
never be delegated.
Comparison of Authority, Responsibility and Accountability
Basis Authority Responsibility Accountability
1. Meaning Right to give Duty to perform Being answerable
orders given job for the job
performed

2. Delegation It can be It cannot fully It cannot be

delegated delegated delegated at all

3. Origin It arises from It arises from Arises from

formal position delegated responsibility
of an individual authority

4. Flow It flows from It flows from It flows upward

superior to subordinate to from subordinate
subordinates superior to superior.
Importance of Delegation:
Delegation of authority is necessary for the smooth functioning of
a business. It increases the working capacity of a manager.
Effective delegation can lead to the following benefits: …...
1. Effective management:
Delegation enables superior to assign the routine activities
to the subordinates and he can concentrate on other important
functions. Thus, a manager can increase his effectiveness by
using the skills of subordinates through delegation of authority.
2. Employee development:
Delegation enables employees get an opportunity to utilize
their skills and talents within an organization. It motives them to
develop themselves for higher positions, through their skills &
knowledge.
3. Facilitation of growth:
Delegation helps in developing the talents of the employees.
It makes employees feel encouraged and tries to improve their
performance further.
4. Facilitation of growth:
Delegation facilitates growth and expansion by providing
trained and experienced personnel for taking up leading positions
in new projects.
5. Basis of management hierarchy:
Delegation of authority determines who has to report to
whom. It creates the chain of superior-subordinate relationship
which is the basis for hierarchy of management.
6. Better co-ordination:
The elements of delegation namely Authority, responsibility
and accountability, which helps to avoid overlapping of duties
and brings better coordination among the various departments
and functions of management.

Meaning and Definition of Decentralization:

The decision making power in the hands of among all persons is
called decentralization.
According to Louis Allen, “Decentralization refers to systematic
effort to delegate to the lowest level, all authority except that which can
be exercised at central points”.
Importance of Decentralization:
The importance of delegation are as follows: ……………
1. Develops initiative among subordinates:
Decentralization encourages subordinates to develop initiative
to take their own decisions and to develop solutions for the
various problems they encounter. It helps to promote self-reliance
and confidence among the subordinates.
2. Develops managerial talent for the future:
Decentralization gives the subordinates a chance to prove
their abilities. In turn, it helps to develop a qualified team of
subordinates who can be considered to fill up more challenging
managerial positions through promotions.
3. Quick decision making:
Managers are free to make their own decision within the
specific area of task assigned to them. The enterprise enjoys the
benefit of quick decision making.
4. Relief to top management:
The authority is delegated to the lower levels. The top
management is relieved of taking operational decisions. They can
concentrate on corporate planning, control and coordination of
the activities of different departments.

5. Facilitates growth:
It enables the managers at the lower level heads to perform
to their full potential and also develops a sense of competition
among the departments. It helps to reduce the work load of
managers and contributes towards growth of enterprise.
6. Better control:
Decentralization makes it possible to evaluate performance
at each level and the departments can be individually held
accountable for their results. As a result of decentralization,
better control systems like management information systems are
being evolved.
 CHAPTER – 06
STAFFING

Introduction:
Once the organization structure can be well defined in the
organization, it needs people with right skills, knowledge and abilities
to fill in that structure. People are very important resources of every
organization because, the success of every organization depends on the
talented and hardworking people who are the principle assets of any
organization. Employees are much more important assets than
buildings or equipments. In order to get things done by others, in an
organization requires persons at right places at right times and in right
numbers.

Meaning of staffing:
Staffing refers to the providing required human resources to the
organization. The main purpose of staffing is to putting a right person
to a right job at right place at right time.
OR
Staffing is the managerial function of filling and keeping filled the
positions in the organisation.

Importance of Staffing:
An organization must respond to change effectively, in order to
remain competitive. The right staff can carry an organization through
a period of change and ensure its future success. Solid staffing
practices can shape organization’s workforce into a motivated and
committed team capable of managing change effectively and achieving
the organizational objectives. Human resources of an organization are
considered as most vital assets because, the right people can take
the business to the top and wrong people can even break the
business.
Importance of staffing can be understood through by analyzing
following benefits: ………………………….
1. For implementing managerial function:
Staffing provides life to the organization through by selecting
right people for right jobs. The effectiveness and successful
implementation of all managerial functions depend on the
effectiveness of the staffing function.
 2. Higher job satisfaction:
The staffing function aims in building a sound human
organization in which the employee’s job performance and job
satisfaction are very high. Here worker’s goals matches with the
goals of the organization.
3. Increased productivity and profitability:
Selecting a right person to right job at right place at right
time and also providing better training and development facilities
to the employees it leads to increase in production, productivity
and profitability of the organization.
4. Effective use of resources:
Selecting a right person to right job is an instrument for the
effective utilization of capital, materials, technology etc., in the
organization. It will also ensure minimum wastage and improves
the quality in work and products.
5. Right people for right jobs:
The staffing function helps the organization in discovering
and selecting competent personnel for various positions in the
organization. This will increase the organizational efficiency and
strengthens the organization to face the challenge of changes.

Staffing is a part of Human Resource Management:

The traditional staffing function is just one part of the human
resource management. Staffing involves the function of recruitment,
selection, training and development etc., to persons employed. All
these functions are covered by the operative functions of human
resource management. Hence it can be concluded that staffing is a part
of human resource management.
The following reasons are supported for above view point: ……….
a. Recruitment i.e. search for qualified people.
b. Analyzing jobs, collecting information about jobs and prepare job
descriptions.
c. Developing compensation and incentive plans.
d. Training and development of employees for efficient performance
and career growth.
e. Maintaining labour relations.
f. Handling grievances and complaints.
g. Providing social security and welfare of employees.
h. Defending the company in law suits and avoiding legal
complications.
Staffing Process:
The main purpose of staffing is to obtain the most competent
persons suitable for the organizational requirement.
The following steps are to be followed in staffing process: ….
1. Estimating the man power requirements:
Man power requirement refers to the process of estimating
the man power requirement of an organization. While estimating
the man power requirement, the management generally keeps in
mind, the available infrastructure including the technology,
production schedule, market fluctuation, demand forecasts etc.,
2. Recruitment:
Recruitment is the process of searching for prospective
employees and stimulating them to apply for jobs in the
organization. This step involves locating the potential candidate
or determining the sources of potential candidates.
3. Selection:
Selection is the process of choosing suitable candidates from
the pool of the prospective job applicants to fill various jobs in the
organization.
4. Placement and Orientation:
Placement refers to the assigning jobs to the newly selected
candidates. It involves striking a fit between the requirements of
a job and the qualifications of a candidate.
Orientation refers to the introducing the newly selected
employee to the existing staff members of the organization and
also inform about the rules and policies of the organization.
5. Training and Development:
Training is the process to increase the knowledge and skills
of an employee to perform the present job accurately.
Development refers to the learning opportunities designed
to help employees to grow. It helps to overall development of an
employee.
6. Performance appraisal:
Performance appraisal is the systematic evaluation of the
individual with respect to his performance on the job and his
potential for development. It also determines the efficiency of an
employee.
7. Promotion and Career planning:
Promotion refers to the transferring of an employee from
lower level job to higher level job. When it happens salary, status
and responsibility of an employee will be increases. It requires
more knowledge, experience and skills to perform the job.
 8. Compensation:
Compensation refers to it is a cash payment made by
employer to employee for his performance. It includes basic salary
and other benefits like bonus, commission, pension, profit etc.,

Meaning and Definition of Recruitment:

Recruitment is the process of finding the prospective candidates
and stimulate them to apply for the job.
According to Edwin B. Flippo defines “Recruitment is the
process of finding and attracting prospective applicants for the
employment and stimulate them to apply for the job”.

Sources of Recruitment:
It is a positive process of attracting the applicants for job in the
organization can chose the right people, in right number, for the
different positions in the organization.
The various sources of recruitment are classified into two
broad categories, i.e.,
a) Internal sources
b) External sources

Sources of Recruitment

Internal Sources External Sources

Director Director
 Promotions Direct Recruitment
 Transfers Casual callers
Advertisement
Employment exchange
Placement Agencies and
management consultants
Campus Recruitment
Recommendations of employees

Labour contractors
Advertising on television
Web – publishing
Internal Sources:
There are two important sources of internal recruitment: ….
a. Promotions:
Promotion refers to the transferring of an employee from
lower level job to higher level job. When it happens salary, status
and responsibility of an employee will be increases. It requires
more knowledge, experience and skills to perform the job.
b. Transfers:
Transfer means lateral movement of an employee from one
job to another, without any change in his status, responsibility
and salary. Transfer is a good source of filling the vacancies with
employees from overstaffed departments. It is practically a
horizontal movement of employees.
Advantages / Merits of Internal Sources:
Following are the important advantages of internal sources: ……
a) Employees are motivated to improve their performance.
b) It simplifies the process of selection and placement.
c) Filling jobs internally is cheaper.
Dis-advantages / De-Merits of Internal Sources:
a) It reduces the scope for induction of fresh talent.
b) A new enterprise cannot use internal sources of recruitment.
c) Frequent transfer of an employees may reduce the productivity.
External sources:
All the vacancies of an organization cannot be filled up from
within the organization. Existing employees may lack the required skill,
initiative and qualifications needed for the jobs involved.
External recruitment provides wide choice and brings new blood
in the organization. The commonly used external sources of
recruitment are discussed below:
1) Direct Recruitment:
Under the direct recruitment, a notice is placed on the
notice-boards of outside the factory. It specifying the details of the
jobs available. Jobseekers assemble outside the premises of the
organization on the specified date and selection is done on the spot.
2) Casual Callers:
Many qualified persons apply for employment to the reputed
companies on their own initiative. Such applications are known as
unsolicited applications. A proper record may be kept of such
unsolicited applications and the candidates may be called for
interview whenever the need arises.
3) Advertisement:
Advertisement is the most effective means to search potential
employees from outside the organization. Advertisement in
newspapers or trade and professional journals is generally used
when a wider choice is required.
4) Employment Exchange:
Employment exchanges have been set up by the Government for
bringing together job seekers and employees who are looking for
jobs. In some cases, compulsory notification of vacancies to
employment exchange is required by law. Thus, employment
exchanges help to match personnel demand and supply by serving
as link between job-seekers and employers.

5) Placement Agencies and management consultants:

In urban areas, a number of private organizations have started
functioning as employment or placement agencies. These agencies
register with them, the names of job seekers and try to arrange job
interviews for such candidates.
6) Campus Recruitment:
Now a days, many companies maintain a close contact with the
various universities and colleges for recruitment of their staff
members. As and when the need arises, the companies send their
executives to the above educational institutions. These executives
conduct interview to the interested candidates and select the
suitable candidate as per their requirement. It is called Campus
interview.
7) Recommendations of employees:
Applications introduced by present employees or their friends and
relatives may also prove to be a good source of recruitment.
8) Labour contractors:
Labour contractors are specialist people who supply man power
to the factory or manufacturing plant. Through these contractors,
workers are appointed on contract basis. This system of recruitment
has been abolished in the public sector enterprises.
9) Advertising on television:
Advertising on T.V. is a widely used source of recruitment. The
practice of telecasting of vacant posts, job description, qualifications
required etc., has a very wide reach. Generally, this type of
telecasting is popular in big cities.
10) Web-Publishing:
Internet is becoming a common source of recruitment these days.
There are certain websites specifically designed and dedicated for
the purpose of providing information about both job seekers and job
available. In fact, www.naukri.com, www.jobstreet.com etc., are very
popular websites visited both by the prospective employees and the
organizations searching for suitable people.

Advantages / Merits of External Sources:

1) Qualified personnel:
It helps the management to attract qualified and trained
people.

2) Wider choice:
Management gets wider choice while selecting the people for
the employment.

3) Fresh talent:
It helps to bring new blood with fresh talent.

4) Competitive spirit:
It makes the present employees to work hard to complete
with the outsiders.

Dis-advantages / De-Merits of External Sources:

a) Dissatisfaction among existing staff:
It may lead to dissatisfaction and frustration among existing
employees – since chances of promotion are reduced.
b) Lengthy process:
It takes a long time to initiate the selection process.
c) Costly process:
Giving advertisement and processing of applications is a
costly process.

Meaning and Definition of Selection:

Selection is the process of choosing the suitable candidates from
among the various job applicants to fill various jobs in the
organisation.
According to Dale Yoder defines as “selection is the process of
choosing from among the candidates from within the organization or
from the outside, the most suitable person for the current position or for
the future position”.
Selection Process:
The following steps are to be followed, while selecting of an
employee for all types of business organizations: ………………
1) Preliminary Screening:
After receiving the applications from the candidates through
recruitment process, the same must be examined to decide, which
ones deserve to be considered and followed up.
Preliminary screening helps the manager to eliminate unqualified
or unfit job seekers based on the information supplied in the
application forms.
2) Selection Tests:
After screening the applications, eligible candidates are asked to
appear for selection tests. An employment test is a mechanism that
attempts to measure certain characteristics of individuals such as
skills and abilities, intelligence to personality etc.,
Important Tests Used for Selection of Employees:
a) Intelligence Tests:
This is one of the most important psychological tests used
to measure the level of intelligence quotient of an individual. It is
an indicator of a person’s learning ability or the ability to make
decisions and judgments.
b) Aptitude Test:
It is a measure of individuals’ potential for learning new
skills. It indicates the person’s capacity to develop. Such tests are
good indices of a person’s future success score.
c) Personality Tests:
Personality tests provide clues to a person’s emotions, her
reactions, maturity and value system etc. These tests probe the
overall qualities of a person as a whole. Hence, these are difficult
to design and implement.
d) Trade or Proficiency test:
These tests measure the existing skills of an individual. It
helps to measure the level of knowledge and proficiency in the
area of professions or technical training.
e) Interest Tests:
Every individual has fascination for some job than the other.
Interest tests are used to know the pattern of interests or
involvement of a person.
3) Employment Interview:
Interview is a formal, face to face conversation conducted to
evaluate the applicant’s suitability for the job. The role of the
interviewer is to seek information and that of the interviewee is to
provide the same. Interview helps the employer to evaluate the
candidate regarding the personality, smartness, intelligence,
attitude etc.,
4) Reference and Background Checks:
The employer tries to verify information and check the
background of applicants. This helps to know additional information
such as character, honesty, loyalty and such other qualities of
candidates. For this purpose, information may be obtained and
verified from the heads of educational institutions, previous
employers, teachers and university professors can act as references.
5) Selection Decision:
The final decision has to be made from among the candidates who
pass the tests, interviews and reference checks. The views of the
concerned manager will be generally considered in the final selection
because it is he/she who is responsible for the performance of the
new employee.
6) Medical Examination:
After the selection decision and before the job offer is made, the
candidate is required to undergo a medical fitness test. The job offer
is given to the candidate being declared physically fit for the job.
The physical fitness of an employee reduces the labour turnover,
absenteeism, accidents etc.,

7) Job Offer (issue of appointment letter):

The next step in the selection process is job offer to those
applicants who have passed all the previous hurdles. Job offer is
made through a letter of appointment/confirm his acceptance. Such
a letter generally contains nature of job, the remuneration, pay scale
and other terms and conditions relating to employment. Usually a
reasonable time is given to the candidate to join the organization.

8) Contract of Employment (Acceptance of job offer):

If the selected candidate decides to join the organization, he has
to report to the concerned authority and formally join the
organization by giving his consent in writing. Then, the organization
will open a service register in the name of the candidate and records
all details like qualification, particulars of employment, pay scale
etc.
Training and Development:
Training is the process of teaching the new or present employees,
the basic skills they need to effectively perform their job.
Meaning of Training:
Training is the process to increase skills, knowledge and abilities
of an employees to perform the specific job.
Meaning of Development:
Development refers to the learning opportunities designed to help
the employees to grow.

Differences between Training and Development:

Training Development
1) It is a process to increase the 1) It is a process of learning and
knowledge and skills. growth.
2) It enables the employee to do 2) It enables the overall growth of
the job better. an employee.
3) It is a job oriented process. 3) It is a career oriented process.

Importance / Significance of training:

In order to perform well in an organization, an employee must
have the theoretical and practical knowledge of the work. We gain
theoretical knowledge in educational institutions, but for the practical
knowledge training is required.
The importance of Training can be understood through by
analyzing following benefits: ………
A. Benefits of Training and Development to the Organisation:
1) Training is a systematic learning methods.
2) It helps to increase the organisation productivity both in terms of
quantity and quality.
3) Training equips the future manager who can take over in case of
emergency.
4) It helps to obtaining effective response from the employees to fast
changing environment of technical and economic.
5) A well trained employee needs less supervision. It results in
reduced cost of supervision.
B. Benefits of Training and Development to the Employees:
a) Training helps to improve the employee’s skills and knowledge.
b) It helps to the employees to do their work better.
c) Training helps to increases the performance of an employees.
d) Training helps to increase the employee efficiency to handle the
machines.
e) Training increases the job satisfaction and employee morale.
Methods of Training:
The following chart shows the different methods of training: ……
Methods of Training

On the job training Off the job training

 Apprenticeship programmes Classroom lectures

 Coaching Films
 Internship training Case study
 Job – Rotation Computer modelling
Vestibule training
Programmed instruction
On the Job Training Methods:
On the job training method refers to “It is a method of training in
which the workers learn by doing the work”.
Workers work under the guidance and supervision of supervisors
or certain trained employees. In this method, the workers get training
through step-by-step doing their job practically.
The following are the important methods of on the job training:
A. Apprenticeship programmes:
It is one of the most important method of on the job training
method. In this method the worker gets training facility through
by combining classroom education with on the job work under
supervision. It is also called as “Under study” in which the trainee
is put under the supervision and guidance of an experienced
expert. This method of training suitable for electricians,
mechanics and computer trainees.
B. Coaching:
In this method, the trainee is placed under a particular
supervisor, who functions as a coach in training the employee.
The supervisor provide training to the employee with equipment,
materials, tools etc. The supervisor provides feed back to the
trainee on his performance and offers him suggestions for
improvement.
C. Internship training:
Internship training is a system of on the job training method
that allows learners to gauge their interest in their chosen
professional area. It provides training as real world experiences
instead of second hand experiences. In medical, management and
lawyer’s profession, internship training is very essential.
 D. Job-rotation:
Job rotation is a method of training in which involves
rotation of an employee from one job to another job, from one
department to another department within an organisation.
This method of training helps an employee to learn each and
every job within the organization.

Off the job training methods:

Off the job training method refers to “It is method of training
method in which training is provided away from the actual working
conditions”.
Following are the important methods of off the job training: ….
A. Classroom lectures or Conferences:
Classroom lecture method is well known to train white collar
or managerial executives in the organization. Under this method,
trainees are called to the room like that of classroom, to give
training in the form of lecture.
B. Films:
They can provide information and explicitly demonstrate
skills that are not easily represented by the other techniques. It
is a very effective and more attractive method.
C. Case study:
Case study is a written description of an actual situation in
the past in the same organization and trainees are supposed to
analyses and give their conclusions. This is an excellent method
to ensure full participation of employees and generates good
interest among them.
D. Vestibule training:
In this method, the employees learn their jobs on the
equipment or tool they will be using in the place of training, which
is away from their actual work place. Vestibule training allows
employees to get full feel for doing work, without real world
pressure.
E. Computer modeling:
Computer modeling is a type of off the training method in
which employees get the training through by using computer
program or software. It is the most important method of training,
which attracts large number of employees for a longer period of
training sessions.
F. Programmed instruction:
Under this method some useful information is broken into
meaningful units and these units are arranged in a proper way to
form a logical and sequential learning package i.e. from simple to
complex.
 CHAPTER – 07
DIRECTING
Introduction:
Directing is another important element of management. It is the
sum total of efforts which takes the organization towards the
predetermined goals. The organization does not start working till the
manager gives direction which means guiding and supervision of
subordinates.

Meaning of Directing:
Directing is the process of instructing, guiding, counselling,
motivating and leading people in the organisation to achieve
organizational objectives.
Features / characteristics of Directing:
The main characteristics of directing are discussed below: ……….
1) Directing initiates action:
Directing is a key managerial function. A manager has to
perform this function along with planning, organising, staffing and
controlling while discharging his duties in the organisation. While
other functions prepare a setting for action, directing initiates
action in the organisation.
2) Directing takes place at every level of management:
Every manager, from top executive to supervisor performs the
function of directing. The directing takes place wherever superior –
subordinate relations exist.
3) Directing is a continuous process:
Directing is a continuous activity. It takes place throughout the
life of the organisation irrespective of people occupying managerial
positions.
4) Directing flows from top to bottom:
Directing is first initiated at top level and flows to the bottom
through organizational hierarchy. It means that every manager can
direct his immediate subordinate and take instructions from his
immediate boss.

Importance of Directing:
Direction is a continuous process through which manager
interact with the employees of an enterprise and provide necessary
instructions or guidelines for the achievement of organizational goals.
Following points to be considered the importance of directing: ….
 1) Directing helps to initiate action by people in the organisation
towards attainment of desired objectives.
2) It ensures the individual work for organizational goals.
3) Directing guides employees to realize their potential and
capabilities by motivating and providing effective leadership.
4) Directing facilitates introduction of needed changes in the
organisation.
5) Effective directing helps to bring stability and balance in the
organisation.

Principles of Directing:
Providing good and effective directing is a challenging task as it
involves many complexities. A manager has to deal with people with
diverse background, and expectations. Certain principles of directing
may help in directing process. These principles are briefly explained
below: ………….
1) Maximum individual contribution:
This principle emphasizes that directing techniques must help
every individual in the organisation to contribute to his maximum
potential for achievement of organizational objectives. It should
bring out untapped energies of employees for the efficiency of
organisation.
2) Harmony of objectives:
Very often, we find that individual objectives of employees and
the organisational objectives as understood are conflicting to each
other. For example, an employee may expect attractive salary and
monetary benefits to fulfill his personal needs.
3) Unity of Command:
This principle insists that a person in the organisation should
receive instructions from one superior only. If instructions are
received from more than one, it creates confusion, conflict and
disorder in the organisation.
4) Appropriateness of direction technique:
According to this principle, appropriate motivational and
leadership technique should be used while directing the people
based on subordinate needs, capabilities, attitudes and other
situational variables.
5) Managerial communication:
Effective managerial communication across all the levels in the
organisation makes direction effective. Directing should convey
clear instructions to create total understanding to subordinates.
6) Use of informal organisation:
A manager should realize that informal groups or organisations
exist within every formal organisation. He should spot and make
use of such organisations for effective directing.
7) Leadership:
While directing the subordinates, managers should exercise good
leadership as it can influence the subordinates positively without
causing dissatisfaction among them.
8) Follow through:
Mere giving of an order is not sufficient. Managers should follow
it up by reviewing continuously whether orders are being
implemented accordingly or any problems are being encountered.

Elements of Directing:
Following are the important elements of directing: ……………
1. Supervision:
Supervision is one of the important element of direction. It
is concerned with observing the work of sub-ordinates. It ensures
the work to be performed as per plans and contributes for the
achievement of organizational goals.
2. Leadership:
Leadership is the process of influencing the subordinates to
work willingly and enthusiastically for achievement goals of an
organization.
3. Motivation:
Motivation is another important element of direction. It
creates men the desire and sense of belongingness to the work for
the organization.
4. Communication:
Communication is an integral part of direction. Through
communication manager issues guidelines to the subordinates as
to what should they do and how they should do it.

Meaning of Supervision:
Supervision is the process of guiding the efforts of employees and
other resources to accomplish the desired objectives.
Importance of Supervision:
Importance of supervision can be explained as below: ……………
a) Supervisor maintains friendly relations with workers:
Supervisor maintains day-to-day contact and friendly relations
with workers. A good supervisor acts as a guide, friend and
philosopher to the workers.
 b) Supervisor act as a link between workers and management:
Supervision represents both workers and the management.
He acts as a link between them. It communicates the policies of
the management to workers and also provides the feedback of the
workers to the management.
c) Motivating subordinates:
It inspires team work and secures maximum co-operation
from the workers.
d) Feedback to workers:
It compares the actual performance of the workers with the
standards and helps in identifying the weaknesses of the workers.
e) Proper assignment of work:
Supervision helps to identify the capabilities of workers and
assigns the work accordingly.
f) Maintain discipline:
Supervision is directly responsible for enforcing the rules
and regulations of the organization, which helps to maintain
discipline.
g) A good supervisory leadership build up high morale among
workers:
Supervisory leadership plays a key role in influencing the
workers in the organisation. A supervisor with good leadership
qualities can build up high morale among workers.

Meaning and Definition of Motivation:

Motivation is the process of inducing people to action to
accomplish desired goals.
According to William G. Scout defines as, “Motivation means a
process of stimulating people to action to accomplish desired goals”.

Meaning of Motive:
A motive is an inner state that energizes, activates or moves and
directs behaviour towards goals.

Meaning of Motivator:
Motivator is a technique used to motivate the people in the
organisation. For example: Pay, bonus, commission etc.,

Features of Motivation:
The analysis of various definitions and viewpoints on motivation
reveals the following features of motivation: ……
1) Motivation is an internal feeling:
The urge, drives, desires, aspirations, striving or needs of human
being, which are internal, influence human behaviour. For example,
people may have the urge or desire for possessing a motorbike,
comfortable house, reputation in the society.
2) Motivation produces goal directed behaviour:
The promotion in the job may be given to employee with the
objective of improving his performance. If the employee is interested
in promotion, it helps to produce a behaviour to improve
performance.
3) Motivation can be either positive or negative:
Positive motivation provides positive rewards like increase in pay,
bonus, promotion, recognition etc., but Negative motivation
provides punishment, stopping increments, threatening etc.
4) Motivation is a complex process:
Motivation is a complex process as the individuals are
heterogeneous in their expectations, perceptions and reactions. Any
type of motivation may not have uniform effect on all the members.

Importance of Motivation:
The importance of motivation can be pointed out by the following
benefits: ……………
a) Motivation helps to improve the performance level of employees
as well as the organisation.
b) Motivation helps to change negative attitude of employees to
positive attitude to achieve organisational goals.
c) Motivation helps to reduce employee turnover.
d) Motivation helps to reduce absenteeism in organisation.
e) Motivation helps the manager to introduce changes smoothly
without much resistance from people.

Maslow’s need Hierarchy Theory of Motivation:

Abraham Maslow, a U.S. famous psychologist and social scientist
developed this theory of motivation in 1943 based human needs. He
felt that within every human being, there is exists a hierarchy of five
needs. They are as follows: ………
Assumptions of Maslow’s need Hierarchy Theory of Motivation: …
a) People’s behaviour is based on their needs.
b) People’s needs are in hierarchical order, starting from basic needs
to other higher level needs.
c) A satisfied need can no longer motivate a person; only next higher
level need can motivate him.
d) A person moves to the next higher level of the hierarchy only when
he satisfied lower level needs.
 Self
Actualization
needs
Esteem Needs

Belongingness Needs

Safety / Security Needs

Basic physiological Needs

1. Basic Physiological Needs:

Every person in the gives first preference to the basic needs
like food, water, air, shelter etc., once these needs are satisfied he
thinks the next level of needs.
2. Safety / Security Needs:
These needs arise when physiological needs are satisfied.
These needs are protection against danger, job security, stability
of income etc.,
3. Affiliation / Belongingness Needs:
These needs arise, when they satisfied safety needs. These
needs include sense of belongingness, acceptance, friendship and
love.
4. Esteem Needs:
These needs arise, when satisfied all the above three needs. It
includes self-respect, recognition, autonomy status, attention etc.
5. Self-Actualization Needs:
These needs arise only when an individual is reasonably
satisfied with esteem needs. These needs include growth, self-
fulfillment and achievement of goals. An individual accepts such
work which is challenging and creative and also provide
opportunities for self-development.
Conclusion:
This theory is based on some reasonable assumptions. It assumes
that the people are motivated by unfulfilled needs. It states that once
a need is satisfied it ceases to be a motivating force. Maslow pointed
out that once the lower level needs are satisfied, upper level needs
arises in each and every one’s life.
Financial and Non-Financial Incentives:
Incentive means all measures which are used to motivate people
to improve performance.
Financial Incentives:
Financial incentives refer to incentives which are in direct
monetary form or measurable in monetary term and serve to motivate
people for better performance.
Financial incentives generally used in organisations are listed below:
1) Pay and allowances:
For every employee, salary is the basic monetary incentive. It
includes basic pay, dearness allowance and other allowances.
Salary system consists of regular increments in the pay every year
and enhancement of allowances from time-to-time.
2) Productivity linked wage incentives:
Several wage incentive plans aim at linking payment of wages
to increase in productivity at individual or group level.
3) Bonus:
Bonus is an incentive offered over and above the wages/ salary
to the employees.
4) Profit Sharing:
Profit sharing is meant to provide a share to employees in the
profits of the organisation. This serves to motivate the employees
to improve their performance and contribute to increase in profits.
5) Co-partnership/ Stock option:
Under these incentive schemes, employees are offered company
shares at a set price which is lower than market price. Sometimes,
management may allot shares in line of various incentives payable
in cash. The allotment of shares creates a feeling of ownership to
the employees and makes them to contribute for the growth of the
organisation.
6) Retirement Benefits:
Several retirement benefits such as provident fund, pension,
and gratuity provide financial security to employees after their
retirement. This acts as an incentive when they are in service in
the organisation.
7) Perquisites:
In many companies perquisites and fringe benefits are offered
such as car allowance, house rent allowance, medical allowance,
and education to the children etc., over and above the salary. These
measures help to provide motivation to the employees.
Non-Financial Incentives:
Some of the important non-financial incentives are discussed below:
1) Status:
In the organisational context, status means ranking of positions
in the organisation. The authority, responsibility, rewards,
recognition, perquisites and prestige of job indicate the status given
to a person holding a managerial position.
2) Organisational Climate:
Organisational climate indicates the characteristics which
describe an organisation and distinguish one organisation from the
other. These characteristics influence the behaviour of individuals
in the organisation. Some of these characteristics are–individual
autonomy, reward orientation, consideration to employees, risk-
tasking etc.,
3) Career Advancement Opportunity:
Every individual wants to grow to the higher level in the
organisation. Managers should provide opportunity to employees
to improve their skills and be promoted to the higher level jobs.
Appropriate skill development programme, and sound promotion
policy will help employees to achieve promotions.
4) Job Enrichment:
Job enrichment is concerned with designing jobs that include
greater variety of work content, require higher level of knowledge
and skill; give workers more autonomy and responsibility; and
provide the opportunity for personal growth and a meaningful work
experience.
5) Employee Recognition programmes:
Most people have a need for evaluation of their work and due
recognition. They feel that what they do should be recognised by
others concerned. Recognition means acknowledgment with a show
of appreciation. Some examples of employee recognition are:
 Congratulating the employee for good performance.
 Displaying the name of employee on notice board.
 Installing award or certificate for best performance.
 Distributing prizes, compliments like T-shirts in recognition of
employee services.

6) Job security:
Employees want their job to be secure. They want certain stability
about future income and work so that they do not feel worried on
these aspects and work with greater zeal.
7) Employee participation:
It means involving employees in decision making of the issues
related to them. In many companies, these programmes are in
practice in the form of joint management committees, work
committees, canteen committees etc.,
8) Employee Empowerment:
Empowerment means giving more autonomy and powers to
subordinates. Empowerment makes people feel that their jobs are
important. This feeling contributes positively to the use of skills and
talents in the job performance.

Meaning and Definition of Leadership:

Leadership is the process of influencing the behaviour of people
by making them strive voluntarily towards the achievement of
organisational goals.
According to George Terry defines as, “leadership is the activity
of influencing people to strive willingly for group objectives”.

Meaning of a Good Leader:

A good leader is a person who guides and directs other people. He
must also put his effort for direction and purpose.

Features / Characteristics of Leadership:

Following are the important points to be considered as features of
leadership: …….
a) Leadership indicates ability of an individual to influence others.
b) Leadership is a continuous process.
c) Leadership tries to bring change in the behaviour of others.
d) It indicates interpersonal relations between leaders and followers.
e) Leadership exercised to achieve common goals of an organisation.

Importance of Leadership:
The importance of leadership can be discussed from the following
benefits to the organisation: ……
a) Leadership influence the behaviour of people and makes them to
positively contribute their energizes for the benefit of the
organisation.
b) A leader maintains personal relationships and helps followers in
fulfilling their needs.
c) A leader plays a key role in introducing required changes in the
organisation.
d) A leader handles conflicts effectively.
e) Leadership provides training to their subordinates.
Qualities of a Successful / Good leader:
Following are the important qualities of a successful leader: ….
1) Physical features:
Physical features like height, weight, health, appearance
determine the physical personality of an individual. It is believed
that good physical features attract people. Good health helps a
leader to work hard which inspires others to work efficiently.
2) Knowledge:
A good leader should have required knowledge and
competence. Only such person can instruct subordinates
correctly and influence them.
3) Integrity:
A leader should possess high level of integrity and honesty.
He should be a role model to others regarding the ethics and
values.
4) Initiative:
A leader should have courage and initiative. He should not
wait for opportunities come to his way, rather he should grab the
opportunity and use it to the advantage of organisation.
5) Communication skills:
A leader should be a good communicator. He should have
the capacity to clearly explain his ideas and make the people to
understand his ideas. He should be not only good speaker but a
good listener, teacher, counsellor and persuader.
6) Motivation skills:
A leader should be an effective motivator. He should
understand the needs of people and motivate them through
satisfying their needs.
7) Self Confidence:
A leader should have high level of self-confidence. He should
not lose his confidence even in most difficult times. In fact, if the
leader lacks self-confidence, he cannot provide confidence to his
followers.
8) Decisiveness:
Leader should be decisive in managing the work. Once he
is convinced about a fact, he should be firm and should not
change opinions frequently.
9) Social skills:
A leader should be sociable and friendly with his colleagues
and followers. He should understand people and maintain good
human relations with them.
Types / Styles of Leadership:
Leadership can be classified based on the attitudes and
approaches followed by leaders in getting things done through their
sub-ordinates.
Following are some important types / styles of leadership: ……...
1) Autocratic Leader:
It is a style of leadership where the leader tends to run the
whole show by himself. He does not delegate authority to his sub-
ordinates to work according to his orders. He cannot accept any
suggestions or ideas from his subordinates and he cannot provide
an opportunity to his subordinate to participate in decision
making.
2) Democratic Leader:
It is another important type of leadership where the leader
seeks suggestions and opinions from his sub-ordinates and also
he allows them to participate in decision making and in its
implementation.
3) Laissez faire / Free Run Leader:
A free run leader is one who leaves his subordinates free to
decide things for themselves. All the authority and power is given
to staff and they determine goals, make decisions and resolve
problems on their own. This style creates a sense of insecurity
and anxiety among sub-ordinates and they are not ready to
accept him as their leader.

Meaning and Definition of Communication:

Communication refers to the process of exchange of ideas, views,
facts, feelings etc., between or among people to create common
understanding.
According to Herald Koontz and Heinz weihrich defines as,
“Communication is the transfer of information from the sender to the
receiver with the information being understood by the receiver”.

Elements of communication process:

The elements involved in communication process are explained
below: ……….
1) Sender:
Sender means person who conveys his thoughts or ideas to
the receiver. The sender represents source of communication.

2) Message:
It is the content of ideas, feelings, suggestions, order etc.,
intended to be communicated.
3) Encoding:
It is the process of converting the message into communication
symbols such as words, pictures, gestures etc.,

4) Media:
It is the path through which encoded message is transmitted
to receiver. The channel may be in written form, face to face,
phone call, internet etc.,

5) Decoding:
It is the process of converting encoded symbols of the sender.
6) Receiver:
The person who receives communication of the sender.
7) Feedback:
It includes all those actions of receiver indicating that he has
received and understood message of sender.
8) Noise:
Noise means some obstruction or hindrance to communication.
This hindrance may be caused to sender, message or receiver.

Importance of Communication:
Following are the importance of communication: ………………….
1) Acts as a basis of Co-ordination:
Modern business is large and complex. It consists of many
employees working towards common goal. Communication
facilitates such co-ordination through by grouping the activities
of different departments of an organization.

2) Helps in Smooth working of an enterprise:

Good communication ensures smooth and uninterrupted
working of an organization. Smooth functioning depends on
proper information supply. Communication is the essence of it.
3) Acts as basis of decision making:
Sound decision is the result of good communication. If
incorrect and incomplete information reaches to the top level
management, even though they having best decision making
skills, but they cannot able to take the right decision.

4) Increases managerial efficiency:

Managerial functions like planning, controlling, staffing,
directing, co-ordination, motivation cannot be discharged without
communication.
 5) Promotes Co-operation and industrial peace:
Co-operation among the workers is possible only when there
is an exchange of information between individuals and groups
and between the management and the employees.
6) Establishes effective leadership:
There is always a continuous process of communication
between the leader and the followers. Success of leadership lies
in good communication skill.

7) Boosts morale and provides motivation:

An effective system of communication builds good morale
and improves human relations. Participatory communication is
the best technique of morale building and motivation.

Formal and Informal Communication:

The communication which flows through official channels
designed in the organisation chart is called as formal organisation.
Communication that takes place without following the formal
lines of communication is called as Informal communication.
Grapevine Communication:
Informal communication is also called as grapevine communication.
Because it spreads throughout the organization in all directions
irrespective of authority levels”.
Formal communication Networks:
Following are the formal communication networks: …….
a) Single chain
b) Wheel
c) Circular
d) Free flow
e) Inverted ‘V’
Informal communication Networks:
Following are the informal communication networks: …….
a) Single strand
b) Gossip
c) Probability
d) Cluster
Barriers to Effective Communication:
Communication is complete and perfect when the receiver
understands the message in the same sense and spirit as the
communicator intends to convey. But practically, it has been noted
that such perfect and complete communication does not take place
many a times due to certain obstacles which are known as barriers to
communication.
 Following are the important barriers of communication: …….
A. Semantic barriers:
Semantics is the branch of linguistics dealing with the
meaning of words and sentences. Semantic barriers are concerned
with problems and obstructions in the process of encoding and
decoding of message into words or impressions.
1) Badly expressed message:
Sometimes intended meaning may not be conveyed by a
manager to his subordinates. These badly expressed messages
may be an account of inadequate vocabulary, usage of wrong
words, omission of needed words etc.
2) Symbols with different meanings:
A word may have several meanings. Receiver has to perceive
one such meaning for the word used by communicator. For
example, consider these three sentences where the work ‘value’
is used:
(a) What is the value of this ring?
(b) I value our friendship.
(c) What is the value of learning computer skills?
You will find that the ‘value’ gives different meaning in different
contexts.
3) Faulty translations:
Sometimes the communications originally drafted in one
language need to be translated to the language understandable
to workers. If the translator is not proficient with both the
languages, mistakes may creep in causing different meanings to
the communication.
4) Unclarified assumptions:
Some communications may have certain assumptions
which are subject to different interpretations. For example, a
boss may instruct his subordinate, “Take care of our guest”. Boss
may mean that subordinate should take care of transport, food,
accommodation of the guest until he leaves the place. The
subordinate may interpret that guest should be taken to hotel
with care.

5) Technical jargon:
It is usually found that specialists use technical jargon
while explaining to persons who are not specialists in the
concerned field. Therefore, they may not understand the actual
meaning of many such words.
 6) Body language and gesture decoding:
Every movement of body communicates some meaning. The
body movement and gestures of communicator matters so much
in conveying the message. If there is no matching between what
is said and what is expressed in body movements,
communications may be wrongly perceived.

B. Psychological barriers:
Emotional or psychological factors acts as barriers to
communicators. Some of the psychological barriers are:
1) Premature evaluation:
Sometimes people evaluate the meaning of message before
the sender completes his message. Such premature evaluation
may be due to pre-conceived notions or prejudices against the
communication.
2) Lack of attention:
The preoccupied mind of receiver and the resultant non-
listening of message acts as a major psychological barrier. For
instance, an employee explains about his problems to the boss
who is pre-occupied with an important file before him.

3) Loss by transmission and poor retention:

When communication passes through various levels,
successive transmissions of the message results in loss of, or
transmission of inaccurate information.
Poor retention is another problem. Usually people cannot
retain the information for a long time if they are inattentive or
not interested.
4) Distrust:
Distrust between communicator and communicate acts as
a barrier. If the parties do not believe each other, they cannot
understand each other’s message in its original sense.

C. Organisational barriers:
The factors related to organisation structure, authority
relationships, rules & regulations may sometimes, act as barriers
to effective communication. Some of these barriers are: ….
1) Organisational policy:
If the organisational policy, explicit or implicit, is not
supportive to free flow of communication, it may hamper
effectiveness of communications.
 2) Rules and regulations:
Rigid rules and cumbersome procedures may be a hurdle to
communication. Similarly, communications through prescribed
channel may result in delays.
3) Status:
Status of superior may create psychological distance
between him and his subordinates. A status conscious manager
also may not allow his subordinates to express their feelings
freely.
4) Complexity in organisation structure:
In an organisation where there are number of managerial
levels, communication gets delayed and distorted as number of
filtering points are more.
5) Organisational facilities:
If facilities for smooth, clear and timely communications are
not provided communications may be hampered. Facilities like
frequent meetings, suggestion box, complaint box, transparency
in operations etc., will encourage free flow of communication.
Lack of these facilities may create communication problems.

D.Personal barriers:
The personal factors of both sender and receiver may exert
influence on effective communication. Some of the personal barriers
of superiors and subordinates are mentioned below:
1) Fear of challenge to authority:
If a superior perceives that a particular communication may
adversely affect his authority, he or she may withhold or
suppress such communication.

2) Lack of confidence of superior on his subordinates:

If superiors do not have confidence on the competency of
their subordinates, they may not seek their advice or opinions.

3) Unwillingness to communicate:
Sometimes, subordinates may not be prepared to
communicate with their superiors, if they perceive that it may
adversely affect their interests.

4) Lack of proper incentives:

If there is no motivation or incentive for communication,
subordinates may not take initiative to communicate. For
example, if there is no reward or appreciation for a good
suggestion, the subordinates may not be willing to offer useful
suggestions.
Measures to overcome the barriers to effective communication:
Following are the important ways to overcome barriers of effective
communication: …………
1. Clarify the ideas before communication:
If any person sending information or message that should
be very clear in his mind about what he wants to say. He should
also know the objective of his message.
2. Communicate according to the needs of the receiver:
The sender of the communication should prepare the
structure of the message not according to his own level or ability
but he should keep in mind the level of understanding of the
receiver.
3. Consult others before communicating:
At the time of planning the communication, suggestions
should be invited from all the persons concerned. It helps to
maintain effective communication between two persons.
4. Be aware of language, tone and content of message:
The sender should take care of the fact that the message
should be framed in clear and beautiful language. And also the
tone of the message should not hurt the feelings of the receiver.

5. Convey things of help and value to the listeners:

The subject matter of the message should be helpful to the
receiver. The need and interest of the receiver should specially be
kept in mind.

6. Ensure proper feedback:

The purpose of feedback is to find out whether the receiver
has properly understood the information to be received. In case
of face-to-face communication, the reaction on the face of the
receiver can be understood. But in case of written communication
proper method of feedback should be adopted by the sender.
7. Communicate for present and future:
Communicate according to the requirements of present as
well as future needs.
8. Follow up communication:
In order to make effective communication, the management
should regularly try to know the weakness of the communication
system.
9. Be a good listener:
The essence of communication is that both the sender and
the receiver should be good listeners. Both should listen the
viewpoints with attention, patience and positive attitude.
 CHAPTER – 08
CONTROLLING
Introduction:
All organizations face the necessity of control like other managerial
functions. The need for control arises to maximize the use of scarce
resources and to achieve the goals of the management. After the plans
are put to operations through directing, it is necessary to check
regularly whether the actual results are consistent with the planned
results. Controlling is an important function of management. Planning
is the basis, action is the essence, delegation is the key and information
is the guide for control.

Meaning and Definition of Controlling:

Controlling is the process of ensuring that activities of an
organisation are performed as per the plans.
According to Koontz and O’Donnell defines as “managerial
control implies the measurement of accomplishment against the
standard and the correction of deviations to assure attainment of
objectives according to the plans”.
Importance of Controlling:
Control is an indispensable function of management. Without
control the best of plans can go away. A good control system helps
an organisation in the following ways:
1) It helps in Accomplishing organisational goals:
The controlling function measures progress towards the
organisational goals and brings to light the deviations, if any, and
indicates corrective action. It guides the organisation and keeps
it on the right track so that organisational goals might be
achieved.
2) It helps in Judging accuracy of standards:
A good control system enables management to verify
whether the standards set are accurate and objective. An efficient
control system keeps a careful check on the changes taking place
in the organisation and in the environment and helps to review
and revise the standards in light of such changes.
3) It helps in Making efficient use of resources:
By exercising control, a manager seeks to reduce wastage
and spoilage of resources. Each activity is performed in
accordance with predetermined standards and norms. This
ensures that resources are used in the most effective and efficient
manner.
 4) It helps to Improving employee motivation:
A good control system ensures that employees know well in
advance what they are expected to do and what are the standards
of performance on the basis of which they will be appraised. It
will motivate them and helps them to give better performance.
5) It helps in Ensuring order and discipline:
Controlling creates an atmosphere of order and discipline
in the organisation. It helps to minimise dishonest behaviour on
the part of the employees by keeping a close check on their
activities.
6) It helps in Facilitating coordination in action:
Controlling provides direction to all activities and efforts for
achieving organisational goals. Each department and employee
is governed by predetermined standards which are well
coordinated with one another.

Limitations of Controlling:
Although controlling is an important function of management, it
suffers from the following limitations.
1) Difficulty in setting quantitative standards:
Control system loses some of its effectiveness when standards
cannot be defined in quantitative terms. This makes measurement
of performance and their comparison with standards a difficult
task.
2) Little control on external factors:
Generally, an enterprise cannot control external factors such as
government policies, technological changes, competition etc.
3) Resistance from employees:
Control is often resisted by employees. They see it as a restriction
on their freedom. For instance, employees might object when they
are kept under a strict watch with the help of Closed Circuit
Televisions (CCTVs).
4) Costly affair:
Control is a costly affair as it involves a lot of expenditure, time
and effort. A small enterprise cannot afford to install an expensive
control system. It cannot justify the expenses involved. Managers
must ensure that the costs of installing and operating a control
system should not exceed the benefits derived from it.
Controlling Process:
Controlling is a systematic process involving the following steps:
1. Setting performance standards.
2. Measurement of actual performance.
3. Comparison of actual performance with standards.
4. Analyzing deviations.
5. Taking corrective action.
Step 1: Setting Performance Standards:
The first step in the controlling process is setting up of
performance standards. Standard is a yardstick consisting of a
specific set of actions, relating to a particular job on which the
actual results are to be evaluated. Thus, standards serve as
benchmarks towards which an organization strives to work.
Standards may be quantitative standards (quantity, quality, cost,
time etc.) or qualitative standards (employee morale, consumer
satisfaction, brand leadership etc.)
Step 2: Measurement of actual performance:
Once the standards are fixed, the next step is to measure the
actual performance. Performance should be measured in the same
terms in which standards have been established. It means knowing not
only what has happened but also to know what is likely to happen.
Therefore, measurement must be clear, simple, relevant, rational and
understandable.
Step 3: Comparing actual performance with standards:
The third step in the controlling process is to compare the actual
performance with standard performance. When the management will
compare the performance through data, charts, graphs and written
reports, besides personal observation to keep itself informed about
performance in different segments of the organization.
Step 4: Analyzing deviations:
Deviation means variation from the standard. Deviation may
be negative, positive or zero. If the actual performance is less than the
standard is called as Negative deviation. If the actual performance is
more than the standard is called as Positive deviation. If an actual
performance is equal to standard is called as Zero standard. Every
deviation is analyzed to find out why it has occurred. It helps to finding
out who are responsible for deviations.
Step 5: Taking Corrective Action:
It is the final step in the controlling process involves taking
corrective action so that deviations may be not occur again and the
organizational objectives are achieved. After finding what has gone
wrong, where and why, management can initiative remedial action.
Techniques of Managerial control:
The techniques of managerial control can be classified into two
categories i.e. Traditional and Modern techniques.
A. Traditional Techniques:
Traditional techniques are those which have been used by the
companies for a long time now. These include.
1) Personal observation:
This is the most traditional method of control. Personal
observation enables the manager to collect firsthand information.
It also creates a psychological pressure on the employees to
perform well as they are aware that they are being observed
personally on their job.

2) Statistical Reports:
Statistical analysis in the form of averages, percentages,
ratios, correlation, etc., present useful information to the
managers regarding performance of the organisation in various
areas. Such information presented in the form of charts, graphs,
tables, etc., enables the managers to read them more easily and
allow a comparison to be made with performance.

3) Breakeven Analysis:
Breakeven analysis is a technique used by managers to
study the relationship between costs, volume and profits.
It determines the probable profit and losses at different
levels of activity. The sales volume at which there is no profit,
no loss is known as breakeven point.
Breakeven Point = fixed cost
Selling price per unit – Variable cost per unit

4) Budgetary control:
It is a technique of managerial control in which all
operations are planned in advance in the form of budgets and
actual results are compared with budgetary standards. This
comparison reveals the necessary actions to be taken so that
organisational objectives are accomplished.
B. Modern Techniques:
Following are the important modern techniques of managerial
control: …………
1) Return on Investment:
Return on investment is a useful technique which provides
the basic yardstick for measuring whether or not invested capital
has been used effectively for generating reasonable amount of
return.
2) Ratio Analysis:
Ratio Analysis refers to analysis of financial statements
through computation of ratios. The most commonly used ratios
used by organisations.
For example: liquidity ratios, solvency ratios, profitability
ratios, turnover ratios etc.,
3) Responsibility accounting:
Responsibility accounting is a system of accounting in
which different sections, divisions and departments of an
organisation are set up as ‘Responsibility Centres’. The head of
the centre is responsible for achieving the target set for his
centre.
For example: cost centre, revenue centre, profit center and
investment centre.
4) Management audit:
Management audit refers to systematic appraisal of the
overall performance of the management of an organisation. The
purpose is to review the efficiency and effectiveness of
management and to improve its performance in future periods.

5) PERT = (Programme Evaluation and Review Technique)

CPM = (Critical Path Method)
These are the important network techniques useful in
planning and controlling. These techniques are especially useful
for planning, scheduling and implementing time bound projects
involving performance of a variety of complex, diverse and
interrelated activities.
6) Management information system: (MIS)
Management Information System is a computer-based
information system that provides information and support for
effective managerial decision-making.
 CHAPTER – 09
FINANCIAL MANAGEMENT
Introduction:
In the factors of production (i.e. Land, Labour, Capital and
Organization) capital or finance is considered as the most important
factor of production. Any kind of business activity depends on the
finance as it is the basic requirement of every business. All the plans
of a businessman would remain mere dreams unless adequate finance
is available to convert them into reality. The main aim of every
organization is to get optimum finance and use it efficiently and
effectively for profit maximization and wealth maximization while
achieving its organizational objectives.

Meaning of Business Finance:

Money required for carrying out the business activities is called
as business finance.
Meaning of Financial Management:
Financial management means procurement of required funds at
minimum cost and utilisation of such funds in an effective manner.

Role or Importance of Financial Management:

The overall financial health of a business is determined by the
quality of its quality of its financial management. Good financial
management aims at mobilization of financial resources at a lower cost
and deployment of these in most lucrative activities.

Objectives of Financial Management:

The objectives of financial management can be discussed below:
There are two Basic Objectives of financial management:
a) Profit Maximization:
Profit maximization is one of the main objective of the
financial management. The company should earn sufficient profit
for meeting its expenses, expansion and modernization. Profit can
be maximized with proper utilization of organizational resources.

b) Wealth maximization:
Wealth maximization is another main important objective of
financial management. Wealth Maximization means increasing
the market value of shares. The market value of shares is related
to three financial decisions. Viz., Investment decision, Financing
decisions and Dividend Decisions.
Shareholder’s wealth can be maximized by maximizing the
market value of equity shares. Market value of a company’s
shares can be maximized by taking effective financial decision.
Financial Decisions:
Financial management is concerned with decision – making in
three major issues relating to the financial operations of a business.
1. Investment Decisions:
The investment decision is a financial decision which relates
to how the firm’s funds are invested in different assets.
For example: a decision to make investment of Rs. 5 crores
to purchase a new machine.
These decisions involve investment in fixed assets which has
long term implications. For example, replacement of an existing
machine or acquiring a new fixed asset or opening a new branch
etc. These decisions normally involve huge amount of investment
and they affect earning capacity of the business.
Short term investment decisions are also called as working
capital decisions. These decisions involve investment in current
assets and immediate return can be expected from such
investment. For example, investment in current assets such as
cash, receivables and inventories. These decisions affect the day
to day working as well as liquidity and profitability of the
business.

Factors affecting on capital budgeting decision:

Long term investment decisions are also called as capital
budgeting decision.
Following are the important factors affecting on capital
budgeting decision: ….
1) Cash flows of the Project:
A series of cash receipts and cash payments over the
life of an investment project should be carefully analysed
before considering a capital budgeting decision. The project
which gives maximum cash inflow is to be selected.
2) The rate of return:
The expected rate of return is another factor affecting
capital budgeting decision. Usually the project which gives
highest rate of return should be selected.
3) The investment criteria involved:
While taking capital budgeting decision, the amount of
investment, interest rate, cash flows and rate of return
involved in each investment proposal should be evaluated
by applying different capital budgeting techniques.
2. Financing decision:
The decision about the amount of finance to be raised from
various long term and short term sources of finance is called as
financing decision.
The main sources of funds for an organization are
shareholders fund (owners’ fund) and borrowed funds (debt fund).
Shareholders fund refers to the equity capital and the retained
earnings. Borrowed funds refers to the finance raised through
debentures or other forms of debts.
A firm decide the right proportion between these two
important sources of finance, viz., owners’ fund and debt fund by
evaluating different factors affecting financing decisions such as
cost, risk, effect on management control, state of capital market
etc.

Factors affecting on financing decision:

The factors affecting on financing decision are as follows: ….
1) Cost:
The cost of raising funds through different sources are
different. A prudent financial manager would normally opt for
a source which is the cheapest.
2) Risk:
The risk associated with each of the sources is different.
3) Floatation Costs:
Higher the floatation cost, less attractive the source.
4) Cash Flow Position of the Company:
A stronger cash flow position may make debt financing more
viable than funding through equity.
5) Fixed Operating Costs:
If a business has high fixed operating costs (e.g., building
rent, Insurance premium, Salaries, etc.), It must reduce fixed
financing costs. Hence, lower debt financing is better.
Similarly, if fixed operating cost is less, more of debt financing
may be preferred.
6) Control Considerations:
Issues of more equity may lead to dilution of management’s
control over the business. Debt financing has no such
implication. Companies afraid of a takeover bid would prefer
debt to equity.
7) State of Capital Market:
A better capital market may also affect the choice of source
of fund. During the period when stock market is rising, more
people invest in equity. However, depressed capital market
may make issue of equity shares difficult for any company.
3. Dividend decisions:
Dividend decision is a financial decision which relates to
how much of profits earned by the company is to be distributed
to the shareholders and how much of it should be retained in the
business.
Retained earnings increase the future earning capacity of
the organizations whereas, dividend results in maximizing the
shareholders’ wealth. Hence the finance manager has to take
balanced dividend decision.
Factors affecting on Dividend decision:
How much of the profits earned by a company will be
distributed as profit and how much will be retained in the
business is affected by many factors.
Some of the important factors are discussed as follows: ….
1) Amount of Earnings:
Dividends are paid out of current and past earning.
Therefore, earnings are a major determinant of the decision
about dividend.
2) Stability Earnings:
Other things remaining the same, a company having stable
earning is in a better position to declare higher dividends. As
against this, a company having unstable earnings is likely to
pay smaller dividend.
3) Stability of Dividends:
Companies generally follow a policy of stabilising dividend
per share. The increase in dividends is generally made when
there is confidence that their earning potential has gone up and
not just the earnings of the current year.
4) Growth Opportunities:
Companies having good growth opportunities retain more
money out of their earnings so as to finance the required
investment. The dividend in growth companies is, therefore,
smaller, than that in the non– growth companies.
5) Cash Flow Position:
The payment of dividend involves an outflow of cash. A
company may be earning profit but may be short on cash.
Availability of enough cash in the company is necessary for
declaration of dividend.
6) Shareholders’ Preference:
While declaring dividends, management must keep in mind
the preferences of the shareholders in this regard. If the
shareholders in general desire that at least a certain amount is
paid as dividend, the companies are likely to declare the same.
 7) Taxation Policy:
The choice between the payment of dividend and retaining
the earnings is, to some extent, affected by the difference in the
tax treatment of dividends and capital gains. If tax on dividend
is higher, it is better to pay less by way of dividends. As
compared to this, higher dividends may be declared if tax rates
are relatively lower.
8) Stock Market Reaction:
Investors, in general, view an increase in dividend as a good
news and stock prices react positively to it. Similarly, a decrease
in dividend may have a negative impact on the share prices in
the stock market.
9) Access to Capital Market:
Large and reputed companies generally have easy access to
the capital market and, therefore, may depend less on retained
earnings to finance their growth. These companies tend to pay
higher dividends than the smaller companies which have
relatively low access to the market.
10) Legal Constraints:
Certain provisions of the Companies Act place restrictions
on payouts as dividend. Such provisions must be adhered to
while declaring the dividend.

Meaning of Financial planning:

The preparation of a financial blue print of an organization’s
future operations is called as financial planning. Its main objective is
to ensure that enough funds are available at right time.

Objectives of financial planning:

Financial planning strives to achieve the following two objectives.
(a) To ensure availability of funds whenever required:
This include a proper estimation of the funds required for
different purposes such as for the purchase of long term assets or
to meet day-to-day expenses of business etc. Apart from this, there
is a need to estimate the time at which these funds are to be made
available.

(b) To see that the firm does not raise resources unnecessarily:
Excess funding is almost as bad as inadequate funding. Even if
there is some surplus money, good financial planning would put it
to the best possible use so that the financial resources are not left
idle and don’t unnecessarily add to the cost.
Thus, a proper matching of funds requirements and their
availability is sought to be achieved by financial planning.
Importance / Role / Significance of Financial Planning:
Financial planning is an important part of overall planning of any
business enterprise. Financial planning helps an organization to tackle
the uncertainty in respect of the availability of funds and helps in the
smooth functioning of an organization.
The importance of financial planning can be explained as below:
a) It helps in forecasting the future financial requirement of an
organisation.
b) It helps in avoiding business shocks and surprises.
c) It helps in coordinating various business functions i.e. sales
function, production function etc.
d) It helps to reduce waste and duplication of efforts.
e) It tries to link the present with the future.
f) It provides a link between investment and financing decisions on
a continuous basis.

Capital structure:
Capital structure refers to the mix between owner’s fund and
borrowed funds.

Factors affecting on choice of capital structure:

Deciding about the capital structure of a firm involves determining
the relative proportion of various types of funds. This depends on
various factors. Important factors which determine the choice of capital
structure are as follows: ….
1) Cash Flow Position:
Size of projected cash flows must be considered before
borrowing. Cash flows must not only cover fixed cash payment
obligations but there must be sufficient buffer also.

2) Interest Coverage Ratio (ICR):

The interest coverage ratio refers to the number of times
earnings before interest and taxes of a company covers the
interest obligation. This may be calculated as follows:
ICR = EBIT
Interest

3) Debt Service Coverage Ratio(DSCR):

Debt Service Coverage Ratio takes care of the deficiencies
referred to in the Interest Coverage Ratio (ICR). The cash profits
generated by the operations are compared with the total cash
required for the service of the debt and the preference share
capital.
4) Return on Investment (ROI):
If the ROI of the company is higher, it can choose to use
trading on equity to increase its EPS, i.e., its ability to use debt
is greater.
5) Cost of debt:
A firm’s ability to borrow at a lower rate increases its
capacity to employ higher debt. Thus, more debt can be used if
debt can be raised at a lower rate.
6) Tax Rate:
A higher tax rate makes debt relatively cheaper.
7) Cost of Equity:
Stock owners expect a rate of return from the equity which
is commensurate with the risk they are assuming. When a
company increases debt, the financial risk faced by the equity
holders, increases.
8) Floatation Costs:
Process of raising resources also involves some floatation
cost. Public issue of shares and debentures requires considerable
expenditure. Getting a loan from a financial institution may not
cost so much.
9) Risk Consideration:
As discussed earlier, use of debt increases the financial risk
of a business. Financial risk refers to a position when a company
is unable to meet its fixed financial charges such as interest
payment, preference dividend and repayment of loan etc.
10)Flexibility:
If a firm uses its debt potential to the full, it loses flexibility
to issue further debt. To maintain flexibility, it must maintain
some borrowing power to take care of unforeseen situations.

11)Control:
A public issue of equity may reduce the managements’
holding in the company and make it vulnerable to takeover. This
factor also influences the choice between debt and equity
especially in companies in which the current holding of
management is on a lower side.
12)Regulatory Framework:
Every company operates within a regulatory framework
provided by the law e.g., public issue of shares and debentures
have to be made under SEBI guidelines.
 13)Stock Market Conditions:
If the stock markets are bullish, equity shares are more
easily sold even at a higher price. Use of equity is often preferred
by companies in such a situation. But during a bearish phase, a
company, may find raising of equity capital more difficult and it
may opt for debt.
14)Capital Structure of other Companies:
A debt equity ratio of other companies in the same industry
may also be considered with due care.
Meaning of Fixed capital:
Fixed capital refers to the capital invested for acquiring long term
assets / fixed assets.
Fixed assets are those which remain in the business for a long
period and not intended for sale. These assets increase the profit
earning capacity of the business. For example, Plant & Machinery,
Land and Building, vehicles, Furniture and fittings etc…
In short fixed capital refers to investment in fixed assets.
Factors affecting fixed capital requirement:
The amount of fixed capital requirement of a business concern
affected by a number of factors. The important factors are as follows:
1) Nature of business:
The nature of the business determines the amount of fixed
capital requirement to a great extent. For example, trading
concern needs lower investment on fixed assets compared to a
manufacturing organization.
2) Scale of operation:
If an organization big in size with large scale operations
requires more fixed capital. On the other hand, a concern of small
size requires less fixed capital.
3) Choice of technique:
A capital intensive organization requires higher investment
in plant & Machinery, thereby it requires higher fixed capital. On
the other hand, labour intensive organizations require less
investment in fixed assets resulting in lower capital requirement.
4) Technology upgradation:
In certain industries, assets become obsolete soon. Consequently,
their replacements become due faster. Higher investment in fixed
assets may, therefore, be required in such cases. For example,
computers become obsolete faster and are replaced much sooner
than say, furniture.
5) Growth prospects:
Higher growth of an organization generally requires higher
investment in fixed assets, as the organization has to create
higher capacity in order to meet the higher demand.
 6) Diversification:
Diversification of production or operations is an important
factor affecting fixed capital requirement. A concern which
chooses to diversify its production requires more fixed capital.
7) Financing alternatives:
A developed financial market may provide leasing facilities
as an alternative to outright purchase. When an asset is taken on
lease, the firm pays lease rentals and uses it. Availability of
leasing facilities, reduces the funds required to be invested in
fixed assets.
8) Level of collaboration:
Certain business organizations may share each other’s
facilities. For example, a bank may use ATM of other bank or
some of them jointly establish a particular facility. Such
collaboration reduces the level of investment on fixed assets for
such organization.
Meaning of Working Capital:
Working capital refers to the funds invested to meet the day to
day activities of an organization.
OR
Working capital is the excess of current assets over current
liabilities. i.e. Working Capital = Current assets – Current liabilities.
The capital invested in various current assets such as stock, work
in progress, bills receivable, finished goods, marketable securities etc…
In short working capital means investment in current assets.
There is a need to maintain a balance in working capital. Because,
if excess of working capital increases the idle of funds or misuse of
funds and inadequate working capital disturbs the production.
Factors affecting the Working capital requirement:
The various factors which affecting the working capital requirement
of a concern are as follows: …………………….
1) Nature of business:
The nature of the business determines the amount of
working capital requirement to a great extent. For ex: trading
concern needs less working capital compared to manufacturing
business needs very little working capital.
2) Scale of operation:
If an organization big in size with large scale operations
requires more working capital. On the other hand, a concern of
small size requires less working capital.
3) Growth prospects:
Higher growth of an organization generally requires higher
amount of working capital, so that it is able to meet the higher
production and sales target.
 4) Business Cycle:
The amount of working capital requirement of a concern
varies with different phases of business cycle. In the boom
situation, demand for goods increases, requiring large amount of
working capital. In case of recession and depression, demand for
goods decline, requiring lesser amount of working capital.

5) Seasonal factors:
Most of the business concerns are subject to its seasonality
in their operations. In peak season, due to higher level of activity
large amount of working capital is required. During the lean
season, the requirement of working capital will be lower.
6) Production cycle:
Production cycle is the time span between receipt of raw
material and their conversion into finished goods. Working capital
requirement is higher in concerns with longer production cycle
and lower in concerns with shorter production cycle.
7) Credit allowed:
A concern which allows liberal credit to its customers will
require larger amount of working capital than a concern which
restricts credit to its customers.
8) Credit availed:
A concern which allows liberal credit to its customers will
require large amount of working capital than a firm which does
not enjoy liberal credit facilities from its suppliers.
9) Operating efficiency:
Operating efficiency may reduce the level of raw material,
finished goods and debtors resulting in lower requirement of WC.
10) Availability of raw materials:
If the raw materials and other required materials are available
continuously, lower stock levels may be sufficient requiring less
amount of working capital.

11) Level of competition:

Higher level of competition may necessitate larger stocks of
finished goods to meet urgent orders from customers. This
increases the working capital requirement.

12) Inflation:
If the rate of inflation is very high, the firm needs more
working capital.
 CHAPTER – 10
FINANCIAL MARKETS
Introduction:
In an economic system, there are two major groups. One group
who invests money or lends money and other who borrows the money
for use in their business. It is an intermediary between lenders and
borrowers of funds. Funds are borrowed by selling different financial
assets or instruments like shares, debentures, securities, bills of
exchange, foreign currencies etc…,

Meaning of Financial Markets:

A financial market is a market for the creation and exchange of
financial assets. Financial assets include shares, debentures & bonds.

Functions of financial market:

Financial markets play an important role in the allocation of
scarce resources in an economy by performing the following four
important functions.
1) Mobilisation of Savings and Channeling them into the most
productive uses:
A financial market facilitates the transfer of savings from
savers to investors. Further, it helps to channelise surplus funds
into the most productive use.
2) Facilitating Price Discovery:
The interaction between the suppliers of funds (household)
and the receivers of funds (business firms) helps to establish a
price for the financial asset.
3) Providing Liquidity to Financial Assets:
Financial markets facilitate easy purchase and sale of
financial assets. Thus, they provide liquidity to financial assets,
i.e., shares or debentures can be easily converted into cash
4) Reducing the Cost of Transactions:
Financial markets provide a common platform where buyers
and sellers can meet for fulfillment of their individual needs.
Thus, it helps both the buyers and sellers of financial assets to
save their time, effort and money.
 Classification of Financial Markets:
A financial market consists of two major components. They are…….
a) Money Market b) Capital Market

Financial Markets

Money Market Capital Market

Primary Secondary
Capital Market Capital Market

Debt. Equity Debt. Equity

Market Market Market Market
Meaning of Money Market:
Money market is a market for short term funds. It deals with
monetary assets whose period maturity is less than one year.
In short, it is a market for short term funds.
Money market instruments:
Money market instruments like Treasury bills, Commercial
papers, Certificate of deposits, Call money, Commercial bills etc.,
Participants of money market:
The major participants in Money market are Reserve Bank of
India, Commercial Banks, Large Corporate Houses, State Governments
Mutual funds, and Non-Banking Finance Companies.

Money Market Instruments:

Money market consists of the following instruments: ...………
1. Treasury Bills:
A treasury bill is an instrument of short term borrowing
issued by the RBI on behalf of the central Government of India.
Generally, the duration varies from 14 days to 364 days. These
bills are in the nature of promissory notes. They are highly liquid,
having assured return and negligible risk.
The difference between the face value and the issue price is
called as discount.
 2. Call Money:
Sometimes the banks faced with temporary shortage of cash
at that time they borrow short term finance from other banks is
called as Call money.
Maturity period of call money is very short i.e., one day to
fifteen days. The interest rate paid on call money loans is known
as call rate. This rate is highly volatile that varies from day-to-day
and hour-to-hour.
3. Certificate of Deposit:
These are short term, unsecured negotiable instruments in
bearer form issued by commercial banks. They can be issued to
individual, corporations and companies. Generally, the maturity
period is from 3 months to 1 year. They are stamped and
transferred by endorsement.
4. Commercial Papers:
It was introduced in 1990 as a money market instrument.
Commercial Paper is a short term unsecured promissory note,
negotiable and transferable by endorsement and delivery with a
fixed maturity period issued by large and credit-worthy
companies. It usually has a maturity period of 15 days to 1 year.
5. Commercial Bills:
Commercial Bills are the short term, negotiable and self-
liquidating money market instrument with low risk.
The seller of the goods draws the bill and the buyer accept
it. On being accepted, the bill becomes a marketable instrument
and is called a trade bill. The drawer can discount the bill with a
bank if he needs funds before the date of maturity. When a trade
bill is accepted by a commercial bank is called as a commercial
bill.

Capital Market:
Capital market is a market for long term funds. It deals with long
term and medium term funds whose maturity period is more than one
year.
In short, it is a market for medium and long term funds is known
as capital market.
It consists the instruments like shares, debentures, bonds and
securities of the government.
The capital market consists the various participants like
companies, individual investors, institutional investors and various
intermediaries like brokers, merchant bankers, lead managers etc.,
Differences between Money market and Capital market:
Following are the important differences between money market
and capital market: ………………….
Basis Money market Capital market
1. Meaning It is a market for short term It is a market for long
funds. term funds.
2. Instruments It includes the instruments It includes the
like Treasury bills, Call instruments like shares,
money, Commercial Papers, debentures, bonds and
Certificate of deposit, Govt. securities etc.,
Commercial Bills etc.,
3. Participants Participants are
The major players are RBI, Companies, institutional
Commercial Banks, investors, individual
Financial institutions. investors, foreign
investors, Banks &
Financial institutions.
4. Investment A huge amount of
outlay Huge sum of money is financial outlay is not
required required by an individual
investor
5. Duration It deals with securities is It deals with medium
upto one year and long term securities
6. Liquidity It has higher liquidity It has less liquidity

7. Safety It has less risk It has more risk

8. Expected Rate of return is low Rate of return is high

return

The capital market consists the two important components:

(a) Primary capital market (b) Secondary capital market.
a) Primary Capital Market:
This market is also called as New Issue Market. It collects the
funds from the investors through by issuing the new securities.
Participants in primary market:
Financial institutions, insurance companies, mutual funds
and individual investors.

Primary market instruments:

In this market funds raised through shares, debentures and
bonds, loans and deposits.
Methods of floatation:
Methods of floating new issues in the primary market are as follows:
1) Offer through Prospectus:
Offer through prospectus is the most popular method of
raising funds by public companies in the primary market. This
involves inviting subscription from the public through issue of
prospectus. A prospectus makes a direct appeal to investors to
raise capital, through an advertisement in newspapers and
magazines.
2) Offer for Sale:
Under this method, securities are not issued directly to the
public but are offered for sale through intermediaries like issuing
houses or stock brokers. In this case, a company sells securities
embolic at an agreed price to brokers who, in turn, resell them to
the investing public.
3) Private Placement:
Private placement is the allotment of securities by a
company to institutional investors and some selected individuals.
It helps to raise capital more quickly than a public issue. Access
to the primary market can be expensive on account of various
mandatory and non-mandatory expenses.
4) Rights Issue:
This is an opportunity given to existing shareholders to
subscribe to a new issue of shares according to the terms and
conditions of the company. The shareholders are offered the
‘right’ to buy new shares in proportion to the number of shares
they already possess.
5) e-IPOs: (IPO = Initial Public Offer)
A company proposing to issue capital to the public through
the on-line system of the stock exchange has to enter into an
agreement with the stock exchange. This is called an Initial Public
Offer (IPO). SEBI registered brokers have to be appointed for the
purpose of accepting applications and placing orders with the
company.

b) Secondary Capital Market:

It is also called as stock market or stock exchange. It is a
market for the purchase and sale of already existing securities.
This market creates liquidity and easy marketability to the
securities. It consists of recognized stock exchanges operating
under rules and regulations approved by the government.
Differences between Primary market and Secondary market
Primary Market Secondary Market
1. It deals with new securities 1. It deals with already existing
only. securities.
2. Securities are sold by the co., 2. Ownership of existing securities
to the investor directly is exchanged between investors.
3. The flow of funds is from 3. It enhances encashability of
savers to investors. shares.
4. It directly promotes capital 4. It indirectly promotes capital
formation. formation.
5. Prices of securities are 5. Prices of securities are
determined and decided by determined by demand and
the company management. supply of securities.
6. There is no fixed geographical 6. Located at specific places.
location.
7. Only buying of securities are 7. Both buying and selling of
taken place. securities are taken place.

Meaning and Definition of Stock Exchange:

A stock exchange is an institution which provides a platform for
buying and selling of existing securities.
According to Securities Contract Act of 1956, stock exchange
means “Any body of individuals whether incorporated or not
constituted for the purpose of assisting, regulating or controlling the
business of buying and selling or dealing in securities”.

Functions of a Stock Exchange

The efficient functioning of a stock exchange creates a conducive
climate for an active and growing primary market for new issues.
The following are some of the important functions of a stock exchange.
1) Providing Liquidity and Marketability to Existing Securities:
The basic function of a stock exchange is the creation of a
continuous market where securities are bought and sold. It gives
investors the chance to disinvest and reinvest. This provides both
liquidity and easy marketability to already existing securities in
the market.

2) Pricing of Securities:
Share prices on a stock exchange are determined by the
forces of demand and supply. A stock exchange is a mechanism
of constant valuation through which the prices of securities are
determined. Such type of valuation provides important instant
information to both buyers and sellers in the market.
 3) Safety of Transaction:
The membership of a stock exchange is well regulated and
its dealings are well defined according to the existing legal
framework. This ensures that the investing public gets a safe and
fair deal on the market.
4) Contributes to Economic Growth:
A stock exchange is a market in which existing securities
are resold or traded. Through this process of disinvestment and
reinvestment savings get channelised into their most productive
investment avenues. This leads to capital formation and
economic growth.
5) Spreading of Equity Cult:
The stock exchange can play a vital role in ensuring wider
share ownership by regulating new issues, better trading
practices and taking effective steps in educating the public about
investments.
6) Providing Scope for Speculation:
The stock exchange provides sufficient scope within the
provisions of law for speculative activity in a restricted and
controlled manner. It is generally accepted that a certain degree
of healthy speculation is necessary to ensure liquidity and price
continuity in the stock market.

Meaning of Electronic Trading System:

All buying and selling of shares and debentures are done through
a computer terminal in the broker’s office.

Advantages of Electronic trading systems:

Following are the advantages of Electronic trading system:
1. It ensures transparency in transactions:
It allows participants to see the prices of all securities in the
market while business is being transacted. They are able to see the
full market during real time.

2. It helping in fixing prices efficiently:

It increases the efficiency of information being passes on. The
computer screens display information on prices and also capital
market developments that influence share prices.

3. It increases the efficiency of operations:

It increases the efficiency of operations, since there is reduction
in time, cost and risk of error.
4. This system has improving the liquidity of securities:
People from all over the country and even abroad who wish to
participate in the stock market can buy or sell securities through
brokers or members without knowing each other.
5. A single trading platform has been provided:
It provides a single trading platform as business is transacted at
the same time in all the trading centres. Thus, all the trading centres
spread all over the country have been brought onto one trading
platform, i.e., the stock exchange, on the computer.

Trading and settlement Procedure in Stock Exchange:

In our country, it has been made compulsory to settle all trades
within 2 days of the trade date, i.e., on a T+2 basis, since 2003.
The procedure for purchase and sale of securities on a stock
exchange involves the following steps: ….
1) If an investor wishes to buy or sell any security, he has to first
approach a registered broker or sub-broker and enter into an
agreement with him. He has also to provide certain details such as:
• PAN number (This is mandatory)
• Date of birth and address.
• Educational qualification and occupation.
• Residential status (Indian/NRI).
• Bank account details.
• Depository account details.
• Name of any other broker with whom registered.
The broker then opens a trading account in the name of the investor.
2) The investor has to open a ‘demat’ account with a depository
participant (DP) for holding and transferring securities in the demat
form.
3) The investor then places an order with the broker to buy or sell
shares. The investor should specify the type and number of shares
and the price at which the shares should be bought or sold.
4) The broker then will go on-line and connect to the main stock
exchange and match the share and best price available.
5) When the shares can be bought or sold at the price mentioned, it
will be communicated to the broker’s terminal and the order will be
executed electronically.
6) After the trade has been executed, within 24 hours the broker issues
a Contract Note. This note contains details of the number of shares
bought or sold, the price, the date and time of deal, and the
brokerage charges.
 7) Now, the investor has to deliver the shares sold or pay cash for the
shares bought. It should be done immediately after receiving the
contract note or before the day when the broker shall make payment
or delivery of shares to the exchange. This is called the pay-in day.
8) Cash is paid or securities are delivered on pay-in day, which is
before the T+2 day.

9) On the T+2 day, the exchange will deliver the share or make
payment to the other broker. This is called the pay-out day.
10) The broker has to make the payment to the investor who had sold
shares within 24 hours of the payment day. Similarly, the broker
makes delivery of shares in demat form directly to the demat
account of the investor who made purchase.

Dematerialization and Depositories:

The share or debenture certificates were issued in physical form
under the common seal of the company. The transfer of the certificates
in physical form and consequential updating of the records involved a
lot of time, effort and labour. The system of holding securities in the
physical form is inconvenient, expensive and causing delay in transfer
of securities from one investor to another. To avoid these difficulties
India introduced the concept of dematerialization in the year 1986.
Meaning of Dematerialization:
The process of converting the securities from physical form to
electronic form is called as dematerialization.
Meaning of Demat Account:
Demat account is an account opened and maintained with a
depository through depository participant for holding and transferring
securities in electronic form.
Working of Demat System:
1) A depository participant (DP), either a bank, broker, may be
identified.
2) An account opening form and documentation may be completed.
3) The physical certificate is to be given to the DP along with a
dematerialization request form.
4) If shares are applied in a public offer, simple details of DP and demat
account are to be given.
5) If shares are to be sold through a broker, the DP is to be instructed
to debit the account with the number of shares.
6) The broker then gives instruction to his DP for delivery of the shares
to the stock exchange.
7) The broker then receives payment and pay the person for the shares
sold.
8) All these transactions are to be completed within 2 days, i.e.,
delivery of shares and payment received from the buyer is on a T+2
basis, settlement period.

Meaning of depository:
Depository is an institution that keeps securities in electronic
form on behalf of the investor.
At present there are two depositories worked in our India:
1. National Securities Depository Limited (NSDL).
(This is the first and largest depository in India.)
2. Central Depository Services Limited (CDSL)
Meaning of Depository Participant: (DP)
Depository Participant is an intermediary between investor and
the depository.
For Ex: It may be Banks, stock brokers and financial institutions.
NSEI or NSE (National Stock Exchange of India)
It was established in the year 1992 and it was recognised as a
stock exchange in April 1993. It started its operations in the year 1994.
It has the Bench Mark Index of NSE is Nifty. It deals with top
fifty companies shares and debentures. NSE has set up a nationwide
fully automated screen based trading system.
Objectives of NSE:
Following are the objectives of NSE: ……..
a) Establishing a nationwide trading facility for all types of securities.
b) Ensuring equal access to investors all over the country through an
appropriate communication network.
c) Providing a fair, efficient and transparent securities market using
electronic trading system.
d) Enabling shorter settlement cycles and book entry settlements.
e) Meeting international benchmarks and standards.

Market segments of NSE:

The Exchange provides trading in the following two segments.
a) Whole Sale Debt Market Segment:
This segment provides a trading platform for a wide range of
fixed income securities that include central government securities,
treasury bills, state development loans, bonds issued by public
sector undertakings, zero coupon bonds, commercial paper,
certificate of deposit, corporate debentures and mutual funds.
 b) Capital Market Segment:
The capital market segment of NSE provides an efficient and
transparent platform for trading in equity, preference, debentures,
exchange traded funds as well as retail Government securities.
BSE (Bombay Stock Exchange):
It was established in the year 1875 and Asia’s first stock
exchange. It is the first and oldest stock exchange in India.
It has Bench Mark Index of BSE is SENSEX. It deals with top
30 companies shares and debentures.
NASDAQ (National Association of Securities Dealers Automated
Quotations): It is the New York stock exchange Index.
OTCEI (Over The Counter exchange of India):
It was a fully computerized and transparent stock exchange. It
was established in the year 1956.
It was started for the purpose of providing or collecting finance
through lower cost from capital market.
It starts its functioning in the year 1992. It will be established as
a model of NASDAQ.
Meaning of Securities Exchange Board of India (SEBI):
Securities Exchange Board of India was established by the
Government of India on 12th April, 1988 as a regulator of capital
market in the country in order to promote orderly and healthy growth
of securities market and foe investor protection. It was get statutory
status in the year 1992.
The SEBI has some powers concerning various aspects such as
regulating stock market, mutual funds market, promoting investors’
education, establishing self-regulating organizations and steps to
prohibit unfair trade practices and insider trading in the securities
market.
Objectives of SEBI:
The main objectives of SEBI are as follows: ……………………….
a) Development of Securities Market:
For a long period, the securities market remained under-
developed due to some malpractices on the part of companies,
brokers, merchant bankers and others involved in the securities
market. SEBI was set up mainly to develop the capital market in
general and securities market in particular.
b) Protection of Interest of Investors:
The main aim of SEBI is to protecting the rights and
interests of the investors through by providing accurate and
authentic information. SEBI prosecutes the defaulting companies
in the matters of non-payment of dividend or non-issue of
certificate of shares after allotment etc.,
 c) To prevent trading malpractices in stock exchange:
It helps to prevent trading malpractices and achieve a
balance between self-regulation by the securities industry and its
statutory regulation.
d) Regulation of Capital Market:
SEBI regulates both the primary and secondary capital
markets. Every issue of shares to the public by the companies is
subject to clearance from SEBI. It also issues guidelines from time
to time regulate stock exchanges regarding time, settlement,
speculation etc.

Functions of SEBI:
SEBI is entrusted with the twin task of both regulation and
development functions. It also has certain protective functions.
Regulatory Functions
1) Registration of brokers and sub brokers and other players in the
market.
2) Registration of collective investment schemes and Mutual Funds.
3) Regulation of stock brokers, portfolio exchanges, underwriters and
merchant bankers and the business in stock exchanges and any
other securities market.
4) Regulation of takeover bids by companies.
5) Calling for information by undertaking inspection, conducting
enquiries and audits of stock exchanges and intermediaries.
6) Levying fee or other charges for carrying out the purposes of the Act.
7) Performing and exercising such power under Securities Contracts
Act 1956, as may be delegated by the Government of India.

Development Functions:
1) Training of intermediaries of the securities market.
2) Conducting research and publishing information useful to all
market participants.
3) Undertaking measures to develop the capital markets by adapting a
flexible approach.

Protective Functions:
1) Prohibition of fraudulent and unfair trade practices like making
misleading statements, manipulations, price rigging etc.
2) Controlling insider trading and imposing penalties for such
practices.
3) Undertaking steps for investor protection.