CHAPTER 1- NATURE AND SIGNIFICANCE OF MANAGEMENT

Sl.
Topic
No.
Introduction
Definition of Management
Meaning of Management
1. Concept of Management
2. Effectiveness versus Efficiency
3. Characteristics / Features
4. Objectives of Management
5. Importance of Management
6. A : Management as an Art
B : Management as a Science
C : Management as a profession
Combination of any 2 for /exam
7. Levels of management
8. Functions of management
Co-ordination
Introduction
Definition
Meaning
1. Characteristics of Co-ordination
2. Importance
INTRODUCTION
The above case is an example of a successful organisation which is amongst the top
companies in India. It has risen to the top because of its quality of management.
Management is required in all kinds of organisations whether they are manufacturing
computers or hand looms, trading in consumer goods or providing hairstyling services and
even in non business organisations.
Successful organisations do not achieve their goals by chance but by following a
deliberate process called ‘management’.
Management is essential for all organisations big or small, profit or non –profit,
services or manufacturing Management is necessary so that individuals make their best
contribution towards group objectives. Management consists of a services of interrelated
functions that are performed by all managers.

Definition of Management
According to Robert and Trevelly and M. Gene Newport “Management is defined as
the process of planning, organisation, actuating and controlling resources essential in the
effective and efficient attainment of objectives.

Meaning of Management
Management has therefour been defined as a process of getting things done with the
aim of achieving goals efficiently and effectively.

Concept of Management
Management is a very popular term and has been extensively used for all types of
activities and mainly for taking charge of different activities in any enterprise.
Management has therefore, been defined as a process of getting things done with the
aim of achieving goals efficiently and effectively.
There are some terms to be understood they are:
a) Process
b) Effectively
c) Efficiently
 a) Process: Process in the definition means the primary functions or activities that
management performs to get things done.

b) Effective: Being effective or doing work effectively basically means finishing the
given task.

c) Efficiency: Efficiency means doing the task correctly and with minimum cst. Input
resources are money. Materials, equipment and person required to do a particular
task. Obviously, management is concerned with the efficient use of these resources,
because they reduce costs and ultimately lead to higher profits.

Effectiveness versus Efficiency

Effectiveness and efficiency are two sides of the same coin. But these two aspects
need to be balanced and management at times, has to compromise with efficiency. For
example, it is easier to be effective and ignore efficiency ie., complete the given task but at a
higher cost.
It is important for management to achieve goals (effectiveness) with minimum
resources i.e., as efficiently as possible while maintaining a balance between effectiveness
and efficiency.

Characteristics of Management

Sl.
Characteristics
No.
1. Management is a goal-oriented process
2. Management is all pervasive
3. Management is multidimensional
4. Management is a continuous process
5. Management is a group activity
6. Management is a dynamic function
7. Management is an intangible force

Above stated characteristics can be explained as under:

1. Management is goal-oriented process
An organisation has a set of basic goals which are the basic reason for its existence.
These should be simple and clearly stated. Different Organisations have different goals.
Management unites the efforts of different individuals in the organisation towards achieving
these goals.

2. Management is all pervasive

The activities involved in managing an enterprise are common to all organisations
whether economic, social or political. This difference is due to the difference in culture,
tradition and history.

3. Management is multidimensional
Management is a complex activity that has three main dimensions. These are.
a) Management of work
All organisations exist for the performance of some work. In a factory, a product is
manufactured, in a garment store a customer’s need is satisfied and in a hospital a
patient is treated.
b) Management of people
Human resources or people are an organisation’s greatest asset. Despite all
developments in technology. “Getting work done through people” is still a major task
for the manager.
c) Management of operations
No matter what the organisation it has some basic product or service to provide in
order to survive. This requires a production process which entaier the flow of input
material and the technology for transforming this input into desired output for
consumption.

4. Management is a continues process

The process of management is a series of continues, composite, but seprate functiosn
(planning, organising directing, staffing and contriving) These functions are simultaneously
performed by all managers all the time.

5. Management is a group activity

 An organisiation is a collection of diverse individuals with different needs. Every
member of the group has a different purpose for joining the organisation but as members of
the organisation they work towards fulfilling the common organisational goal.
6. Management is a dynamic function
Management is a dynamic function and has to adapt itself to the changing
environment. An organisation interacts with its external environment which consists of
various social, economic and political factors.

7. Management is an intangible force

Management is an intangible force that cannot be seen but its presence can be felt in
the way the organisation functions.

Objectives of Management

Sl.No Objectives
.
I Organisational objectives
a. Survival
b. Profit
c. Growth
II Social objectives
III Personal Objectives

Management seeks to achieve certain objectives which are the desired result of any
activity. In any Organisation there are different objectives and management has to achieve all
objectives in an effective and efficient manner.

I. Organisational Objectives
Management is responsible for setting and achieving objectives for the organisation. It
has to achieve a variety of objectives in all areas considering the interest of all stakeholders
including shareholders, employees, customers and the government.
To fulfill the economic objectives of a business. These are:
 a) Survival
b) Profit
c) Growth
a) Survival: The basic objectives of any business is survival. Management must strive to
ensure the survival of the organisation. In order to survive, an organisation must earn
enough revenues to cover costs.

b) Profit: Mere survival is not enough for business. Management has to ensure that the
organisation makes a profit. Profit is essential for covering costs and risks of the business.

c) Growth: A business needs to add to its prospects in the long run, for this it is important
for the business to grow. Growth of a business can be measured in terms of sales volume
increase in the number of employees, the number of products or the increase in capital
investment etc.,

II. Social Objectives

It involved the creation of benefit for society. As a part of society, every organisation
whether it is business or non-business, has a social obligation to fulfil. This includes using
environment friendly methods of production, giving employment opportunities to the
disadvantaged sections of society and providing basic amenities like schools and creates in
employees.

III. Personal Objectives

Organisations are made up of people who have different personalities backgrounds,
experiences and objectives management has to reconcile personal goals with organizational
objectives for harmony in the organisation.

Importance of Management
Sl.
Importance of Management
No.
1. Management helps in achieving group goals
2. Management increases efficiency
3. Management creates a dynamic organisation
4. Management helps in achieving personal objective
5. Management helps in the development of society
1. Management helps in achieving group goals
Management is required not for itself but for achieving the goals of the organisation.
The task of the manager is to give a common direction to the individual effort in achieving
the overall goal of the organisation.

2. Management increases efficiency

The aim of a manager is to reduce costs and increase productivity through bettern
planning, organising, directing, staffing and controuing the activities of the organisation.

3. Management creates a dynamic organisation

All organisations have to function in an environment which is constantly changing.
Management helps people adapt to these changes so that the organisation is able to maintain
its competitive edge.

4. Management helps in achieving personal objectives

A manager motivates and leads his team in such a manner that individual members
are able to achieve personal goals while contributing to the overall organizational objective.

5. Management helps in development of society

An organisation has multiple objectives to serve the purpose of the different groups
that constitute objective.

Nature of Management
Organisations may be considered the distinguishing feature that separated civilized
society management practices were a set of rules and regulations that grew out of the
experiences of governmental and commercial activities. The development trade and
commerce gradually led to the development of management principles and practices.
The term management today has several different connotations (dimensions) that nigh
eight the different aspects of its nature. The study of management has evolved over a period
of time along with the modern organisations; based both on the experience and practice of
managers and set of theoretical relationships.
Management as an Art
What is Art?
Art is the skilful and personal application of existing knowledge to achieve desired
results. It can be acquired through study, observation and experience.

The basic features of an art are as follows:

i) Existence of theoretical knowledge
ii) Personlised application
iii) Based on practice and creativity

i) Existence of theoretical knowledge

Art presupposes the existence of certain theoretical knowledge. Experts in their
respective areas have derived certain basic principles which are applicable to a particular
form of art.
For Ex: literature on dancing, public speaking, acting or music is widely recoginsed.

ii) Personalised application

The use of this basic knowledge differs from individual to individual. Art, therefore is a
very personalized concept.
For example: Two dances, Two speakers,
Two actors or two writers will always differ in demonstrating their art.

iii) Based on practice and creativity

All art is practical. Art involves the creative practice of existing theoretical knowledge.
For Example: We know that music is based on seven basic notes. However what makes
the composition of a musician unique or different is his use of these notes in a creative
manner that his entering his own interpretation Management can be said to be an art since
it satisfies the following criteria:

i) A successful manager practices the art of management in the day – to – day job of
managing an enterprise based on study, observation and experience.
 There is a lot of literature available in various areas of management like marketing, fiancé
and Human resources. So there is existence of theoretical knowledge.

ii) There are various theories of management as propounded by many management thinkers,
which prescribe certain universal principles. A good manager works through a
combination of practice, creativity, imagination, initiative and innovation. A manager
achieves perfection and long practice.

iii) A manager applies this acquired knowledge in a personalized and skillful manner in the
light of realities of given situation.
Manager is involved in activities of the organisation, studies critical situations and
formulates his own theories for use in a given situation. This gives rise to different styles
of management.

Management as a science
Science is a systematized body of knowledge that explains certain general truths or
the operation of general laws. The basic features of science are as follows:

Sl. No. Basic Features

i) Systematised body of knowledge
ii) Principles based on experimentation
iii) Universal validity

i) Systematised body of knowledge

Science is a systematic 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.
ii) Principles based on experimentation
Scientific principles are first developed through observation and then tested through
repeated experimentation under controlled condition.

iii) Universal validity

 Scientific principles have universal validity and application.
Based on the above features, we can say that management has some characteristics of
science.

i) Management has a systematised body of knowledge. It has its own theories and principles
that have developed over a period of time.
Managers need to communicate with one another with the help of a common vocabulary
for a better understanding of their work situation.

ii) The principles of management have evolved over a period of time based on repeated
experimentation and observation in different types of organisations.
Therefore, management can be called an inexact science.

iii) The principles of management have to be modified according to a given situation

However, they provide managers with certain standarised techniques that can be used in
different situation.

Management as a Profession
A Profession has the following characteristics
i) Well defined body of knowledge
ii) Restricted entry
iii) Professional association
iv) Ethical code of conduct
v) Service motive

i) Well defined body of knowledge

All professions are based on a well-defined body of knowledge that can be acquired
through instruction.
ii) Restricted entry
The entry to a profession is restricted through an examination or through acquiring an
educational degree.
For ex: To become a charted accountant in India a candidate has to clear a specified
examination conducted by the Institute of chartered Accountants of India.
iii) Professional association
All professions are affiliated to a profession association which regulates entry, grants
certificate of practice and formulates and enforces a code of conduct
For example: To be able to practice in Indian lawyers have to become members of the Bar
council which regulates and controls their activities.

iv) Ethical code of conduct

All professions are bound by a code of conduct which guides the behavior of its members.
All doctors take the oath of ethical practice at the time they enter the profession.

v) Service motive
The basic motive of a profession is to serve their clients interests by rendering dedicated
and committed service. The task of a larger is to ensure that his client gets justice.

Management does not meet the exact criteria of profession

i) All over the world there is marked growth in management as a discipline. It is based on a
systematic body of knowledge comprising well, defined principles based on a variety of
business situations.
ii) There is no restriction on anyone being designated or appointed as manager in any
business enterprise.
Unlike professions such as medicine or law which require a practicing doctor or lawyer
to possess valid degrees, nowhere in the world is it mandatory for a manager to possess
any such specific degree.
iii) There are several associations of practicing managers in India, like the AIMA (All India
Management Association) No compulsion for managers.
iv) The basic purpose of management is to help the organisation achieve its stated goal. This
may be profit maximisation for a business enterprise and service for a hospital.

Levels of Management
Management is a universal term used for certain functions performed by individuals
in an enterprise who are bound together in a hierarchy is responsible for successful
completion of a particular task. To be able to fulfil that responsibility he is assigned a certain
amount of authority or the right to take a decision.

There are three levels in the hierarchy of an organisaiton.

Top Chief Finance

Officer
Manage
Vice President

Middle Line manager

Management Production
Manager

Operational Foremen

Management Supervisor

i) Top Management
They consist of the senior most executives of the organisations by whatever name
they are called. They are usually referred to as the chairman, the chief executive officer,
chief operating officer, president and vice – president.
Their basic takes is to integrate diverse elements and co-ordinate the activities of
different departments according to the overall objectives of the organisation. There top-
level managers are responsible for the welfare and survival of the organisations. They
analyse the business environment and its implications for the survival of the firm. They
formulate overall organizational goals and strategies for their achievement.
The job of the top manager is complex and stressful, demanding loan hours and
commitment to the organisaiton.

ii) Middle Management

 Is the link between top and lower-level managers. They are sub ordinate to top
managers and superior to the first line managers. They are usually known as division
heads, for example production manager.

Their main task is to carry out the plans formulated by the top managers for this they
need to;

a) Interpret the policies framed by top management.

b) Ensure that their department has the necessary personnel.
c) Assign necessary duties and responsibilities to them.
d) Motivate them to achieve desired objectives.
e) Cooperate with other departments for smooth functioning to the organisation.

iii) Supervisory or Operational Management.

Foremen and supervisors comprise the lower level in the hierarchy of the
organisation. Their authority and responsibility are limited according to the plans drawn
by the top management. They interact with the actual work force and pass on instruction
of the middle management to the workers. Through their efforts quality of output is
maintained, wastage of materials is minimised and safety standards and maintained.

Functions of Management

FUNCTIONS OF MANAGEMENT

PLANNING

ORGANISING

STAFFING

DIRECTING

CONTROLLING
Planning
 Planning is the function of determining in advance what is to be done and who is to
do i. This implies setting goals in advance and developing a way of achieving them
efficiently and effectively.
Planning cannot prevent problems. But it can predict them and prepare contingency
plans to deal with them if and when they occur.
Organising
Organising is the management function of assigning duties, grouping tasks,
establishing authority and allocating resources required to carry out a specific plan onc a
specified plan has been established for the accomplishment of an organizational goal, the
organising function examines the activities and resources required to implement the plan.
Organising involves the grouping of the required tasks into manageable departments
or work units and the establishment of authority and reporting relations within the
organizational hierarchy.
Different kinds of business require different structures according to the nature of
work.
Staffing
A very important aspect of management is to make sure that the right people with the
right qualifications are available at the right places and times to accomplish the goals of the
organisation. This is also known as human resource function and it involves activities such as
recruitment, selection, placement and training of personnel.
Directing
Directing involves leading, influencing and motivating employees to perform the
tasks assigned to them. Motivation and leadership are two key components of direction
Directing also involves communicating effectively as well as supervising employees at work.
Controlling
Controlling is the management founction of monitoring organisations performance
towards the attainment of organizational goals. The taks of controlling involves establishing
standards of performance, measuring current performance, comparing this with established
standards and taking corrective action where only deviation is found.

Co-ordination – the essence of management

Co-ordination is the force process whereby According to McFarland; Co-ordination is
the process whereby an executive develops an orderly pattern of group efforts among his
subordinates and secures unity of action in the pursuit of common purpose.
 Co-ordination is the force that binds all the other functions of management. It is the
common thread that runs through all activities such as purchase, production, sales and finance
to ensure continuity in the working of the organisation.
Each managerial function is an exercise contributing individually to co-ordination.
The process of co-ordinating the activities of an organisation begins at the planning stage
itself.
It is through the process of co-ordination that a manager ensures the orderly
arrangement of individual and group efforts to ensure unity of action in the realization of
common objectives. Co-ordination therefore involves synchronisation of the different actions
or efforts of the various units of an organisation.

Characteristics of Co-ordination
Sl. No. Characteristics of Co-ordination
i) Co-ordination integrates group efforts
ii) Co-ordination ensures unity of action
iii) Co-ordination is a continues process
iv) Co-ordination is an all-pervasive function
v) Co-ordination is the responsibility of all managers
vi) Co-ordination is a deliberate function

i) Co-ordination integrates group efforts

Co-ordination unifies unrelated or diverse interests into purposeful work activity. It
given a common focus to group effort to ensure that performance is as it was planned and
scheduled.

ii) Co-ordination ensures unity of action

The purposes of co-ordination is to secure unity of action in the retia realization of a
common purpose. It acts as the binding force between departments and ensures that all
actions is aimed at achieving the goals of the organisation.

iii) Co-ordination is a continues process

Coordination is not a one-time function but a continuous process. It begins at the
planning stage and continues till controlling.
iv) Coordination is an all-pervasive function
Coordination is required at all levels of management due to the interdependent nature
of activities of various departments.
It integrates the efforts of different departments and different levels. The purchase,
production and sales departmental efforts have to be coordinated.

v) Co-ordination is the responsibility of all managers.

Coordination is the function of every manager in the organisaiton. To level managers
need to coordinate with their sub-ordinates to ensure that the overall policies for the
organisation are duly carried out.
Middle level management coordinates with both the top level and first line managers.
Operational level management coordinates the activities of its workers to ensure that
work proceeds according to plans.

vi) Coordination is a deliberate function

A manager has to co-ordinate the efforts of different people in a conscious and
deliberate manner.
Co-ordination is not a separate function of management, but its very essence. For an
organisation to effectively and efficiently achieve its objectives coordination is required.

Importance of Coordination
Ccordination is important as it integrates the efforts of individuals, departments and
specialists.

Sl. No. Importance of Coordination

i) Growth in size
ii) Functional differentiation
iii) Specialization
i) Growth in size
As organisaitons grow in size the number of people employed by the organisaiton also
increases.
It becomes necessary to ensure that all individuals work towards the common goals of
the organisation. But employees may have their own individual goals also. Therefore, for
organizational efficiency, it is important to harmonies individual goals and organizational
goals through co-ordination.

ii) Functional differentiation

Functions of an organisation are divided into departments, divisions and sections. In
an organisation there may be separate departments of finance, production marketing or
human resources.
All these departments may have their own objectives, policies and their own style of
working.
All departments and individuals are interdependent and they have to depend on each
other for information to perform their activities. They activity of each department needs
to be focused on attainment of common organisational goals.

iii) Specialisation
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
difference in approach. Interest on or opinion of the specialists.
****

Chapter 2 - PRINCIPLES OF MANAGEMENT

Sl. Topic
 No.
1. Introduction
Concept
1. Nature of Principles of Management
2. Significance of Principles
3. Taylors scientific management
 Introduction
 Principles
 Techniques
4. Fayol’s Principles of Management
5. Fayal V/s Taylor

Introduction
A number of management thinkers, and writers have also studied principles of
management from time – to – time management principles have evolved and are in the
continuous process of evolution.
Fredrick Winslow Taylor and Henri Fayol are associated with classical management
theory.
F.W. Taylor was an American mechanical engineering. Henri Fayol was a French
mining engineer. Taylor gave the concept of ‘Scientific management’ whereas Fayol
emphasized administrative principles.

Principles of Management : The Concept

A management Principle is a broad and general guideline for decision making and
behaviour. Management principles are not as rigid as principles of pure science. They deal
with human behaviour and, thus, are to be applied creatively given the demands of the
situation Human behaviour is never static and also technology, which affects business.
Hence, all principles have to keep pace with these changes.
In developing an understanding of the meaning of principles of management. It is also
usuful to know what these are not. The principles of management should be distinguished
from techniques of management. Techniques are procedures or methods, which involve a
series of steps to be taken to accomplish desired goals. Principles are guidelines to take
decisions or actions while practicing techniques.
Nature of Principles of Management
Principles are general prepositions, which are applicable with certain conditions are
present. These have been developed on the basis of observation, experimentation as well as
personal experiences of the manager. These principles lend credibility of a learnable and
teachable discipline to the practice of management.
These principles are guidelines to action. They denote a cause-and-effect relationship.
While functioning functions of management.

The nature of principles of management are:

i) Universal applicability
ii) General guidelines
iii) Formed by practice and experimentation
iv) Flexible
v) Mainly behavioral
vi) Cause and effect relationship
vii) Contingent

i) Universal Applicability
The principles of management are intended to apply to all types of organisations,
business as well as non-business, small as well as large public as well as private sector,
manufacturing as well as the service sector. However, the extent of their applicability
would vary with the nature of the organisation, business activity, scale of operation and
the like.
For example: Far greater productivity work should be divided into smaller tasks and
each employee should be trained to perform his/her specialized job.

ii) General guidelines

The principles of are guidelines to action but do not provide readymade straitjacket
answers or solutions to all managerial problems. This is so because real business
situations are very complex and dynamic and are a result of many factors.

iii) Formed by practice and experimentation

 The principles of management are formed by experience and collective wisdom of
managers as well as experimentation.
For example: It is a matter of common experience that discipline is indispensable for
accomplishing any purpose.

iv) Flexible
The principles of management are not rigid prescriptions, which have to be followed
absolutely. They are flexible and can be modified by the manager when the situation so
demands moreover individual principles are like different tools serving different
purposes, the manager has to decide which tool to use under what circumstance.

v) Mainly behavioural
Management principles aim at influencing behavior of human beings. Therefore,
principles of management are mainly behavioural in nature Principles enable a better
understanding of the relationship between human and material resources in accomplishing
organizational purpose.
For example: while planning the layout of the factory, orderliness would require that
workflows are matched by flow of materials and movement of men.

vi) Cause and effect relationship

The principles of management are intended to establish relationship between cause
and effect so that they can be used in similar situations in a large number of cases. As
such, they till us if a particular principle was applied in a particular situation.
For example: in situation requiring cross functioning expertise, such as setting up of a
new factory, more participative approach to decision making would be advisable.

vii) Contingent
The application of principles of management is contingent or dependent upon the
prevailing situation at a particular. Point of time. The application of principles has to be
changed as per requirement.
For example: Employees deserve fair and just remuneration. But what is fair and just
is determined by various factors. They include contribution of the employee, paying
 capacity of the employer and also prevailing wage rate for the occupation under
consideration.

Significance of Principles of Management

The principles of management derive their significance from their utility. They
provide useful insights to managerial behavior and influence management practices.
Managers may apply these principles to fulfil their tasks and responsibilities.
Principles guide managers in taking and implementing decisions.
i) Providing managers with useful insights into reality
ii) Optimum utilization of resources and effective administration
iii) Scientific decisions
iv) Meeting changing environment requirements
v) Fulfilling social responsibility
vi) Management training, education and research

i) Providing managers with useful insights into reality

The principles of management provide the managers with useful insights into real
world situations. 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.

ii) Optimum utilisation of resources of effective administration

Resources with human and material available with the company are limited. They
have to be put to optimum use. By optimum use we mean that the resources should be
put to use in such a manner that they should give maximum benefits with maximum cost.
Principles equip managers to foresee the cause-and-effect relationships of their decisions
and actions. Principles of management limit the boundary of managerial discussion so
that their decision may be free from personal prejudices and biases.

iii) Scientific decisions

Decisions must be based on facts, thoughtful and justifiable in terms of the intended
purposes. They must be timely realistic and subject to measurement and evaluation.
Management principles help in thoughtful decision making.
iv) Meeting changing environment requirements:
Although the principles are in the nature of general guidelines but they are modified
and as such help managers to meet changing requirements of the environment.

v) Fulfilling social responsibility

The increased awareness of the public, forces business especially limited
companies to fulfil their social responsibilities. Management theory and management
principles have also evolved in response to these demands.
Value to the customer, care for the environment, dealings with business associates
would also come under the purview of this principle.

vi) Management training, education and research

Principles of management are at the core of management theory. As such these are
used as a basis for management. Training, education and research.
These principles provide basic groundwork for the development of management as
a discipline, professional courses such as MBA (Master of Business Administration) BBA
(Bachelor of Business administration) also teach these principles as part of their
curriculum at the beginner’s level.

Taylor’s Scientific Management:

Principles of scientific management. Scientific management means knowing exactly
what you want men to do and seeing that they do it in the best and a cheapest way.

i) Science not rule of thumb

ii) Harmony not discord
iii) Cooperation not individualism
iv) Development of each and every person to his Dr. her greatest
efficiency and prosperity

i) Science not Rule of Thumb

Taylor pioneered the introduction of the method of scientific. As different
managers would follow their indigenous rules of thumb, it is but a statement of the
obvious that all would not be equally effective. Taylor believed that there was only one
 best method to maximize efficiency this method can be developed through study and
analysis. The method so developed should substitute ‘Rule of Thumb’ throughout the
Organisation.
According to Taylor, even a small production activity like loading pigs of iron into
boxcars can be scientifically planned and managed. This can result in tremendous saving
of human energy as well as wastage of time and materials.

ii) Harmony, Not Discord

Factory system of production implied that managers served as a link between the
owners and the workers since as managers they had the mandate to ‘get work done’ from
the workers. It should not be difficult for you to appreciate that there always existed the
possibility of a kind of class-confect, the managers versus workers. He emphasized that
there should be complete harmony between the management and workers. Taylor called
for complete mental revolution on the part of both management and the workers. It means
that management and should transform their thinking. In such a situation even trade
unions will not think on going on strike etc.,
Japanese work culture is a classic example of such a situation. In Japanese
companies, paternalistic style of management is in practice. There is complete openness
between the management and workers. If at all workers go to strike, they wear a black
badge but work more than normal working hours to gain the sympathy of management.

iii) Cooperation, not individualism

There should be compute cooperation between the labour and the management
instead of individualism. The principle is an extension of principle of ‘Harmony not
discord’. Competition should be replaced realize that they need each other. For this,
management should not class its ears to any constructive suggestions made by the
employees. They should be rewarded for their suggestions which results in substantial
reduction in costs.
When there will be open communication system and goodwill there will no need
for when a trade union, paternalistic style of management, whereby the employer takes
care of the needs of the employees, would prevail as in case of Japanese companies.
According to Taylor, there should be an almost equal division of work and
responsibility between workers and management.
iv) Development of each and every person to his or her greatest efficiency and
prosperity
Industrial efficiency depends to a large extent on personnel competencies. As such,
scientific management also stood for worker development. Worker draining was essential
also to learn the ‘best method’ development as a consequence of the scientific approach.
Taylor was of the view that the concern for efficiency could be built in might from the
process of employer selection. Each person should be scientifically selected.
To increase efficiency, they should be given the required training. Efficient
employees would produce more and earn more. This will ensure their greatest efficiency
and prosperity for both company and workers.

Techniques of scientific Management

i) Functional Foremanship
In a factory system, the foreman represents the managerial figure with whom the
workers are in face-to-face contact on a daily basis.
He is the pivot around whom revolves the entire production planning, implementation
and control. Thus, Taylor concentrated in improving the performance of the role in the
factory set up.
Functional foremanship is an extension of the principle of division of work and
specialization to the shop floor. Each worker will have to take orders from these eight
foremen in the related process or function of production, Forman should have intelligence,
education, tact, grit, judgment special knowledge, manual dexterity and energy, honesty and
good health. Since all these qualities could not be found in a single person so Taylor
proposed eight specialists. Each specialist is to be assigned work according to his / him
qualities.

ii) Standardisation and Simplification of work

Taylor was an ardent supporter of standardization. According to him scientific
management should be used to analyse methods of production prevalent under the rule of
thumb. The best practices can be kept and further redefined to develop a standard which
should be followed throughout the organisation. This can be done through work study
techniques which include time study, motion study, fatigue study and method study.
 Standardisation refers to the process of setting standards for every business
activity, it can be standardization of process, raw material, time, product, machinery,
methods or working conditions. There standards are the bench marks, which must be
adhered to during production.

The objectives of standardization are

1) To reduce a given line or product to fixed types, sizes and characteristics

2) To establish interchanged ability of manufactured parts and products.
3) To establish standards of excellence and quality in material.
4) To establish standards of performance of men and machines.

Simplification aims at elimination of superfluous verities, sizes and dimensions while

standardization implies devising new verities instead of the existing one. Simplification aims
at eliminating unnecessary diversity of products. It results in saving of cost of labour machine
and tools. It implies reduced inventories, fuller utilization of equipment and increasing
turnover.

A. Method study
The objective of method study is to find out one best way of doing the job Right from
procurement of raw material to the final product is delivered to the customer every activity is
part of method study. Taylor devised the concept of assembly line by using method study.
The objective of the whole existence exercise is to minimise the quality and
satisfaction of the customer.

B. Motion study
Motion study refers to the study of movements like lifting, putting objects sitting and
changing positions etc., which are undertaken while doing a typical job, unnecessary
movements are sought to be eliminated so that it takes less time to complete the job
efficiently.
On close examination of body motions, for example, it is possible to find out:
i) Motions which are productive
ii) Motions which are incidental (eg. Going to stores)
iii) Motions which are unproductive.
 Taylor used stopwatches and various symbols and colours to identify different
motions.

Time study
It determines the standard time taken to perform a will – defined job. Time measuring
devices are used for each element of task. The standard time is fixed for the whole of the task
by taking several readings. The objective of time study is to determine the number of workers
to be employed, frame suitable incentive schemes and determine labour costs.

Fatigue study
A person is bound to fall physically and mentally if she/ he does not rest while
working. The rest intervals will help one to regain stamina and work again with the same
capacity. This will result in increased productivity. Fatigue study seeks to determine the
amount and frequency of rest intervals in completing a task.
There can be many causes for fatigue like long working hours, doing unsuitable work,
having un-cordial relations with the boss or bad working conditions etc., Such hindrances in
good performance should be removed.

Differential piece wage system

Taylor was a strong advocate of piece wage system. He wanted to differentiate
between efficient and inefficient workers. The standard time and other parameters should be
determined on the basis of the work study discussed above. The workers can then be
classificed as efficient and inefficient on the basis of these standards. He wanted to reward
efficient workers so he introduced different rate of wage payment for those who performed
above standard and for those who performed below standard.
Mental revolution involves a change in the attitude of workers and management
towards one another from competition to cooperation. Management should share part of
surplus with workers.

Fayol’s Principles of Management

Henri Fayol explained what amounts to a managers work and what principles should
be followed in doing this work. Fayol’s contribution must be interpreted in terms of the
impact that his writings had and continue to have improvements in managerial efficiencies.
 Henri Fayol theories concerning scientific organisation of labour were widely
influential in the beginning of twentieth century.

The 14 principles of management are:

Sl. No. Principles of Management
i) Division of work
ii) Authority and Responsibility
iii) Discipline
iv) Unity of Command
v) Unity of Direction
vi) Subordination of Individual interest to general interest
vii) Remuneration of employees
viii) Centralization and Decentralization
ix) Scalar chain
x) Order
xi) Equity
xii) Stability of Personnel
xiii) Initiative
xiv) Espirit de comps

i) Division of work
Work is divided into small tasks / jobs. A trained specialist who is competent is
required to perform each job. Thus, division of work leads to specialization. According to
Fayol, “The intent of division of work is to produce more and better work for the same effort.
Specialisation is the most efficient way to use human effort.
All of them have specialized persons. Collectively they achieve production and sales
target of the company. Fayol applies this principle of division of work to all kinds of work
technical as well as managerial.

ii) Authority and Responsibility

According to Fayol. “Authority is the right to give orders and obtain obedience and
responsibility is the corollary of authority. The two types of authority are official authority,
which is the authority to command and personal authority which is the authority of individual
manager.
 Authority is both formal and informal Managers require authority commensurate with
the responsibility. There should be balance between authority and responsibility an
oranisation should build safeguards against abuse of managerial power.
At the same time a manager should have necessary authority to carry out his
responsibility.

iii) Discipline
Discipline is the obedience to organisational rules and employment agreement which
are necessary for the working of the organisation. According to Fayol, discipline requires
good superiors at all levels, clear and fair agreements and judicious application of penalties.

iv) Unity of command

According to Fayol there should be one and only one boss for every individual
employee gets orders from two superiors at the same time the principle of unity of command
is violated Dual subordination should be avoided. This is to prevent confusion regarding tasks
to be done.

v) Unity of Direction
All the units of an organisation should be moving towards the same objectives
through coordinated and focused efforts. Each group of activities having the same objective
must have one head and one plan. This ensures unity of action and co-ordination.
For example: If company is manufacturing motorcycles as well as cars. Then it
should have two separate divisions for both of them. Each division should have its own in
charge.

vi) Subordination of Individual interest to General interest

The interest of an oranisation should take priority over the interests of any one
individual employee according to Fayol. Every worker has some individual interest for
working in a company. The company has got its own objectives.
For example: The company would want to get maximum output from its employees at
a competitive cost (salary) on the other hand, an employee may want to get maximum salary
while working the least. In another situation an individual employee may demand some
concession, which is not admissible to any other employee like working for less time.
vii) Remuneration of Employees
The overall pay and compensation should be fair to both employees and the
organisation. The employees should be paid fair wages, which should give them at least a
reasonable standard of living. At the same time, it should be within the paying capacity of the
company. In other words, remuneration should be just and equitable. This will ensure
congenial atmosphere and good relation between works and management.
viii) Centralisation and Decentralisation
Te concentration of decision-making authority is called centralization. Whereas its
dispense among more than one person is known as decentralisation. According to Fayol,
“There is a need to balance subordinate involvement through decentralization with
managers/’ retention of final authority through centralization will depend upon the
circumstances in which the company is working. In general, large organisations have more
decentralisation than small organisations.

ix) Scalar Chain

An organisation consists of superiors and subordinates. The formal lines of authority
from highest to lowest ranks are known as scalar chain. According to Fayol, “Organisations
should have a chain of authority and communication that runs from top to bottom and should
be followed by managers and subordinates.
Let us consider a situation where there is one head ‘A’ who has two lines of authority
under her/him. One line consists of B – C – D – E – F.
Another line of authority under A is L – M – N – O – P. If E has to communication
with ‘D’ who is at the same level of authority then she/ he has to traverse the route E – D – C
– B – A – L – M – N – O. This is due to the principle of scalar chain followed in this
situation.

FAYOL’S SCALAR CHAIN

According to Fayol, this chain should not be violated in the normal course of formal
communication. However, if there is an emergency then E can directly contact ‘o’ through
Gang Plank as shown in the diagram. This a shorter route and has been provided so that
communication is not delayed.
x) Order
According to Fayol, “People and materials must be in suitable places at appropriate
time for maximum efficiency.
If there is a fixed place for everything and it is present there, then there will be no
hindrance in the activities of business / factory. This will lead to increased productivity and
efficiency.

xi) Equity
Good sense and experience are needed to ensure fairness to all employees. Who
should be treated as fairly as possible.” According to Fayol. This principle emphasises
kindliness and justice in the behaviour of managers towards workers. This will ensure loyalty
and devotion.
There should be no discrimination against anyone on account of sex, religion,
language, caste, belief or nationality etc.,

xii) Stability of personnel

“Employee turnover should be minimized to maintain organizational efficiency”,
according to Fayol Personal should be selected and appointed after due and rigorous
procedure. Once selected they should be kept at their post/ position for a minimum fixed
tenure. They should have stability of tenure. They should be given reasonable time to show
results. Recruitment. Selection and training cost will be nigh. So stability in tenure of
personnel is good for the business.

xiii) Initiative
Workers should be encouraged to develop and carry out their plans for improvements
according to Fayol, Initiative means taking the first step with self – motivation. It is thinking
out and executing the plan. It isone of the traits of an intelligent person Initiative should be
encourage.

xiv) Spirit De corps

Management should promote a team spirit of unity and harmony among employees,
according to Fayol. Management should promote teamwork especially in large organisations
because otherwise objectives would be difficult to realize. It will also result in a loss of
coordination.
 A manager should replace ‘I’ with ‘we’ in all his conversations with workers to
foster team spirit.
From the foregoing discussion it is clear that Fayol’s 14 principles of management are
widely applicable to managerial problems and have cast profound impact on management
thinking today.

**********
 CHAPTER- 3 BUSINESS ENVIRONMENT
Meaning of Business Environment:
Business environment refers to sum total of all individuals, other forces and institutions
outside the control of the business organization but affects the activities of the business
organization and the profitability of the business.
• Forces are economic, social, political, technological, and legal.
• Institutions and individuals are suppliers, customers, competitors, government etc
It includes all those constraints and forces external to a business within which it
operates. therefore,
• The firm must be aware of these external forces and institutions.
• The firm must keep in mind these forces, individuals, and institutions so that the
organizational objectives are achieved.
One of the authors has put that,” Just take the universe and subtract from the subset that
represents the organization and the remainder is environment””.
Features of Business Environment
1. Totality of external forces: Business environment is the sum total of all the
forces/factors external to a business firm. All these factors and forces are aggregative in
nature.
2. Specific and general forces: Business environment includes both specific and
general forces. Specific forces include investors, competitors, customers etc. who
influence business firms directly while general forces include social, political, economic,
legal and technological conditions which affects all business firms and also individual firms
indirectly.
3. Inter-relatedness: All the forces/factors of a business environment are closely
interrelated. For example, increased awareness of health care has raised the demand for
organic food and other health products. New health products and services have, in turn,
changed people`s life style.
4. Dynamic: Business environment is dynamic in nature which keeps on changing with
the change in technology, consumer’s fashion and tastes, shifts in consumer taste, or entry of
new competition in the market.
5. Uncertainty: Business environment is uncertain as it is difficult to predict the future
environmental changes and their impact with full accuracy. Especially in the case of
information technology and fashion industries.
6. Complexity: Since business environment consists of numerous inter related and dynamic
conditions or forces which arise from different sources. It becomes difficult to comprehend at
once what exactly constitutes a given environment. Business environment is complex-
phenomenon which is easy to understand in parts separately but it is difficult to understand in
totality. For example: It may be difficult to know the extent of relative impact of their social,
economic, political, technological or legal factors on change in demand of product in the
market.
7. Relativity: Business environment is a relative concept whose impact differs from
country to country, region to region and firm to firm. For example, Political condition in
USA is different from that of China or India or Russia etc. Similarly demand for sarees may
be fairly high in India where as it may be almost non-existent in France.

IMPORTANCE OF BUSINESS ENVIRONMENT

1. Identification of opportunities to get first mover advantage: Opportunity refers
to the positive external trends or changes that will help a firm to improve the
performance. Understanding of business environment helps an organization in
identifying advantageous opportunities and getting their benefits prior to competitors,
thus, the organization gets the benefit of being a pioneer.

2. It helps the firms in Identification of threats and gives early warning

signals: Threats refers to the external environment, trends and changes that affects
firm’s performance. Besides opportunities environment is the source of threat. Correct
knowledge of business environment helps an organization to identify those threats on
time otherwise which may adversely affect its operations. Hence understanding business
environment serves as a source of early warning so that management can take measures
to avoid those threats.
3. It helps in Tapping useful resources: Business environment makes available various
resources such as capital, labour, machines, raw material etc. to a business firm. In order
to know the availability of resources and making them available on time at economical
price, knowledge of business environment is necessary.
Business organisations decides to provide these resources with their own expectations to get
something from the enterprise. The business organisation supplies the environment with it’s
output such as goods and services for customers, payment of taxes to the government, return
on investment to investors and so on. This can be done better by understanding what the
environment has to offer.
4. It helps in Coping with Rapid changes: Today’s business environment is getting
increasingly dynamic where changes are taking place at a fast rate. It is not the fact of change
itself that is so important as the pace of change. Turbulent market conditions, less brand
loyalty, divisions and sub divisions (fragmentation) of markets, more demanding customers,
rapid changes in technology, intense global competition are just a few of the factors used to
describe today’s business environment. Continuous study of
business environment helps in knowing the changes which are taking place and thus
they can be faced effectively.
5. Assistance in planning and policy formulation: Business environment is a source
of business opportunities and threats. Understanding and analysis of business
environment helps an organization in planning &policy formulation. For instance, entry
of a new competitor may make an enterprise to think fresh idea to deal with the
situation.
6. Helps in Improving performance: Many studies reveal that the future of an
enterprise is closely bound up with what is happening in the environment. Correct
analysis and continuous monitoring of business environment helps an organization in
adopting suitable business practices which not only improves its present performance but
also continues to succeed in the market for longer period.

Economic Environment in India

As a part of economic reforms, the Government of India announced New Economic
Policy in July 1991 for taking out the country out of economic difficulty and speeding up
the development of the country.
Main features of New Industrial Policy, 1991 are as follows:
1. Only six industries were kept under licensing scheme.
2. The role of public sector was limited only to four industries.
3. Disinvestment was carried out in many public sector enterprises.
4. Foreign capital/investment policy was liberalized and in many sectors100% direct
foreign investment was allowed.
5. Automatic permission was given for signing technology agreements with foreign
companies.
6. Foreign investment promotion board (FIPB) was setup to promote & bring foreign
investment in India.
7. Various benefits were offered to small scale industries.

The three main strategies adopted for the above may be defined as follows:
1. Globalization: It refers to integration of the various economies of the world
leading towards the emergence of the world leading towards the emergence of a
cohesive global economy.
In other words, Integrating the economy of a country with the economies of other countries
to facilitate free flow of trade, capital, persons and technology across borders. It
leads to the emergence of a cohesive global economy.
• Till 1991, the Government of India had followed a policy of strictly regulating
imports in value and volume of terms. These regulations were with respect to (a)
licensing of imports, (b) tariff restrictions and (c) quantitative restrictions.
• New Industrial Policy 1991 advocated rapid advancement in technology and directed trade
liberalization towards: a. Import Liberalization b. Export promotion towards
rationalization of the tariff structure.
2. Liberalization: The economic reform aimed at liberalizing the Indian business and
industry from all unnecessary control and restrictions. This signalized the end of the
license-permit quota Raj.
Liberalising aimed at the Indian business and industry from all unnecessary controls
and restrictions. That is relaxing rules and regulations which restrict the growth of the
private sector and allowing the private sector to take part in economic activities that
were earlier reserved for the government sector.
The steps taken for this were:
a. Abolishing licensing b. Freedom in deciding the scale of operations
c. Removal of restrictions on movement of goods and services.
d. Freedom in fixing prices
e. Reduction in tax rates and unnecessary controls
f. Simplifying procedures for import and exports
g. Making it easy to attract foreign capital.
3. Privatization: Refers to the reduction of the role of the public sector in the economy
of a country and giving greater role to the private sector in the nation building process.
In this, the government planned for dis-investments of the public sector and decided to
refer the loss making and sick industries to the Board of Industrial and Financial
reconstruction.
Transfer of ownership and control from the private to the public sector (disinvestment)
can be done by:
a. Sale of all/some asses of the public sector enterprises.
b. Leasing of public enterprises to the private sector.
c. Transfer of management of the public enterprise to the private sector.
• To achieve privatization in India, the government redefined the role of the public
sector and –
a. Adopted a policy of planned disinvestment of the public sector
b. Refer the loss making and sick units to the Board of Industrial and Financial
Reconstruction (BIFR)
DIMENSIONS/COMPONENTS OF BUSINESS ENVIRONMENT
1. Economic Environment: It has immediate and direct economic impact on a business.
Rate of interest, inflation rate, change in the income of people, the value of money, stock
market condition, disposable income of people, monetary policy, price level etc. are
some economic factors which could affect business firms. Economic environment may
offer opportunities to a firm or it may put constraints. For example, change in the rate of
interest on short-term and long-term loan affect the demand for products and services
of construction companies and automobile manufacturers. Similarly, a rise in the
disposable income of people due to increase in the gross domestic product of a country
creates increasing demand for products. Components of economic environment are
• Existing structure of the economy in terms of relative role of private and public
sector.
• The rate of growth of GNP and per capita at current and constant prices.
• Rate of saving and investment.
• Volume of imports and exports of different items.
• Balance of payment and changes in foreign exchange reserves.
• Money supply and public debt.
• Agricultural and industrial production trends etc.,
2. Social Environment: It includes various social forces such as customs, beliefs,
literacy rate, educational levels, lifestyle, values, life expectancy, birth and death
rate etc. Changes in social environment affect an organization in the long run.
Example: Now a days people are paying more attention towards their health, as a
result of which demand for mineral water, diet products, health drinks etc. has
increased while demand of tobacco, fatty food products has decreased.
Traditions define social practices that have been followed for last decades or
centuries. For example, celebrations like Diwali, Christmas, Eid, Ganesha festival,
etc., in India have provided financial opportunities to Greeting care companies,
sweat manufacturers etc.,
Components of social environment are
* Attitudes towards product innovations, lifestyles and consumer preferences.
* Concern with quality of life.
* Life expectancy
* Expectations from the workforce
* Birth and death rates.
* Population shifts.
* Consumption habits.
* Composition of family etc.,
3. Technological Environment: It provides new and advanced ways/techniques of
production. A businessman must closely monitor the technological changes
taking place in the industry as it helps in facing competition, increase production
and improving quality of the product. For Example, Digital watches in place of
traditional watches, artificial fabrics in place of traditional cotton and silk fabrics,
booking of railway tickets on internet, shifts in demand from vacuum tubes to transistors,
from propeller aeroplane to jets, from steam locomotives to diesel and electric engines, from
fountain pens to ball point, from type writers to computer-based word processors etc. The
recent technologies advances in computers and electronics, they have modified the ways in
which companies advertise their goods and services.
products.
4. Political Environment: Changes in political situation also affect business
organizations. Political stability builds confidence among business community
while political instability and bad law & order situation may bring uncertainty in
business activities. Ideology of the political party, attitude of government towards
business, type of government-single party or coalition government, constitution
of the country, extent of government intervention in the business etc., affects the
business organization. For Example: Bangalore and Hyderabad have become the
most popular locations for IT due to supportive political climate.
Components of political environment are
• Prevailing political system
• The degree of politicization of business and economic issues.
• The political morality
• Political institutions like the government and allied agencies.
• The extent and nature of government intervention in business.
• The Nature of relationship of our country with foreign countries. Etc.,
5. Legal Environment: It constitutes the laws and legislations passed by the
Government, administrative orders, court judgements, decisions of various commissions
and agencies. Businessmen have to act according to various legislations and their
knowledge is very necessary. Example: Advertisement of Alcoholic products is prohibited
and it is compulsory to give statutory warning on advertisement of cigarettes.

MAJOR STEPS IN ECONOMIC REFORMS

1. New Industrial Policy – Under this the industries have been freed to a large extend
from licenses and other controls. Efforts have been made to encourage foreign
investment.
2. New Trade Policy – The Foreign trade has been freed from the unnecessary control.
The age-old restrictions have been eliminated.
3. Fiscal Reforms. The greatest problem confronting the Indian Govt. is excessive fiscal
deficit.
(a) Fiscal Deficit – It means country is spending more than its income
(b) Gross Domestic Product (GDP) – It is the sum total of the financial value of all
goods & services produced in a year in a country.
4. Monetary Reform – It is a sort of control policy through which the central bank
controls the supply of money with a view to achieving objectives of general economic
policy.
5. Capital Market Reforms- The Govt. has taken the following steps for the
development of this market:
(i) SEBI has been established.
(ii) The restriction in respect of interest on debentures has been lifted.
(iii) Private Sector has been permitted to establish Mutual Fund.
6. Dismantling Price control – The govt. has taken steps to remove price control in
many products especially in fertilizers, iron and steel, petroleum products. Restrictions on
the import of these things have also been removed.

IMPACT/ CHALLENGES OF GOVERNMENT POLICY CHANGES ON BUSINESS

AND INDUSTRY
1. Increasing Competition: As a result of changes in the rules of industrial licensing
and entry of foreign firms to Indian market is increased the level of competition for
Indian firms especially in service industries like telecommunications, airlines, banking,
insurance etc., which were earlier in the public sector.
2. More Demanding Customers: Now, customers are more aware and they keep
maximum information of the market as the result of which market is now customer
oriented. Hence, products are produced keeping in mind the demands of the customers.
Increased competition also gives customers wider choice in the purchase of better
quality goods and services.
3. Rapid Changing Technological Environment: Increased competition forces the
firms to develop new ways to survive in the market. New technological advancement
has changed/improved the production process as a result of which maximum
production is possible at minimum cost but it leads to tough challenges in front of small
firms.
4. Necessity for Change: In a regulated market environment of pre-1991 era, the firms
could have relatively stable policies and practices. But After New Industrial Policy of
1991, the market forces (demand & supply) are changing at a very fast rate. Change in
the various components of business environment have made it necessary for the business
firms to continuously modify their policies & operations from time to time.
5. Need for Developing Human Resources: The changing market conditions of today
requires people with higher competence and greater commitment, hence there is a
need for developing human resources which could increase organizational effectiveness
and efficiency.
6. Market Orientation: Earlier selling concept was famous in the market means
producers used to produce first and go to market for sale. But now the marketing
concept, means today firms produce those goods & services which are required by the
customers. Marketing research, educational advertising, after sales services have
become more significant.
7. Loss of budgetary Support to Public Sector: The budgetary support given by the
central government to the public sector is reducing over the years. Thus, the public sectors
have realized that they have to be more efficient and generate their own resources to survive
and grow.

***************************************************************

CHAPTER 4 - PLANNING

Sl.
Topics
No.
Introduction
Concept
1. Importance of Planning
2. Features of Planning
3. Limitations of Planning
4. Planning Process
5. Types of Plans
CONCEPT
Planning is deciding in advance what to do and how to do it. It is one of the best
managerial functions. Planning is closely connected with creativity and innovation. Planning
seeks to bridge the gap between where we are and where we want to go.
Planning provides a rational approach for achieving predetermined objectives. All
members, therefore need to work towards achieving organizational goals. Planning means
setting objectives and targets and formulating an action plan to achieve tem. The plan that is
developed has to have a given time frame but time is a limited resource.

Definition
Planning is defined as setting objectives for a given time period, formulating various
course of action to achieve them and then selecting the best possible alternative from among
the various courses of action available.

Meaning
Planning as setting objectives for a given time period, formulating various course s of
action to achieve them and then selecting the best possible alternative from among the
various courses of action available.
Planning is certainly important as it tells us where to go, it provides direction and
reduces the risk of uncertainty by preparing forecasts.

Importance of Planning
Sl.
Importance
No.
i) Planning provides direction
ii) Planning reduces the risks of uncertainty
iii) Planning reduces overlapping and wasteful activities
iv) Planning promotes innovative ideas
v) Planning facilitates decision making
vi) Planning establishes standards for controlling
i) Planning provides direction
By stating in advance how work is to be done planning provides direction for action.
Planning ensures that the goals or objectives are clearly stated so that they act as a guide for
deciding what action should be taken and in which direction.
Departments and individuals in the organisationo are able to work in coordination, if
there was no planning, employees would be working in different directions and the
organisation would not be able to achieve its desired goals.

ii) Planning reduces the risks of uncertainty

By deciding in advance, the tasks to be performed, planning shows the way to deal
with changes and uncertain events changes or events cannot be eliminated but they can be
anticipated and managerial responses to them can be developed.

iii) Planning reduces overlapping and wasteful activities

Planning serves as the basis of coordinating the activities and efforts of different
divisions, departments and individuals, planning helps in avoiding infusion and
misunderstanding, since planning ensures clarity in thought and action, work is carried on
smoothly without interruptions useless and redundant activities are minimised or eliminated.
It is easy to detect inefficiencies and take corrective measures to dial with them.

iv) Planning promotes innovative ideas

Since planning is the first function of management, new ideas can take the shape of
concrete plans. It is the most challenging activity for the management as it guides all future
actions leading to growth and prosperity of the business.

v) Planning facilities decision making

(Planning helps the manger to look into the future)
The manager has to evaluate each alternative and select the most viable proposition.
Planning involves setting targets and predicting future conditions, thus helin the taking
rational decisions.

vi) Planning establishes standards for controlling

 We can see that planning is a prerequisite for controlling. If there were no goals and
standards, then finding durations which are a part of controlling would not be possible. The
nature of corrective action required depends upon the extent of deviations from the standard.
Therefore, planning provides the basis of control.

Features of Planning
Sl.
Importance
No.
1 Planning focuses on achieving objectives
2 Planning is a primary function of management
3 Planning is pervasive
4 Planning is continuous
5 Planning is futuristic
6 Planning involves decision making
7 Planning is a mental exercise

The above stated features of planning can be explained as below:

i) Planning focuses on achieving objectives

Organisations 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. Thus, planning is
purposeful.

ii) Planning involves is a primary function of management

Planning lays down the base for other functions within the framework of the plans
drawn. Thus, planning precedes other functions.

iii) Planning is pervasive

Planning is required at all levels of management as well as in all departments of the
organisation. It is not on exclusive function of top management or of only particular
department. But the scope of planning differs at afferent departments.

iv) Planning is continuous

 Plans are prepared for a specific period of time, may be a month, a quarter or a year.
At the end of the 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.

v) 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, analysing it and predicting it. Planning is, therefore regarded
as a forward-looking function based on forecasting.

vi) Planning involves decision making.

Planning essentially involves choice from among the 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. The need for planning arises only when alternatives are
available.

vii) Planning is a mental exercise

Planning requires application of the mind involving foresight, intelligent imagination
and sound judgment. If is basically an intellectual activity of thinking rather than doing,
because planning determines the action to be taken.

Limitations of Planning
1 Planning leads to rigidity
2 Planning may not work in a dynamic environment
3 Planning reduces creativity
4 Planning involves huge costs
5 Planning is a time – consuming process
6 Planning does not guarantee success

i) Planning leads to rigidity

 In an organisation a well-defined plan is drawn up with specific goals to be achieved
within a specific time frame. These plans then decide the future course of action and
managers may not be in a position to change it this kind of rigidity in plans may create
difficulty.

ii) Planning may not work in a dynamic environment

Competition in the market can also upset financial plans, sales targets may have to be
revised and accordingly, cash budges and also need to be modified since they are based on
sales figures.

iii) Planning reduces creativity

Planning is an activity which is done by the top management, usually the rest of the
members just implement these plans. As a consequence, middle management, middle
management and other decision makers are neither allowed to deviate from plans nor are they
permitted to act on their own. Thus, planning is a way reduced creativity since people tend to
think along the same lines as others. There is nothing new and innovative.

iv) Planning involves huge costs

When plans are drawn up huge costs are involved in their formulation these may be in
terms of time and money. Ex: Detailed plans require scientific calculations to ascertain facts
and figures. There are a number of incidental costs as well, like expenses on boardroom
meetings, discussions with preliminary investigations to find out the viability of the plan.

v) Planning is a time-consuming process

Sometimes plans to be drawn up take so much of time that there is not much time left
for their implementation.

vi) Planning does not guarantee success

The success of an enterprise is possible only when plans are properly drawn up and
implemented. Any plan needs to be translated into action or it becomes meaningless.

However, despite its limitations, planning is not a useless exercise. It is a tool to be

used with caution. It provides a base for analysing future courses of action. But it is not a
solution to all problems.
Planning Process
It is a process of decision making since planning is an activity there are certain logical
steps for every manager to follow.

i) Setting Objectives
The first and foremost step is setting objectives. Every Organisation must have certain
objectives, objectives may be set for the entire organisation objectives may be set for the
entire organisation and each department or unit within the organisation.
How all departments would contribute to the organizational goals is the plan that is to
be drawn up.
Department /units then need to set their own objectives within the broad framework of
the organisation’s philosophy. They must also understand now their actions contribute to
achieving it becomes easier to work towards the goal.

ii) Developing Premises

Planning is concerned with the future with the future which is uncertain and every
planner is using conjecture about what might happen if future. Therefore, the manager is
required to make certain assumption about the future. These assumptions are called premises.
The base material may be in the form of forecasts, existing plans or any past
information about policies.
Example: Forecasts can be made about the demand for a particular product, policy
change, interest rates, prices of capital goods, tax rates etc., Accurate forecasts, therefore
become essential for successful plans.

iii) Identifying alternative courses of action

Once objectives are set, assumptions are made. Then the next step would be to act
upon them. All the alternative courses of action should be identified. The course of action
which may be taken would be neither routine or innovative. Alternative should be generated
and thoroughly discussed amongst the numbers of the organisation.
iv) Evaluating alternative sources
The next step is to weight the pros and cons of each alternative. Each course will have
many variables which have to be weighed against each other the positive and negative aspects
of each proposal need to be evaluated in the light of the objective to be achieved. In
financial plans, the risk, return trade –off is very common. The riskier the investment the
higher the returns it is likely to give.
Alternatives are evaluated in the light of their feasibility and consequences.
v) Selecting an alternative
This is the real point of decision making. The best plan has to be adopted and
implemented. Most plans may not always be subjected to a mathematical analysis. In such
cases, subjectivity and the manager’s experience, judgment and at times, intuition play an
important part in selecting the most viable alternatives. The managers will have to apply
permutations and combinations and select the best possible course of action.
vi) Implementing the plan
This is the step where other managerial functions also come into the picture. The step
is concerned with putting the plan into action, ie., doing what is required. This step would
also involve organisation for labour and purchase of machinery.
vii) Follow-up action
To see whether plans are being implemented and activities are performed according to
schedule is also part of the planning process. Monitoring the plans is equally important to
ensure that objectives are achieved.
viii) Planning reduces creativity
Planning is an activity which is done by the top management, usually the rest of the
members just implement these plans. As a consequence, middle management, middle
management and other decision makers are neither allowed to deviate from plans nor are they
permitted to act on their own. Thus, planning is a way reduced creativity since people tend to
think along the same lines as others. There is nothing new and innovative types of plans.
Single – use plan
A single – use plan is developed for a one – time event or project such a course of
action is not likely to be repeated in future, ie., they are for non – recurring situations. The
duration of this plan may depend upon the type of the project. It may span a week or a month.
A project may sometimes be of only one day, such as, organising an event or a seminar or
conference. These plans include budgets, programmes and projects.
Standing plan
A standing plan is used for activities that occur regularly over a period of time. It is
designed to ensure that internal operations of an organisation run smoothly. Such a plan
greatly enhances efficiency in routine decision – making. It is usually developed once but is
modified from time to time to meet business needs or required. Standing plans include
policies, procedures, methods and rules.

Type of Plans
In order to accomplish the targets, the management of a business organsation chalks
but different types of plans. The important types of plans are explained below.

OBJECTIVES
STRATERGIES
POLICIES
PROCEDURES
RULES
PROGRAMME
BUGET
METHODS

1. Objectives
Objectives are the ends towards which the activities of an organisations are directed.
They are the deserved future goals that the management of an organisation would like to
reach. Thus, objectives are the goals of which an organisation wants to achieve by its
operations.
Objectives are set by the top management They define the future state of affairs which
the organisation strives to realize they lay down guidelines for the activities and serves as a
bench mark for measuring the performance of the organisation.
Usually, objectives are put in the form of written statement 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
organisations by employing the organisations resources efficiently and economically. It is a
comprehensive plan which acts as a guideline to handle specific problems or crises.
 Strategies are formulated by the top management.
i) Deterring of the long-term objectives
ii) Adopting a course of action to achieve the objectives.
iii) Allocating resources necessary to achieve the objectives
Examples of strategies
i) Strike while the iron is hot
ii) Divide and Rule
iii) Time is a great healer.

3. Policies
Policies are the general statements which serve as a guide to the decision making in
the organisation. They provide a frame work with in which the decision makers are expected
to act while taking decisions.
For example: an organisation may have purchase policy, pricing policy, recruitment
policy.

4. Procedures
Procedure are the plans prescribing the exact time sequence of the work to be done.
They provide details about series of steps to be followed in a regular order for accomplishing
any work.

Example:
i) Procedures for execution of the customer’s order for
ii) Procedure for the admission of student on a college.

5. Methods
The prescribed way or the manner of doing each planned task for the accomplishing
the objectives is known as method. It deals with each step of the procedure and specifies now
each step is to be performed. The method may differ from step to step. Selection of proper
method saves time, money and effort and increases the efficiency examples.
i) Training employees under on the job training method.
ii) Remunerating sales personal under commission method.
6. Rules
Every organisation like to operate in an orderly way. For this purpose it is necessary
for the business organisation to lay down certain rules. They are the specific statements
which prescribe the code of behavior to the people of an organisation and specifies what is to
be done and what is not to be done.
Rules are rigid
Example:
1) Wear identity cards compulsorily at the work place
2) No smoking
3) 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 specified period of time

Examples:
1) Programme for production of 10,000 tonnes of steel the month of December 2013.
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 turns for a specific period. For
example: a sales budget helps in forecasting the sale of a particular product during a
particular month.

A budget is expressed in numbers, it becomes very easy to compare the actual

performance with the estimated figures and corrective actions can be taken conquer
subsequently. Thus, Budget is also considered as a control device. But in many organisations
budget is considered as a fundamental planning instrument, as preparing budget involves
forecasting and estimating.

****

CHAPTER 5 - ORGANISING
“Organizing is the process of identifying and grouping the work to be performed by defining
and delegating responsibility and authority, and establishing relationships for the purpose of
enabling people to most effectively together in accomplishing objectives”, by Lowis Allen.

According to `Theo Heiman’, “organizing s the process of defining and grouping the
activities of the enterprise &establishing authority relationship among them”.

Organizing is essentially a important process which co-ordinates human efforts, assembles

resources and integrates both, so that it can be utilized for achieving specific objectives, It
initiates implementation of plans by classifying jobs & working relationships & effectively
using the resources for achievement of goals.

Steps in organizing:

Identification &Division of work

↓
Departmentalization
↓
Assignment of duties
↓
Establishing reporting relationships
1) Identification &division of work: The first process of organizing involves identifying
and dividing the work that has to be done in accordance with previously determined
activities, so that duplication can be avoided and the burden of work can be shared among the
employees.

2) Departmentalization: Once work has been divided into small and manageable activities
then those activities which are similar in nature are grouped together. Such sets facilitate
specialization. This grouping process is called departmentalization. Departments can be
created using several criteria as a basis. Eg: some of the most popularly used basis are
territory (north, south, east, and west) products- (clothes, cosmetics, appliances) and nature of
work (purchase, sales, production etc,)

3)Assignment of Duties: It is necessary to define the work of different job positions &
accordingly allocate work to various employees. Once departments have been formed, each
one of them is placed under the in charge of an individual. Jobs are allocated to the members
of each department in accordance to their competence. It is necessary to match the nature of
jobs and abilities of an individual. The work must be assigned to those who are best fitted to
perform it well.

4)Establishing reporting relationships: Merely allocating work is not enough. Each

individual is also known who he has to take orders from, to whom he is accountable. The
establishment of such clear relationships helps to create hierarchical structure & helps in
coordination among various departments.

Importance of organizing:

Organizing function provides the way for smooth functioning of an organization in the
dynamic business environment. It helps the organization to meet its goals. Following are
some of the points explains the significance of organizing:

1) Benefits of specialization: Organizing leads to a systematic allocation of jobs among the

work force (employees) . this reduces the workload as well as improves the productivity
because specific workers performing specific jobs on a regular basis. Representative
performance of a particular task helps the workers to gain experience in that area which lead
to specialization.

2) Clarity in working relationship: The establishment in working relationships clarifies

limits of communication & specifies who is to report to whom. This removes confusion &
problems in transfer of info & instruction. It helps in creating higher hierarchical order &
helps in fixation of responsibility & authority to an individual employee.

3) Optimum utilization of resources: The process of organizing leads to the proper usage
of all material, financial & human resources. The proper assignment of jobs avoids
overlapping of work& also makes possible the best use of resources. By avoiding duplicate of
work one can reduce the wastage of resources & efforts. This also prevents conclusion.

4)Adoption to change: The process of organizing allows the b/s organization to

accommodate changes in the b/s environment. It allows the organization structure to be
suitably modify & revise inter - relationship among the managerial levels. Hence helps in
smooth transformation of the organization to the changing environment. Hence gives a
chance for survival & growth.
5)Effective administration: Organizing provides clear description of jobs& related duties.
This helps to avoid confusion & duplication. Clarity in working relationships helps in proper
execution of work. Thereby management of the organization becomes easy & also effective
administration as possible.

6) Development of personnel: Organizing stimulates creativity among the managers.

Effective delegation helps the managers to reduce their work load by assigning routine jobs to
their sub-ordinates, which helps the managers to concentrate on developing new methods &
new ways of performing tasks. It gives them the time to explore themselves for their growth
& gives an opportunity to strengthen their position. Hence leads to development of personal.

7) Expansion& Growth: Organizing helps in growth & diversification of an enterprise by

enabling it to deviate from existing practices & accept new challenges. It allows the business
organization to add more job positions. New geographical territories can also be added by
this organizing function.

Organizing structure: An organizing structure provides the framework which enables the
organization to function as integrated unit by regulating & coordinating the responsibilities of
individual and department. It can also be defined as the framework within which managerial
& operational level tasks are performed. It specifies the relationship between the people,
work & resources. It allows coordination among human, physical & financial resources and
helps in accomplishment of goals or aims.

Types of organizational structure: It can be classified into two types

Functional Structure and Divisional Structure:

I) Functional structure- Grouping of jobs of similar nature under the same department
functional structure. It creates all the departmental report to a coordinating head. Eg-In a
manufacturing concern division of work is based on various such as purchase, marketing,
production, finance and human resource, etc.

Chart showing functional structure

Managing Director
Human Resource Research and
Department Development
Department

Advantages of Functional structure:

1.A functional structure leads to occupational specialization. This promotes efficiency in

utilizing the manpower because similar tasks are repeatedly performed by employees.

2.It promotes control & co-ordination within a department because of similarity in task being
performed.

3.It helps in improving managerial & operation efficiency& results in increased profit.

4.This reduces duplication of work which results in the economy of man-power & reduces
the cost.

5.It stimulates training of employees by repeated jobs& focus only on limited range of skills.
6.It ensures that different functions get due attention.

Disadvantages of functional structure:

1.A functional structure gives less importance on organization as functional heads gives
priority on their departments.

2.It may lead to problem of co-ordination as information has to be exchanged across the
departments which are not doing the same function.

3.A conflict of interest may arise when the interest of two or more departments aren’t
compatible. Eg: Sales dept insisting on customer friendly design may cause difficulties in
production.

4.Functional heads do not get training for top positions because their unable to gather
experience in different areas.,
5.It may lead to inflexibility as people with same skills &knowledge base may develop a
narrow perspective.

Suitability: It is most suitable when the size of organization is large (number of activities) &
has a &operations which requires high degree of specialization.

2) Divisional Structure

The organization structure comprises of separate business units or divisions. Each unit has a
divisional manager responsible for performances who has authority over the unit. Generally,
manpower is grouped on the basis of different products manufactured. Each division is
multifunctional because within each division functions like production, marketing, finance,
purchase, etc. are performed together to achieve common goal. In other words, within each
division the functional structure to be adopted. Functions may vary across divisions in
accordance with particular product line. When it is large and have a greater number of
branches and productivity.

Divisional Structure of an Organization

Maintaining director
 Skincare
Cosmetics

Purchase Purchase
Marketing Marketing
Human Human
resources resources
Finance Finance
Research Research
and and
development development

Advantages of Functional structure:

1. Product specialization helps in the development of different skills in a divisional head. This
helps in by preparing him for higher positions.

2. Divisional heads are accountable for profits, directly as revenues &cost related to different
departments can be easily identified. This provides proper basis for performance
measurement &also helps in fixation of responsibility.

3. It promotes flexibility& infinitive because each division function is an independent unit. It

leads to faster decision making.

4. It facilitates expansion & growth as new divisions can added without interruption and the
existing operations without disturbing other departments.

Disadvantages of Functional structure:

1. Conflict may arise among different divisions regarding allocations of funds

2. It may lead to increase in cost, since there may be duplication of activities among the
products.
3. It provides managers with the authority to supervise all activities related to a particular
division, hence he may gain power & exercise independence &may ignore organization
interest.

Suitability: 1. It is suitable in an organization which involves production of different

lines of products. 2. It is suitable for the organization which needs product
specialization.

Difference between Functional and Divisional structure:

Basis Functional structure Divisional structure

Formation It is based on functions. It is based on product lines.
It is supported by functions
Responsibility Difficult to fix on a department. Easy to fix responsibility for
performance.
Managerial Difficult as each functional Easier, autonomy as well as
development managers has to report to the top the chance to perform
management. multiple functions helps in
managerial development.
Specialization Functional specialization. Product specialization.
Cost Functions are not duplicated Duplication of resources in
hence economical. various departments, hence
costly.
Co-ordination Difficult for a multi-product Easy, because all functions
company. related to a particular
product are integrated in one
department.

Formal and informal organization

Formal organization: It refers to a organization structure which is designed by the

management to accomplish a particular task. It specifies clearly the boundaries of
authority and responsibility. There is systematic co-ordination among the various
activities to achieve organizational goals.

In formal organization, employees are guided by rules and procedures for smooth
functioning of the organization. Job description is also given to employees. The
formal organization structure can be functional or divisional.
Definition: According to Louis Allen, “The formal organization is the system of
well-defined jobs each bearing out definite measure of authority, responsibility and
accountability”.

Features of Formal organization:

1. It specifies the relationship among various job positions and the nature of inter
relationships. This clarifies who has to report to whom.

2. It is a means to achieve the objectives specified in the plans, as it lays down rules
and procedures for achievement of their goals.

3. Efforts of various departments are coordinated, interlinked and integrated through

the formal organization.

4. It is deliberately designed by the top management to facilitate the smooth

functioning of the organization.

5. It places more emphasis on work to be performed than interpersonal relationships

among the employees.

Advantages of Formal Organization

1. It is easier to fix responsibility because mutual relationships are clearly

defined.

2. There is no misunderstanding in the role of each member as their duties are

specified. This helps in avoiding duplication of efforts.

3. Unity of command is maintained through established chain of command.

4. It helps in accomplishing the goals by providing frame work for the operations
to be performed and also it ensures that each employee understands his role to
play.

5. It provides stability to the organization. This is because behaviour of

employees can be predicted, since there are specific rules to guide them.

Limitations:
 1. The formal communication may lead to procedural delays as the
established chain of command has to be followed which increased the time
taken for decision making.

2. Poor organization practices may not provide adequate re-cognition to

creative talent, since it does not allow any deviations from rigidly laid
down policies.

3. It is difficult to understand all human relationships in the organistion as it

emphasis more on the structure and work. Hence, the formal organization
does not provide a complete picture of how and organization works.

Informal Organisation: Interaction among people at work gives rise to a

‘network of social relationships among employees’ called the informal
organization. It emerges within the formal organization when people interact
beyond their officially defined roles. Based on their interaction and friendship
they tend to form groups based on their interests and tastes. It has no written
rules to be followed.

Definition: According to Chester Barnard “Am informal organisation is an

aggregate of interpersonal relationships without any conscious purpose but
which may contribute to joint results”.

Features of Informal organization:

1. It originates from within the formal organization as a result of personal

interaction as a result of personal interaction among employees.

2. The standards of behaviour evolve from group norms rather than officially laid
down rules and regulations.

3. Independent channels of communication without specified direction of flow of

information are developed by group members.

4. It emerges spontaneously and is not deliberately created by the management.

5. It has no definite structure of form because it is a complex network of social

relationships among members.

Advantages of Informal Organisation:

1. Prescribed lines of communication are not followed. Thus, the informal
organization leads to faster spread of information as well quick feedback.

2. It helps to fulfil the social needs of the members and allows them to find
likeminded people. This enhances their job satisfaction.

3. It contributes towards fulfilment of organizational objectives by

compensating for inadequacies in the formal organization. For eg.,
employees’ reaction towards plans and policies can be tested through
informal organization.

Limitations of Informal Organisation:

1. When an informal organization spreads rumours, it becomes a

destructive force and goes against the interest of the formal
organization.

2. The management may not be successful in implementing changes it the

informal organization opposes them. Such resistance to change may
delay or restrict growth.

3. It pressurizes members to confirm to group expectations. This can be

harmful to the organization if the norms set by the group are against
organizational interests.

Differences between Formal and Informal Organisation

 Basis Formal Organisation Informal
Organisation
Meaning Structure of authority Network of social
relationships created by relationships arising
the management. out of interaction
among employees.
Origin Arises as a result of Arises as a result of
company rules and social interaction.
policies.
Authority Arises by virtue of Arises out of personal
position in qualities.
management.
Behaviour It is directed by rules. There is no set
behavior pattern.
Flow of Communication takes Flow of
communication place through the scalar communication is not
chain. through a planned
route. It can take place
in any direction.
Nature It is rigid. It is flexible.
Leadership Managers are leaders. Leaders may or may
not be managers. They
are chosen by the
group.

Delegation: Delegation refers to the downward transfer of authority from a

superior to a subordinate. It is essential for the smooth and efficient
functioning of an organization because it enables a manger to use his time on
high priority activities. It also satisfies subordinate’s need for recognition and
provides them with opportunities to develop and exercise initiative.

In organization, the authorities determine superior subordinate relationship,

under which a superior gives direction and subordinates perform their
functions according to the guidelines of the superior.

According to Theo Haimann, “Delegation of authority merely means the

granting of authority to subordinates to operate within prescribed limits”.

Elements of Delegation
1. Authority
2. Responsibility
3. Accountability
1. Authority: It is the right of an individual to command his subordinates
and take action within the scope of his position. It arises from the
established scalar chain which links the various job positions and
levels of an organization. It also refers to the right to take decisions
inherent in a managerial position to tell people what to do and expect
them to do it.

Authority flows from tope level to bottom level i.e. the superior has the
authority over the subordinates wherein superior communicates his
decision to the subordinates expecting them to perform their job. It
always increases as we are going n higher positions. It is restricted by
laws, rules and regulations.

2. Responsibility: It is the obligation of a subordinate to properly

perform assigned duty. It arises from a superior-subordinate
relationship because the subordinate in bound to perform the duty
assigned to him by his superior. It always flows upwards i.e., a
subordinate will always be responsible to his superior.

When an employee is given responsibility for a job, he must also be

given the degree of authority necessary to carry it out. If authority
granted is more than responsibility, it may lead to misuse of authority
and if responsibility assigned is more than authority it may may make a
person ineffective.

3. Accountability: It implies being answerable for the final outcome.

Once authority has been delegated and responsibility is accepted, one
cannot deny accountability. It cannot be delegated and flows upwards
i.e., a subordinate will be accountable to a superior for satisfactory
performance to ensure the proper discharge of duties by his
subordinates. The subordinate will be expected to explain the
consequences of his actions or omissions.
 Differences between authority responsibility and accountability
Basis Authority Responsibility Accouontability
Meaning Right to Obligation to perform an Answerability for outcome
command assigned task of the assigned task
Delegation Can be delegated Cannot be entirely Cannot be delegated at all
delegated
Origin Arises from Arises from delegated Arises from delegated
formal position authority responsibility
Flow Flows downward Flows upward from Flows upward from
from superior to subordinate to superior subordinate to superior
subordinate

Importance of Delegation:
1. Effective management: By empowering the employees, the managers are able
to function more effectively as they get more time to concentrate on important
matters. It gives superiors freedom from doing routine work and provides
them opportunity to excel in new areas.

2. Employee development: As a result of delegation, employees get more

opportunities to utilize their talent and abilities. It allows them to develop new
skills which will enable them to perform complex tasks and assume and
accept more responsibilities which will improve their career prospects. It also
makes them better leaders and decision makers.

3. Motivation of employees: Delegation helps in developing talents of

employees and also has psychological benefits. When a superior entrusts
subordinate with task, is not merely the sharing or work but involves trust on
superior’s part and commitment of the part of subordinate. It builds
employee’s self-esteem and confidence. He feels encouraged and tries to
improve over his performance.

4. Facilitation of growth: Delegation helps in the expansion of an organization

by providing a ready workforce to take up leading positions in new ventures.
Trained and experienced employees are able to make significant contributions
when an organization launches new product or new project.
5. Basis of management hierarchy: Delegation of authority establishes superior-
subordinate relationships, which are the basis of hierarchy of management. It
is the degree and flow of authority determines who has to report to whom.
The extent of delegation of authority also decides the power that each job
position enjoys in the organization.

6. Better co-ordination: The elements of delegation namely authority,

responsibility and accountability help to define the powers, duties and
answerability related to the various positions in an organization. This helps in
avoiding overlapping of duties and duplication of efforts as it gives a clear
picture of work being done. Such clarity in reporting relationships helps in
maintaining effective co-ordination among all departments, levels and
functions of management.

Centralisation and Decentralisation:

Centralisation refers to the power of decision making at the top-level
management or with one or few people in the organization. Lower-level
management has to follow it and they don’t have any decision-making power.

Decentralisation refers to dispersal of decision-making power or authority to

lower levels of management. it implies reservation of some authority
regarding planning, organizing, directing and controlling is retained at the top
level of management and other functions are delegated to lower levels of
management.

Definition of decentralization: According to Henry Fayol ,“ Everything

which goes to increase the importance of a subordinate’s role is
decentralisation, everything that goes to reduce it is centralization”.

Importance of Decentralisation:
1. Develops initiative among subordinates: Decentralisation helps to
promote self-reliance and confidence among subordinates. This is because
subordinates are given freedom to take their own decision and they learn
 to depend on their own judgment. They also learn to face challenges and
find solutions to problems. This helps to identify those executives who
have necessary potential to become leaders in the organization.

2. Develops managerial talent for the future: Training and experience

both are important to equip subordinates to rise in the organization.
Decentralisation gives them a chance to prove their abilities and creates a
reservoir of qualified and talented people to take more challenging
positions through promotions. It also helps in identifying people who may
not be successful in assuming greater responsibility.

3. Quick decision making: In centralized organization, every decision is

taken up by the top management the flow of information is slow as it has
to pass through many levels. Response also takes time. But in
decentralized organization, decisions are taken at levels which are nearest
to the points of action and no requirement for approval from many levels,
the process is much faster.

4. Relief to top management: Decentralisation reduces the direct

supervision by the superior over the activities of the subordinate because
they are given freedom to act and decide within the limits set by the
superior. So top management can devote their time on important policy
decisions rather than operational decisions.

5. Facilitates Growth: Decentralisation gives more autonomy to lower level

of management. This allows them to function in a manner best suited to
their department and also creates competition among the departments.
Consequently, each department will do the best and thus facilitates growth
of the organization.

6. Better control: Decentralisation makes it possible to evaluate

performance at each level and departments can be individually held
accountable for their results. The contribution of the department to the
overall objectives can be ascertained. Feedback from all levels helps to
analyse variances and improve operations. Hence better control over
departments and organization can be exercised.
 Differences between Delegation and Decentralisation
Basis Delegation Decentralisation
Nature It is a compulsory act It is an optional policy
because no individual decision. It is done at the
can perform all tasks on discretion of the top
his own. management.
Freedom More control by Less control over executives
of action superiors hence less hence greater freedom of
freedom to take own action.
decisions.
Status It is a process followed It is the result of the policy
to share tasks. decision of the top
management.
Scope It has narrow scope as it It has wide scope as it implies
is limited to superior extension of delegation to the
and his immediate lowest level of management.
subordinate.
Purpose To lessen the burden of To increase the role of the
the manager. subordinates in the
organization by giving them
more autonomy.

****************************************

CHAPTER 6 - STAFFING

Staffing is the managerial function of filling and keeping filled positions in the organization
structure.
Staffing is both a function of management as well as a distinct functional area of
management. It is therefore referred to as both line as well as well as a staff activity. It is the
essential function of the manager as well as an advisory role played by the Human Resource
Department.
Mc Farland defines staffing as “Staffing is the function by which managers build an
organization through, the recruitment, selection and development of individuals as capable
employees”
Staffing consists of manpower planning, recruitment, selection, training, compensation,
promotion and maintenance of managerial personnel.
In the simplest terms, staffing is ‘putting people to jobs. It begins with workforce planning
and includes different other function like recruitment, selection, training, development,
promotion, compensation and performance appraisal of work force.
Staffing is that part of the process of management which is concerned with obtaining,
utilising and maintaining a satisfactory and satisfied work force.
HUMAN RESOURCE MANAGEMENT
Human Resource Management includes many specialised activities and duties which the
human resource personnel must perform. These duties are:
a. Recruitment, i.e., search for qualified people
b. Analysing jobs, collecting information about jobs to 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 and union management relations.
f. Handling grievances and complaints.
g. Providing for social security and welfare of employees.
h. Defending the company in law suits and avoiding legal complications.
BENEFITS OF PROPER STAFFING
(i) Helps in discovering and obtaining competent personnel for various jobs;
(ii) Makes for higher performance, by putting right person on the right job;
(iii) Ensures the continuous survival and growth of the enterprise through the succession
planning for managers;
(iv) Helps to ensure optimum utilisation of the human resources.
(v) Improves job satisfaction and morale
HUMAN RESOURCE PLANNING
Human resource planning is a process that identifies current and future human
resources needs for an organization to achieve its goals. Human resource planning should
serve as a link between human resource management and the overall strategic plan of an
organization.

Importance of Staffing
For implementing managerial functions.
Higher job satisfaction
Increased productivity and profitability
Effective use of resources
Right people for right jobs
Staffing Process: The prime concern of the staffing function in the management process is
the timely fulfilment of the manpower requirements within an organisation.
The stages in Staffing Process:
Following are the steps involved in Staffing Process:
i. Estimating the manpower requirements/ Man Power Planning:
ii. Recruitment
iii. Selection
iv. Placement and Orientation
v. Training and Development
vi. Performance appraisal (Evaluation)
vii. Promotion and Career Planning
viii. Compensation (Wage and Salary administration)

1. Man power Planning: It is the estimation of human resources required by an organization.

Its main focus will be on getting right number of qualified people at the right time. 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: It is the process of finding the candidates for employment and motivating
them to apply for the jobs in the organization.
3. Selection: It is a process of choosing the best candidate from the large pool of applicants.
It aims at finding the right person for the right job.
4. Placement: It is a process of assigning job to the selected candidates. Assigning jobs to
employees may involve a new job or different job. it also includes assignment of job to a new
employee, transfer, promotion and also demotion of existing employee. Placement involves
striking a fit between the requirements of a job and the qualifications of a candidate.
5. Orientation: It is a process of introducing the selected employee to other employees and
familiarizing him with the rules and policies of the organization. This process will help the
new entrants to know about their superiors, subordinates, colleagues and about the
organization.
6. Training: Training is the process which is under taken to increase the knowledge and
skills of an employee to perform the present job accurately.
7. Development: It refers to the process of not only building up the skill and abilities for
specific purpose, but also the overall competence of managerial executives to undertake more
difficult and challenging tasks. Development refers to the training of managers and
executives.
8. Performance appraisal (evaluation): It is the systematic evaluation of the individual with
respect to his performance on the job and his potential for development. It is concerned with
determining the differences among the employees, working in the organization. It also
determines an employee’s worth to the organization.
9. Promotion and career planning: Promotion is a term usually used for the upward
movement of an employee to a higher position with greater responsibilities and higher pay.
Promotion requires more knowledge, experience and skills to perform the job.
10. Compensation: Workers work for wages or salary which can be otherwise known as
compensation. The term compensation comprises of cash payments related to wages and
salary, bonus, share in the profit, pension etc. A properly developed compensation system
enables an employer to attract, obtain, retain and motivate people of required intelligence and
qualification in the organization.
Conclusion: A competent staffing process obtains the most competent person to the
organization. Staffing process should be carefully followed to get right man in the right job at
the right time and in the right place.

Aspects of Staffing:
Recruitment is a process of finding suitable applicants for employment.
Selection is a process of choosing the best candidate from a large pool of applicants and
eliminating the rest.
Placement is a process of assigning job to the selected candidates. It is a process of
introducing the new employee in the organization to the existing employees and familiarizing
him with the rules and policies of the organization.
Transfer means lateral movement of employee in the same grade, from one job to another,
without any change in his status, responsibility and salary.

Differences between Training and Development.

Training Development
1. It is a process of increasing knowledge It is a process of learning and growth
and skills
2. It is to enable the employee to do the job It is to enable the overall growth of the
better. employee
3. It is a job-oriented process It is a career-oriented process

Job Rotation is an example for on-the-job training methods. It involves shifting the trainee
from one department to another or from one job to another. This enables the trainees to gain a
broader understanding of all parts of the business and how the organization as a whole
function.
Recruitment: Recruitment is a process of finding suitable applicants for employment.
Recruitment refers to the process of finding possible candidates for a job or a function.
Recruitment has been defined as ‘the process of searching for prospective employees and
stimulating them to apply for jobs in an organisation.’
Recruitment seeks to attract suitable applicants to apply for available jobs.
SOURCES OF RECRUITMENT
The requisite positions may be filled up from within the organisation or from outside. Thus,
there are two sources of recruitment – Internal and External.
Internal Sources: Recruitment from within the enterprise. There are two important sources
of internal recruitment, namely, transfers and promotions.
External Sources: An enterprise has to tap external sources for various positions because all
the vacancies cannot be filled through internal recruitment. The commonly used external
sources of recruitment are Direct Recruitment, Casual Callers, Advertisements, Employment
Exchange, Placement Agencies and Management Consultants, Campus Recruitment,
Recommendations of Employees, Labour Contractors, Advertising on Television and Web
Publishing.
The internal sources of recruitment:
Internal Sources of Recruitment methods include:
1. Promotions: Promotion is the vertical movement of an employee within the organization. It
refers to the upward movement of an employee from one job to another higher one, with
increase in salary, status and responsibilities.
2. Transfers: Transfer means lateral movement of employee in the same grade, from one job
to another, without any change in his status, responsibility and salary.
Merits of Internal Sources of Recruitment:
a. It is economical
b. It motivates the existing employees
c. Through transfer employees get training also in the form of job rotation.

Demerits of Internal Sources of Recruitment:

i. No fresher new ideas will come into the organization
ii. There will be limited choice.
iii. Not suitable for new organization
iv. Frequent transfer may reduce the productivity of the employee.
v. Development refers to the training of managers and executives to increase their overall
competence.
External Sources
An enterprise has to tap external sources for various positions because all the vacancies
cannot be filled through internal recruitment. The existing staff may be insufficient or they
may not fulfill the eligibility criteria of the jobs to be filled.
The advantages of using external sources of recruitment are as follows:
(i) Qualified Personnel: By using external sources of recruitment, the management can
attract qualified and trained people to apply for vacant jobs in the organisation.
(ii) Wider Choice: When vacancies are advertised widely, a large number of applicants from
outside the organisation apply. The management has a wider choice while selecting the
people for employment.
(iii) Fresh Talent: The present employees may be insufficient or they may not fulfill the
specifications of the jobs to be filled. External recruitment provide wider choice and brings
new blood in the organisation. However, it is expensive and time consuming.
(iv) Competitive Spirit: If a company taps external sources, the existing staff will have to
compete with the outsiders. They will work harder to show better performance.
Limitations of External Sources:
1. Dissatisfaction among existing staff:
External recruitment may lead to dissatisfaction and frustration among existing employees.
They may feel that their chances of promotion are reduced.
2. Lengthy process: Recruitment from external sources takes a long time. The business has
to notify the vacancies and wait for applications to initiate the selection process.
3. Costly process: It is very costly to recruit staff from external sources. A lot of money has
to be spent on advertisement and processing of applications.
SELECTION
Selection is the process of identifying and choosing the best person out of a number of
prospective candidates for a job. The process of selection may start right from the screening of the
applications and it may continue even after the offer of employment, acceptance and joining of the
candidate.

The steps involved in selection process:

Employee selection is the process of putting right men on right job. It is a procedure of
matching organizational recruitments with the skills and qualifications of people. The
following steps are generally followed by all business organizations during selection process:
Steps in selection process:
a. Preliminary Screening
b. Selection Tests
1. Intelligence tests
2. Aptitude tests
3. Trade or proficiency tests
4. Personality tests
5. Interest tests
c. Interview
a. Direct Interview
b. Indirect Interview
c. Patterned or structural Interview
d. Stress Interview
e. Board or Panel Interview
f. Group Interview
d. Reference and background checks
e. Selection Decision
f. Medical Examination
g. Job offers (Issue of Appointment Letter)
h. Contract of Employment (Acceptance of job offer)

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. The main purpose of screening is to prepare a list of eligible
candidates who are to be evaluated further. Screening exercise involves checking the contents
of the application, so as to find out whether or not the minimum eligibility conditions are
fulfilled by the applicants.
2. Selection Tests: Selection tests are given to discover and measure, the skill and abilities of
the candidates in terms of the requirements of the job. The following tests are usually
conducted to measure the intelligence, aptitude, proficiency, personality etc.
a. Intelligence tests: These tests are used to judge the mental capacity of the applicant.
Intelligence tests evaluate the ability of an individual to understand instructions and make
decisions.
b. Aptitude tests: Aptitude means the potential which an individual has for learning new
skills. Aptitude test indicate the person’s capacity and his potential for development.
c. Trade or proficiency tests: These tests are designed to measure the skills already acquired
by the individuals. They measure the level of knowledge and proficiency in the area of
profession or technical training.
d. Personality tests: These tests probe for the overall qualities of a person as a while. They
provide clues to a person’s emotional reactions, maturity level, value system etc.
e. Interest tests: These tests identify the areas in which a candidate has special concern,
fascination; involvement etc. These tests suggest the nature of job liked by a candidate which
may bring him job satisfaction.
3. Interview: Interview is a face-to-face conversation and observation. Interview helps the
employer to evaluate the candidate regarding the personality, smartness, intelligence, attitude
etc. There are different kinds of interviews conducted by the employers. Some of them are as
follows:
a. Direct Interview: Under this method, direct questions are asked to the applicant, to
identify his skills, character, area of interest, attitudes etc,. The in-depth knowledge of
applicant is not observed under this type of interview.
b. Indirect Interview: Under this method, the applicant is asked to express his opinion on
any topic he likes. Here the interviewer listens to the views of the applicant without any
intervention. This interview helps the interviewer to assess the personality of the applicant.
c. Patterned or Structural Interview: In this type of interview, the interviewer is looking
for information in a particular area of interest of the organization. A number of standard
questions are framed in advance which is to be answered by the applicant. These questions
focus on the experience, skills and personality of the ideal candidate would possess.
d. Stress Interview: In this interview, the interviewer will intentionally try to upset the
applicant, to see his reactions under pressure. Uncomfortable or irritating questions may be
asked to the applicant to test his patience. This type of interview may be more commonly
used in high stress jobs.
e. Board or Panel Interview: In this interview a group of persons called interviewers ask the
applicant, questions in different subjects or area of interest of the candidate. Immediately
after the interview, they meet, discuss and evaluate the performance of the applicant on the
basis of answers given by him. This type of interview is common in case of professional jobs.
f. Group Interview: A group interview occurs when several candidates for a position are
interviewed simultaneously. A common topic presented before the candidates for discussion.
Group interview offers candidates to express their leadership potential and style.
4. Reference and Background checks: In addition to the required educational qualifications,
skill and experience, the candidates must also possess other qualities liked honesty, loyalty
etc. These qualities can be judged by the information obtained from the heads of educational
institutions where the candidates have studies or from the persons whose names are given by
the candidates as reference or from their previous employers.
5. Selection Decision: After a candidate has cleared all the hurdles in the selection procedure,
the employer may take a decision of selection after consulting the concerned manager who is
responsible for the performance of the new employee.
6. Medical examination: Candidates finally selected for the job are asked to undergo
medical examination to see whether they are physically fit for the job. The physical fitness of
employees reduces labour turnover, absenteeism, accidents etc., and ensure higher standard
of health of employees in the organization.
7. Job Offer: Candidates finally selected are offered to join the organization, for which a
formal appointment order is issued by the organization. It contains the nature of the job, the
remuneration, pay scale and other terms and conditions relating to employment. Usually, a
reasonable time is given to the candidates to join the organization.
8. Contract of Employment: 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. This is known as acceptance of job offer. 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.
Conclusion: Workers are essential, active and sensitive factor of production. Utmost care
should be taken in their selection. The above process assists in proper selection of the
workers who will remain the permanent assets of the organization.

Training: Training is the process of teaching the new or present employees, the basic skills
they need to effectively perform their job.
Training and Development is an attempt to improve the current or future employee
performance by increasing an employee’s ability to perform through learning, usually by
changing the employee’s attitude or increasing his or her skills and knowledge.
Importance of training:
i. Improves employee’s ability and skills.
ii. Leads to high morale among the employees.
iii. The chances of accidents are very less.
iv. Become more eligible for promotion.
v. Maintain industrial peace in the organization.

Benefits of training and development of employees to the organization:

The benefits of training and development activity to the employees are as follows:
a. Improved skills and knowledge due to training lead to better career of the individual.
b. Increased performance by the individual helps him to earn more.
c. Training makes the employee more efficient to handle machines. Thus, less prone to
accidents.
d. Training increases the satisfaction and morale of the employees.

Methods of Training
On the job-training
It is a method, where workers learn by doing the work. The following are the important
methods of on-the-job training:
a. Apprenticeship training
b. Coaching
c. Internship training
d. Job-rotation
Off the job training
a. Classroom lecture
b. Case-study
c. Vestibule training
d. Computer modelling
On the job means learning while doing. The following are the popular on the job training
methods:
1. Apprenticeship Programmes: Apprenticeship programmes put the trainee under the
guidance of a master worker. These are designed to acquire a higher level of skill. People
seeking to enter skilled jobs like plumbers, electricians etc., are required to undergo
apprenticeship training.
2. Coaching: In this method, the superior guides and instructs the trainee as a coach. The
coach or counsellor sets mutually agreed upon goals, suggests how to achieve these goals
periodically reviews the trainees progress and suggests changes required in behavior and
performance. The trainee works directly with a senior manager and the manager takes full
responsibility for the trainee’s coaching.
3. Internship training: It is a joint programme of training in which educational institutions
and business firms cooperate. Selected candidates carry on regular studies for the prescribed
period. They also work in some factory or office to acquire practical knowledge and skills.
4. Job Rotation: This kind of training involves shifting the trainee from one department to
another or from one job to another. This enables the trainee to gain a broader understanding
of all parts of the business and how the organization as a whole function. Job rotation allows
trainees to interact with other employees. When employees are trained by this method, the
organization finds it easy at the time of promotions, replacements or transfers.

Off the job training means learning before doing. The popular off the job methods of training
include:
1. Class room lecture/Conferences: The lecture or conference approach is used to convey
specific information effectively. The use of audio-visuals or demonstrations can often make a
formal classroom presentation more interesting.
2. Case Study: Cases represent attempts to describe, as accurately as possible the real
problems faced by the managers. They are generally taken from actual experiences of the
organization and its managers. Trainees study the cases to determine problems, analyse
causes, develop alternative solutions, select what they believe to be the best solution and
implement it.
3. Computer Modelling: It stimulates the work environment by programming a computer to
initiate some of the realities of the job. It also allows learning to take place without the risk or
high costs that would be incurred if a mistake occurs in real life situation.
4. Vestibule Training: Employees learn their jobs on the equipment they will be using, but
the training is conducted away from the actual work floor. Actual work environments are
created in a class room and employees use the same materials, tools and equipment. This is
usually done when employees are required to handle sophisticated machinery and equipment.
Conclusion: In order to perform well in an organization, an employee must have the
theoretical and practical knowledge of the work. Training provides the practical knowledge
that is required of an employee. Thus, training is necessary to make the workers alert and
active.
The term training is used to indicate the process by which attitudes, skills and abilities of
employees to perform specific jobs are increased. But the term development means growth of
individual in all respects. Training is short term process but development is an on-going
process. Also, development includes training.
Development refers to the learning opportunities designed to help employees grow. It covers
not only those activities which improve job performance but also those which bring about
growth of the personality, help individuals in the progress towards maturity and actualisation
of their potential.

The benefits of training and development to the organization and to the employees:
The benefits of training and development to an organization are as follows:
a. Training is a systematic learning. It is always better than hit and trial methods which lead
to wastage of efforts and money.
b. Training enhances employee productivity both in terms of quantity and quality, leading to
higher profits.
c. Training equips the future manager who can take over in case of emergency.
d. Training increases employee morale and reduces absenteeism and employee turnover.
e. It helps in obtaining effective response to fast changing environment – technological and
economic.
The benefits of training and development activity to the employees are as follows:
a. Improved skills and knowledge due to training lead to better career of the individual.
b. Increased performance by the individual helps him to earn more.
c. Training makes the employee more efficient to handle machines. Thus, less prone to
accidents.
d. Training increases the satisfaction and morale of the employees.
********************************************************

CHAPTER 7 - DIRECTING

Direction is the sum total of managerial efforts which takes the organisation towards the
predetermined goals. Direction is concerned with the mobilization of the human efforts and
human resources to achieve certain goals in a definite time period.

In the context of management of an organisation, directing refers to the process of instructing,

guiding, counselling, motivating and leading people in the organisation to achieve its
objectives.

CHARACTERISTICS OF DIRECTING

(i) 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.
(ii) 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.
(iii) 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.
(iv) Directing flows from top to bottom: Directing is first initiated at top level and
flows to the bottom through organisational hierarchy.

IMPORTANCE OF DIRECTING
 (i) Directing helps to initiate action by people in the organisation towards attainment
of desired objectives. For example, if a supervisor guides his subordinates and
clarifies their doubts in performing a task, it will help the worker to achieve work
targets given to him.
(ii) Directing integrates employees’ efforts in the organisation in such a way that
every individual effort contributes to the organisational performance.
(iii) Directing guides employees to fully realise their potential and capabilities by
motivating and providing effective leadership. A good leader can always identify
the potential of his employees and motivate them to extract work up to their full
potential.
(iv) Directing facilitates introduction of needed changes in the organisation.
Generally, people tend to resist changes in the organisation. Effective directing
through motivation, communication and leadership helps to reduce such resistance
and develop required cooperation in introducing changes in the organisation.
(v) Effective directing helps to bring stability and balance in the organisation since it
fosters cooperation and commitment among the people and helps to achieve
balance among various groups, activities and the departments.

PRINCIPLES OF DIRECTING

(i) Maximum individual contribution: This principle emphasises that directing

techniques must help every individual in the organisation to contribute to his
maximum potential for achievement of organisational objectives. It should bring
out untapped energies of employees for the efficiency of organisation.
(ii) Harmony of objectives: Very often, we find that individual objectives of
employees and the organisational objectives as understood are conflicting to each
other. The organisation may expect employees to improve productivity to achieve
expected profits. But good directing should provide harmony by convincing that
employee rewards and work efficiency are complimentary to each other.
(iii) 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.
 (iv) 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.
(v) 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. Through proper
feedback, the managers should ensure that subordinate understands his
instructions clearly.
(vi) Use of informal organisation: A manager should realise that informal groups or
organisations exist within every formal organisation. He should spot and make use
of such organisations for effective directing.
(vii) Leadership: While directing the subordinates, managers should exercise good
leadership as it can influence the subordinates positively without causing
dissatisfaction among them.
(viii) 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. If necessary, suitable
modifications should be made in the directions.

ELEMENTS OF DIRECTION

(i) Supervision
(ii) Motivation
(iii) Leadership
(iv) Communication

SUPERVISION

Supervision being an element of directing, means overseeing what is being done by

subordinates and giving instructions to ensure optimum utilisation of resources and
achievement of work targets.

IMPORTANCE OF SUPERVISION

(i) Supervisor maintains day-to-day contact and maintains friendly relations with
workers. A good supervisor acts as a guide, friend and philosopher to the workers.
 (ii) Supervisor acts as a link between workers and management. He conveys
management ideas to the workers on one hand and workers problems to the
management on the other. This role played by supervisor helps to avoid
misunderstandings and conflicts between management and workers/employees.

(iii) Supervisor plays a key role in maintaining group unity among workers placed
under his control. He sorts out internal differences and maintains harmony among
workers.

(iv) Supervisor ensures performance of work according to the targets set. He takes
responsibility for task achievement and motivates his workers effectively.

(v) Supervisor provides good on-the-job training to the workers and employees. A
skilled and knowledgeable supervisor can build efficient team of workers.

MOTIVATION

Definitions

“Motivation refers to the way in which urges, drives, desires, aspirations, strivings or needs
direct, control and explain the behaviour of human beings.” Mc Farland

“Motivation means a process of stimulating people to action to accomplish desired goals “

William G. Scout

Motivation means incitement or inducement to act or move. In the context of an organisation,

it means the process of making subordinates to act in a desired manner to achieve certain
organisational goals. To understand motivation, we need to understand three interrelated
terms:

1. Motive
2. Motivation
3. Motivators
(i) Motive: A motive is an inner state that energises, activates or moves and directs
behaviour towards goals. Motives arise out of the needs of individuals. Some such
 motives are – hunger, thirst, security, affiliation, need for comfort, recognition
etc.,
(ii) Motivation: Motivation is the process of stimulating people to action to
accomplish desired goals. Motivation depends upon satisfying needs of people.
(iii) Motivators: Motivator is the technique used to motivate people in an
organisation. Managers use diverse motivators like pay, bonus, promotion,
recognition, praise, responsibility etc., in the organisation to influence people to
contribute their best.

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.
2. Motivation produces goal directed behaviour. For example, the promotion in the job
may be given to employee with the objective of improving his performance.
3. Motivation can be either positive or negative. Positive motivation provides positive
rewards like increase in pay, promotion, recognition etc., Negative motivation uses
negative means like punishment, stopping increments, threatening etc. which also
may induce a person to act in the desired way.
4. 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.

MOTIVATION PROCESS:
IMPORTANCE OF MOTIVATION:
1. Motivation helps to improve performance levels of employees as well as the
organisation. Since proper motivation satisfies the needs of employees, they in turn
devote all their energies for optimum performance in their work.
2. Motivation helps to change negative or indifferent attitudes of employee to positive
attitudes so as to achieve organisational goals.
3. Motivation helps to reduce employee turnover and thereby saves the cost of new
recruitment and training. The main reason for high rate of employee turnover is lack
of motivation. If managers identify motivational needs of employees and provide
suitable incentives, employees may not think of leaving the organisation.
4. Motivation helps to reduce absenteeism in the organisation. Some important reasons
for absenteeism are–bad working conditions, inadequate rewards, lack of recognition,
poor relations with supervisors and colleagues etc. Through sound motivational
system, all these deficiencies can be covered.
5. Motivation helps managers to introduce changes smoothly without much resistance
from people.

MASLOW’S NEED HIERARCHY THEORY OF MOTIVATION:

Abraham Maslow, a well-known psychologist in a classic paper published in 1943,
outlined the elements of an overall theory of motivation. His theory was based on
human needs. He felt that within every human being, there exists a hierarchy of five
needs. These are:

(i) Basic Physiological Needs: These needs are most basic in the hierarchy and
corresponds to primary needs. Hunger, thirst, shelter, sleep and sex are some
examples of these needs. In the organisational context, basic salary helps to
satisfy these needs.
(ii) Safety/Security Needs: These needs provide security and protection from
physical and emotional harm. Examples: job security, stability of income,
Pension plans etc.,
(iii) Affiliation/Belonging Needs: These needs refer to affection, sense of
belongingness, acceptance and friendship.
 (iv) Esteem Needs: These include factors such as self-respect, autonomy status,
recognition and attention.
(v) Self-Actualisation Needs: It is the highest level of need in the hierarchy. It
refers to the drive to become what one is capable of becoming.

Maslow’s theory is based on the following assumptions:

(i) People’s behaviour is based on their needs. Satisfaction of such needs
influences their behaviour.
(ii) People’s needs are in hierarchical order, starting from basic needs to
other higher-level needs.
(iii) A satisfied need can no longer motivate a person; only next higher-
level need can motivate him.
(iv) A person moves to the next higher level of the hierarchy only when
the lower need is satisfied

This Photo by Unknown Author is licensed under CC BY-NC-ND

FINANCIAL AND NON-FINANCIAL INCENTIVES

Incentive means all measures which are used to motivate people to improve performance.
These incentives may be broadly classified as financial and non-financial.
Financial Incentives:
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. 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, housing, medical aid, and education to the children, etc., over
and above the salary.

NON-FINANCIAL INCENTIVES:

Non-financial incentives mainly focus on Psychological, social and emotional factors.

Though promotion involves payment of extra money, non-monetary aspects over-ride
monetary aspects.

Some of the important non-financial incentives are:

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.
Psychological, social and esteem needs of an individual are satisfied by status given to
their job.
2. Organisational Climate: Organisational climate indicates the characteristics which
describe an organisation and distinguish one organisation from the other. Some of
these characteristics are–individual autonomy, reward orientation, 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 programmes, and sound promotion policy will help employees to
achieve promotions. Promotion works as a tonic and encourages employees to exhibit
improved performance.
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: Recognition means acknowledgment with a
show of appreciation. When such appreciation is given to the work performed by
employees, they feel motivated to perform/work at higher level. Examples are
a. Congratulating the employee for good performance.
b. Displaying on the notice board or in the company news letter about the
achievement of employee.
c. Installing award or certificate for best performance.
d. Distributing mementos, complimentary like T-shirts in recognition of
employee services.
e. Rewarding an employee for giving valuable suggestions.
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.
LEADERSHIP

Leadership is the process of influencing the people towards accomplishment of organisational

goals. Leadership is the ability of an individual to influence, motivate and enable others to
contribute towards the effectiveness and success of the organisations of with they are
members. Leadership indicates the ability of an individual to maintain good interpersonal
relations with followers and motivate them to contribute for achieving organisational
objectives.

Definitions

“Leadership is the activity of influencing people to strive willingly for group objectives.”
George Terry

“Leadership is the art or process of influencing people so that they will strive willingly and
enthusiastically towards the achievement of group goals.” Harold Koontz and Heinz
Weihrich

FEATURES OF LEADERSHIP

(i) Leadership indicates ability of an individual to influence others.

(ii) Leadership tries to bring change in the behaviour of others.
(iii) Leadership indicates inter personal relations between leaders and followers.
(iv) Leadership is exercised to achieve common goals of the organisation.
(v) Leadership is a continuous process.

Importance of Leadership:

(i) Leadership influences the behaviour of people and makes them to positively
contribute their energies for the benefit of the organisation.
(ii) A leader maintains personal relations and helps followers in fulfilling their needs.
He provides needed confidence, support and encouragement and thereby creates
congenial work environment.
(iii) Leader plays a key role in introducing required changes in the organisation. He
persuades, clarifies and inspires people to accept changes whole-heartedly.
(iv) A leader handles conflicts effectively and does not allow adverse effects resulting
from the conflicts. A good leader always allows his followers to ventilate their
feelings and disagreement but persuades them by giving suitable clarifications.
QUALITIES OF A GOOD LEADER:

1. Physical features: Physical features like height, weight, health, appearance determine
the physical personality of an individual
2. Knowledge: A good leader should have required knowledge and competence.
3. Integrity: A leader should possess high level of integrity and honesty.
4. Initiative: A leader should have courage and initiative. He should have new ideas and
methods of doing things with scientific bent of mind.
5. Communication skills: A leader should be a good communicator.
6. Motivation skills: A leader should be an effective motivator.
7. Self Confidence: A leader should have high level of self-confidence. He should not
lose his confidence even in most difficult times.
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.

LEADERSHIP STYLE

1. The autocratic style or authoritarian leader

2. Democratic or participative leader
3. Laissez-faire free rein leader
1. Autocratic or Authoritarian leader: An autocratic leader gives orders and expects his
subordinates to obey those orders. This leader is dogmatic, i.e., does not change or
wish to be contradicted. He assumes, that reward or punishment both can be given
depending upon the result. This leadership style is effective in getting productivity in
many situations like in a factory where the supervisor is responsible for production on
time and has to ensure labour productivity.
2. Democratic or Participative leader: A democratic leader will develop action plans and
makes decisions in consultation with his subordinates. He will encourage them to
participate in decision-making They exercise more control by using forces within the
group.
3. Laissez faire or Free-rein leader Such a leader does not believe in the use of power
unless it is absolutely essential. The followers are given a high degree of
 independence to formulate their own objectives and ways to achieve them. The group
members work on their own tasks resolving issues themselves.

COMMUNICATION

Communication is the process through which two or more persons exchange ideas among
themselves. The word communication has been derived from the Latin word ‘communis’
which means ‘common’. Thus, communication stands for sharing of ideas in common.
Communication is a transfer of information and understanding from one person to another.

Definitions:

1. “Communication is the sum of all things one person does when he wants to create
understanding in the mind of another. It involves systematic and continuous process
of telling, listening and understanding.” Louis Allen
2. “Communication is transfer of information from the sender to the receiver with the
information being understood by the receiver.” Harold Koontz and Heniz Weihrich

ELEMENTS OF COMMUNICATION PROCESS

1. Sender: the person who intends to convey the message.

2. Encoding: conversion of subject matter into symbols.
 3. Message: the subject matter of communication, it is the content of ideas, feelings,
suggestions, order etc.,
4. Receiver: receiver is the person who receives the message or for whom the message is
meant for.
5. Decoding: the person who receives the message or symbol from the communicator
tries to convert the same in such a way so that he may extract its meaning to him
complete understanding.
6. Noise: Noise means some obstruction or hindrance to communication. This hindrance
may be caused to sender, message or receiver.
7. Feedback: It includes all those actions of receiver indicating that he has received and
understood message of sender.

IMPORTANCE OF COMMUNICATION

1. Acts as basis of coordination: Communication acts as basis of coordination. It

provides coordination among departments, activities and persons in the organisation.
2. Helps in smooth working of an enterprise: Communication makes possible for the
smooth and unrestricted working of the enterprise. Communication is basic to an
organisation’s existence right from its birth through its continuing life. When
communication stops, organised activity ceases to exist.
3. Acts as basis of decision making: Communication provides needed information for
decision making. In its absence, it may not be possible for the managers to take any
meaningful decision.
4. Increases managerial efficiency: Communication is essential for quick and effective
performance of managerial functions. The management conveys the goals and targets,
issues instructions, allocates jobs and responsibilities and looks after the performance
of subordinates.
5. Promotes cooperation and industrial peace: Efficient operation is the aim of all
prudent management; the two-way communication promotes cooperation and mutual
understanding between the management and workers.
6. Establishes effective leadership: Communication is the basis of leadership.it is an
influencing process. By developing the skill of communication, a manager can be a
real leader of his subordinates.
 7. Boosts morale and provides motivation: An efficient system of communication
enables management to motivate, influence and satisfy the subordinates. Proper and
timely communication between the interested parties reduces the friction and
minimises conflicts.

FORMAL AND INFORMAL COMMUNCIATION

Formal communication is a deliberate attempt to regulate the flow of communication so as to

ensure that information flows smoothly, accurately and timely. Such a communication is that
which is associated with the formal organisation structure and the official status or the
position of the communicator and the receiver. It travels through the formal channels
officially recognised positions on the organisation chart.

Formal communication may be further classified as – Vertical and Horizontal. Vertical

communication flows vertically, i.e., upwards or downwards through formal channels.
Upward communications refer to flow of communication from subordinate to superior
whereas downward communication indicates communication from a superior to subordinate.

The examples of upward communication are – application for grant of leave, submission of
progress report, request for grants. The examples of downward communication include –
sending notice to employees to attend a meeting, ordering subordinates to complete an
assigned work, passing on guidelines framed by top management to the subordinates, etc.

THE PATTERN OF COMMUNICATION NETWORK

FREE FLOW PATTERN

INFORMAL COMMUNICATION

Communication that takes place without following the formal lines of communication is said
to be informal communication. Informal system of communication is generally referred to as
the ‘grapevine’ because it spreads throughout the organisation with its branches going out in
all directions in utter disregard to the levels of authority.

PATTERN OF INFORMAL COMMUNICATION NETWORK

Gossip network

BARRIERS TO COMMUNICATION

Barriers to communication are obstacles / blocks in the process of communication. There are
barriers which tend to distort the messages that pass between the sender and receiver. These
barriers often cause breakdown and mis understanding in the communication leading to poor
human relations. In order to achieve effective communication in the organisation, it is
desirable to analyse the obstacles or barriers to communication and remove them.

The barriers to communication in the organisations can be broadly grouped as:

1. Semantic barriers,
2. Psychological barriers,
3. Organisational barriers, and
4. Personal barriers.
Semantic or language problem. The name “semantic” indicates the systematic study of the
meanings of words. When communication takes place between two persons, the meaning of
communication intended by the sender may be interpreted or understood completely in a
different manner. Normally, such barriers result on account of use of wrong words, faulty
translations, different interpretations, etc.

(i) Badly expressed message

(ii) Symbols with different meanings
(iii) Faulty translations
(iv) Unclarified assumptions
(v) Technical jargon
(vi) Body language and gesture decoding

Psychological barriers: Emotional or psychological factors acts as barriers to

communicators. The state of mind of both sender and receiver of communication reflects in
the effective communication. Some of the psychological barriers are:

1. Premature evaluation
2. Lack of attention
3. Loss by transmission and poor retention
4. Distrust: Distrust between communicator and communicate acts as a barrier

ORGANISATIONAL BARRIERS: the organisational structure has in important influence

on the ability of the members of the organisation to communicate effectively. The factors
related to organisation structure, authority relationships, rules and regulations may,
sometimes, act as barriers to effective communication.

Some of these barriers are:

1. Organisational policy
2. Rules and regulations
3. Status
4. Complexity in organisation structure
5. Organisational facilities
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

2. Lack of confidence of superior on his subordinates
3. Unwillingness to communicate
4. Lack of proper incentives

HOW TO ENSURE EFFECTIVE COMMUNICATION?

1. Clarity of information
2. Adequacy of message
3. Consistency of message
4. Feedback
5. Understanding the receiver
6. Consult others before communicating
7. Communicate according to the needs of receiver
8. Be aware of languages, tone and content of message
9. Convey things of help and value to listeners
10. Communicate for present as well as future
11. Follow up communications
12. Be a good listener

CHAPTER 8- CONTROLLING

Control in the process of finding out whether activities are being carried on as planned, and
taking corrective stops to make the actual performance conform to planned performance and
to prevent the recurrence of deviations between the actual performance and the planned
performance in the future. In other words, control is the process of measuring and evaluating
the current performance and bringing to light the deviations, if any, between the current
performance and the planned performance for the purpose of corrective action by the
management. In short, it is the process of checking whether everything occurs in conformity
with the standards stipulated in the plans. The controlling function finds out how far actual
performance deviates from standards, analyses the causes of such deviations and attempts to
take corrective actions based on the same.
Controlling is both backward looking as well as forward looking. It is backward looking
because control action is based on the past performance. It is forward looking because one
can control future happenings and not the past. In the light of the past performance,
managers suggest corrective actions for future period.

Definitions:

According to George R. Terry, “controlling is determining what is being accomplished, that

is, evaluating the performance, and if necessary, applying corrective measures so that the
performance takes place according to plans”.

In the words of Koontz and O’Donnell, “Control is measurement of accomplishment against

the standard and the correction of deviations to assume attainment of objectives according to
plans”.

Importance of Controlling

1. Accomplishing organisational goals

2. Judging accuracy of standards
3. Making efficient use of resources
4. Improving employee motivation
5. Ensuring order and discipline
6. Facilitating coordination in action

Limitations of Controlling

1. Difficulty in setting quantitative standards

2. Little control on external factors
3. Resistance from employees
4. Costly affair

Controlling Process

1. Setting performance standards

2. Measurement of actual performance

3. Comparison of actual performance with standards

4. Analysing deviations

5. Taking corrective action

TECHNIQUES OF MANAGERIAL CONTROL

Traditional Techniques

(a) Personal observation

(b) Statistical reports

(c) Breakeven analysis

(d) Budgetary control

Modern Techniques

(a) Return on investment

(b) Ratio analysis

(c) Responsibility accounting

(d) Management audit

(e) PERT and CPM

(f) Management information system

Personal Observation

This is the most traditional method of control. Personal observation enables the manager to
collect first-hand 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.

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 when presented in the form of charts, graphs, tables, etc.,

Breakeven Analysis

Break- even analysis is basically concerned with the cost-volume-profit relationship.

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.
Budgetary Control

Budgetary control is a process of comparing the actual results with the corresponding budget
data in order to identify whether both match or differ and rectify factors causing mismatch.
A budget is a quantitative statement for a definite future period of time for the purpose of
obtaining a given objective.

Return on Investment: the efficiency of an organisation is judged by the amount of profit it

earns in relation to the size its investment, popularly known as ‘return on investment’(ROI).
The goal of a business is not to optimize profit, but to optimize return on capital invested in
the business. The rate of return on investment is calculated by dividing the profit by total
investment.

Ratio analysis : financial ratio analysis identifies the relationship between two financial
variables in order to derive meaningful conclusion about their behaviour.

PERT/CPM: PERT (programme evaluation and review technique) was developed by the
special project office of the US Navy in 1958. PERT is a project management technique that
shows the time taken by each component of a project and the time required for its
completion.

CPM (critical path method): CPM is a project management technique that defines critical and
non-critical tasks with the goal of preventing time-frame problem and process bottlenecks.
CPM assumes the duration of every activity to be constant, therefore every activity is either
critical or not.

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CHAPTER 9 – FINANCIAL MANAGEMENT

Money required for carrying out business activities is called business finance. Almost all
business activities require some finance. Finance is needed to establish a business, to run it, to
modernize it, to expand, or diversify it.
It is required for buying a variety of assets, which may be tangible like machinery, factories,
buildings, offices; or intangible such as trademarks, patents, technical expertise, etc.
Also, finance is central to running the day-to-day operations of business, like buying
material, paying bills, salaries, collecting cash from customers, etc. needed at every stage in
the life of a business entity.
 • Money required for carrying out business activities is called BUSINESS FINANCE
• FINANCIAL MANAGEMENT is concerned with optimum procurement as well as
the usage of finance.
• FINANCIAL MANAGEMENT aims at reducing the cost of funds procured, keeping
the risk under control and achieving effective deployment of such funds.

Financial Management is concerned with optimal procurement as well as the usage of

finance.
Money required for carrying out business activities is called business finance.
or
Funds needed to establish, to run, to modernise, to expand and to diversify the
business is called business finance.
The primary aim of financial management is to maximize shareholder’s wealth.
Capital structure refers to the mix between owners’ funds (equity) and borrowed
funds (debt).
Financial risk refers to a position when a company is unable to meet its fixed financial
charges namely interest payment, preference dividend and repayment obligations.
Net working capital = Current Assets – Current liabilities.

Financial Management is concerned with optimal procurement and usage of finance.

It means procurement of required funds at minimum cost and utilization of such funds
in an effective manner.
According to S.N Maheshwari, “Financial management is concerned with raising
financial resources and their effective utilization towards achieving the organizational
goals”
Importance of Financial Management:
a. The size and the composition of fixed assets of the business
b. The quantum of current assets and its break-up into cash, inventory and receivables
c. The amount of long-term and short-term funds to e used
d. Break-up of long-term financing into debt, equity etc,
e. All items in the profit and loss account

OBJECTIVES OF FINANCIAL MANAGEMENT

BASIC OBJECTIVES
i. Profit maximization
 ii. Wealth maximization
OTHER OBJECTIVES:
I. Proper estimation of total financial requirements
II. Obtaining funds at minimum cost
III. Proper utilization of finance
IV. Maintaining proper inflow and outflow of cash
V. Risk minimization through creation of reserves
VI. Proper coordination
VII. Financial control
VIII. Creation of goodwill

Investment Decisions:
A firm’s resources are scarce in comparison to the uses to which they can be put. A
firm, therefore, has to choose where to invest these resources, so that they are able to
earn the highest possible return for their investors. The investment decision, therefore,
relates to how the firm’s funds are invested in different assets. It relates to how the
firm’s funds are invested in different assets.
Investment decision is a financial decision which relates to how the firm’s funds are
invested in different assets.
 Example: The decision of the business to buy land for expansion activities which
involves five crores of rupees.
Fixed capital refers to investment in long term assets such as plant and machinery,
land etc.
Fixed assets are those which remain in the business, for longer period of time; for
more than one year.
Example: land, machinery etc
Current Assets are those assets which can be converted into cash or cash equivalents
within a period of one year.
Example: Inventory (Stock); Debtors etc
Current liabilities are those payment obligations which are due for payment within a
period of one year.
Example: Bills payable; creditors

Investment decisions can be of two types:

 Long-term Investment Decisions
 Short-term Investment Decisions

 The investment decision relates to how the firm’s funds are in invested in different
assets. Investment decision can be long-term or short-term.
 A long-term investment decision is also called a capital budgeting decision. Eg:
making investment in a new machine.
 A short-term investment decision is also called working capital decision. Eg: Decision
about the levels of cash in hand.
 The decision about the quantum of finance to be raised from various long-term
sources is known as financing decisions. These long-term sources of capital include
debt, equity, preference share capital and retained earnings.
 Example for financing decision: Decision about how much funds are to be raised from
which source.
A long-term investment decision is also called as capital budgeting decision. It
involves committing the finance on a long-term basis.
 The following are certain factors which affect capital budgeting decisions:

 Cash flows of the project: When a company takes an investment decision involving
huge amount, it expects to generate some cash flows over a period. These cash flows
are in the form of a series of cash receipts and payments over the life of an
investment. The amount of these cash flows should be carefully analysed before
considering a capital budgeting decision.
 The rate of return: These calculations are based on the expected returns from each
proposal and the assessment of the risk involved.
 Investment criteria: The decision to invest in a particular project involves a number
of calculations regarding the amount of investment, interest rate, cash flows and rate
of return. There are different techniques to evaluate investment proposals which are
known as capital budgeting techniques. These techniques are applied to each proposal
before selecting a particular project.

Financing Decision:
Financing Decision is the decision about raising the necessary amount of finance from
various long-term and short-term sources of finance. It has to make a judicious
combination of these sources namely debt, equity, preference share capital and
retained earnings.
The financing decisions are affected by various factors which are as follows:
 Cost: The cost of raising funds through different sources is different. A good financial
manager would normally opt for a source which is the cheapest.
 Risk: The risk associated with each of the sources is different.
 Flotation Costs: Higher the flotation cost, less attractive is the source.
 Cash Flow position of the company: A stronger cash flow position may make debt
financing more viable than funding through equity.

Dividend Decisions:
Dividend is that portion of profit which is distributed to shareholders. Dividend
decision involves how much of profit earned by company is to be distributed to the
shareholders and how much of it should be retained in the business.
 The following are the factors affecting dividend decisions:
Amount of Earnings: Dividends are paid out of current and past earning Therefore,
earnings is a major determinant of the decision about dividend.
Stability Earnings: Other things remaining the same, a company having stable
earning is in a better position to declare higher dividend. A company having unstable
earnings is likely to pay smaller dividend.
Stability of Dividends: Companies generally follow a policy of stabilizing 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.
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.

Dividend decisions are financial decisions which relate to how much of the profit
earned by the company is to be distributed to the shareholders in the form of dividend
and how much profit should be retained in the business in the form of reserves. It
actually relates to appropriation of profits of the company. To ensure availability of
funds whenever required.

 To see that the firm does not raise resources unnecessarily.

 The proportion of debt in the overall capital is called financial leverage.
 Financial leverage is computed as D/E or D/D+E where D is the Debt and E is the
Equity.
 Trading on Equity refers to the increase in profit earned by the equity shareholders
due to the presence of fixed financial charges like interest.

CAPITAL STRUCTURE
One of the important decisions under financial management relates to the financing
pattern or the proportion of the use of different sources in raising funds. On the basis
of ownership, the sources of business finance can be broadly classified into two
categories viz., ‘owners’ funds’ and ‘borrowed funds. Owners’ funds consist of equity
share capital, preference share capital and reserves and surpluses or retained earnings.
Borrowed funds can be in the form of loans, debentures, public deposits etc. These
 may be borrowed from banks, other financial institutions, debenture holders and
public.
Capital structure refers to the mix between owners and borrowed funds. These shall
be referred as equity and debt in the subsequent text. It can be calculated as debt-
equity ratio.
A capital structure will be said to be optimal when the proportion of debt and equity is
such that it results in an increase in the value of the equity share. In other words, all
decisions relating to capital structure should emphasise on increasing the
shareholders’ wealth.
Trading on Equity refers to the increase in profit earned by the equity shareholders
due to the presence of fixed financial charges like interest.

The proportion of debt in the overall capital is also called financial leverage.
Financial Leverage is computed as D/E or D/D+E where D = Debt and E=Equity
As the financial leverage increases, the cost of funds declines because of increased
use of cheaper debt but the financial risk increases.
Factors affecting the Choice of Capital Structure:
Cash Flow Position
Interest Coverage Ratio (ICR)
ICR = EBIT/Interest
Debt Service Coverage Ratio (DSCR)
Debt Service Coverage Ratio = Profit after tax +Depreciation +Interest +non-cash expenses
preference dividend +Interest+ Repayment obligation

Return on Investment (ROI)

Cost of debt
Tax Rate
Cost of Equity
Floatation Costs
Risk Consideration
Flexibility
Control
Regulatory Framework
Stock Capital Structure of other Companies
 Market Conditions

FINANCIAL PLANNING
The process of estimating the fund requirement of a business and specifying the
sources of funds is called financial planning.
Financial planning process tries to forecast all the items which are likely to undergo
changes. It enables the management to foresee the fund requirements both the
quantum as well as the timing. Likely shortage and surpluses are forecast so that
necessary activities are taken in advance to meet those situations.
The objective of financial planning is to ensure that necessary funds are available at
the right time for the business activities.
Financial Planning refers to the preparation of a blue print of an organisation’s
future operations.
The importance of financial planning can be explained as below:
 Means to face uncertainty: Financial Planning is a tool to face uncertainties. It helps
in forecasting different business situations and develops alternative financial plans to
meet different situations. This makes the business better prepared to face the future.
 Ensuring sufficient funds: Financial planning avoids the situations of both surplus
and shortage of funds and thereby ensures optimum funds.
 Ensuring liquidity: Financial planning would ensure liquidity of funds throughout
the year for meeting various financial commitments, and thereby, would create
confidence in the minds of the suppliers of funds to the enterprise.
 Elimination of waste: Good financial planning, through proper financial policies and
procedures would contribute to the elimination of wastes resulting from complexity of
operations and lack of coordination among the various functions of the enterprise.
Thus, financial planning strives to achieve the following twin objectives:

(a) To ensure availability of funds whenever required: This includes a proper

estimation of the funds required for different purposes such as for the purchase of
longterm assets or to meet day-to-day expenses of business etc.
(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.
 Fixed and Working Capital
Fixed capital refers to investment in long-term assets. Management of fixed capital
involves allocation of firm’s capital to different projects or assets with long-term
implications for the business. These decisions are called investment decisions or
capital budgeting decisions. The management of fixed capital or investment or capital
budgeting decisions are important for the following reasons:
(i) Long-term growth
(ii) Large amount of funds involved
(iii) Risk involved
(iv) Irreversible decisions

Factors affecting the Requirement of Fixed Capital

i. Nature of Business: The type of business has a bearing upon the fixed capital
requirements. For example, a trading concern needs lower investment in fixed
assets compared with a manufacturing organisation; since it does not require to
purchase plant and machinery, etc.
ii. Scale of Operations: A larger organisation operating at a higher scale needs
bigger plant, more space etc. and therefore, requires higher investment in fixed
assets when compared with the small organisation.
iii. Choice of Technique: Some organisations are capital intensive whereas others
are labour intensive. A capital-intensive organisation requires higher investment in
plant and machinery as it relies less on manual labour. The requirement of fixed
capital for such organisations would be higher. Labour intensive organisations on
the other hand require less investment in fixed assets. Hence, their fixed capital
requirement is lower.
iv. Technology Upgradation: In certain industries, assets become obsolete sooner.
Consequently, their replacements become due faster. Higher investment in fixed
assets may, therefore, be required in such cases.
v. Growth Prospects: Higher growth of an organisation generally requires higher
investment in fixed assets.
 vi. Diversification: A firm may choose to diversify its operations for various reasons,
with diversification, fixed capital requirements increase, obviously, its investment
in fixed capital will increase.
vii. Financing Alternatives: Availability of leasing facilities, may reduce the funds
required to be invested in fixed assets, thereby reducing the fixed capital
requirements. Such a strategy is especially suitable in high-risk lines of business.
viii. Level of Collaboration: At times, certain business organisations share each
other’s facilities. This is feasible if the scale of operations of each one of them is
not sufficient to make full use of the facility. Such collaboration reduces the level
of investment in fixed assets for each one of the participating organisations.
Working Capital:
Some part of current assets is usually financed through short-term sources, i.e.,
current liabilities. The rest is financed through long-term sources and is called net
working capital. Thus, NWC = CA – CL (i.e., Current Assets - Current
Liabilities.) Thus, net working capital may be defined as the excess of current
assets over current liabilities.
Working capital is the excess of current assets over current liabilities.
The factors affecting the working capital requirement of a business are as follows:
 Nature of Business: The basic nature of business influences the amount of working
capital required. A trading organization usually needs a smaller amount of working
capital compared to a manufacturing organization. Similarly, service industries which
usually do not have to maintain inventory require less working capital.
 Scale of Operations: For organizations which operate on a higher scale of operation,
the quantum of inventory and debtors required is generally high. Such organizations,
therefore, require large amount of working capital as compared to the organizations
which operate on a lower scale.
 Business Cycle: Different phases of business cycles affect the requirement of
working capital by a firm. In case of a boom, the sales and production are likely to be
larger and therefore larger amount of working capital is required. Working capital
requirement will be less during the period of depression as the sales and production
will be small.
 Seasonal Factors: Most business have some seasonality in their operations. In peak
season, because of higher level of activity, larger amount of working capital is
required. When the level of activity is less, working capital requirement will be less.
 i. Investment decision
ii. Financing decision
iii. Dividend decisions

CHAPTER 10 - FINANCIAL MARKETS

A business is a part of an economic system that consists of two main sectors – households
which save funds and business firms which invest funds. A financial market helps to link the
savers and investors by mobilizing funds between them.

Concept of financial market

A financial market is market for the creation and exchange of financial assets. Financial
markets exist wherever a financial transaction occurs. Financial transactions could be in the
form of creation of financial assets such as the initial issue of shares and debentures by the
firm or the purchase and sale of existing financial assets like equity share, debentures and
bonds.

FUNCTIONS OF FINANCIAL MARKET

1. Mobilization of savings and channeling them into the most productive uses: A
financial market facilities the transfer of savings from savers to investors. It gives
savers the choice of all investments and thus helps to channelize surplus funds into the
most productive use.
2. Facilitating price discovery: You all know that the forces of demand and supply
help to establish a price for a commodity or service in the market. In the financial
market, the house holders are suppliers of funds and business firms represent the
demand ,the interaction them helps to establish a price for the financial asset which
is being traded in that particular market.
3. Providing liquidity to financial assets: Financial markets facilities easy purchase
and sale of financial assets. In doing so they provide liquidity to financial assets. So,
that they can be easily converted into cash whenever required. Holders of assets can
readily sell their financial assets through the mechanism of the financial market
4. Reducing the cost of transactions: Financial markets provide valuable information
about securities being traded in the market . It helps to save time effort and money
that both buyers and sellers of a financial assets would have to otherwise spend to try
and find each other .The financial market is thus a common platform where buyers
and sellers can meet for fulfillment of their individual needs
CLASSIFICATION OF FINANCAL MARKET

FINANCIAL MARKET

MONEY MARKET CAPITAL MARKET

PRIMARY MARKET SECONDARY

MARKET

DEBT EQUITY DEBT

EQUITY
Financial markets are classified on the basis of the maturity of financial instruments
traded in them. Instruments with a maturity less than one year are traded in the money
market. Instruments with longer maturity are traded in the capital market.

MONEY MARKET: It is a market for short term funds which deals in monetary
assets whose period of maturity is up to one year. It has no physical location but is an
activity conducted over the telephone and through the internet. The major participants
in this market are the RBI, commercial banks, non- banking finance corporate, state
government, large corporate houses and mutual funds.

MONEY MARKET INSTRUMENTS

1. TREASURY BILL: It is basically an instrument of short-term borrowing by the
government of India maturing in less than one year. They are also known as zero
coupon bonds issued by the RBI on behalf of the central government to meet its short-
term requirements of funds. Treasury bills are issued in the farm of a promissory
note and they are issued at a price which is lower than their face value and repaid at
par. The difference between the price at which the treasury bills are issued and their
redemption value is the interest receivable on them and is called discount. They are
available or a minimum amount of Rs.2500 and in multiples thereof.
2. COMMERCIAL PAPER: Commercial paper is a short term unsecured
promissory note, negotiable and transferable by endorsement and delivery with a
fixed maturity period. It is issued by large and creditworthy companies to raise short –
term funds at lower rates of interest than market rates .It usually has a maturity
period of 15 days to one year .The issuance of commercial paper is an alternative to
bank borrowing for large companies that are generally considered to be financially
strong. It is sold at a discount and redeemed at par. The original purpose of
commercial paper was to provide short term funds for seasonal and working capital
needs.
Example: companies use this instrument for purposes such as bridge financing.
3. CALL MONEY: Call money is the short-term finance repayable on demand, with
a maturity period of one day to fifteen days used for inter-bank transactions.
Commercial banks have to maintain a minimum cash balance known as cash reserve
ratio. The RBI changes the cash ratio from time to time which in turn affects the
amount of funds available to be given as loans by commercial banks. call money is a
method by which banks borrow from each other to be able to maintain the cash
reserve ratio .The interest rate is highly volatile rate that varies from day to day and
sometimes even from hour to hour . The interest rate paid on call money loans is
known as the call rate.
4. CERTIFICATE OF DEPOSITS: They are unsecured negotiable, short term
instruments in bearer from, issued by commercial banks and development financial
institutions. They can be issued to individuals, corporations and companies during
periods of tight liquidity when the deposit growth in banks is slow but the demand for
credit is high. They help to moblise a large amount of money for short periods.
5. COMMERCIAL BILL: It is a bill of exchange used to finance the working
capital requirements of business firms. It is a short-term, negotiable self –liquidating
instrument which is used to finance the credit sale of firms when goods are sold on
credit. The buyer becomes liable to make payment on a specific date in future .The
seller could wait till the specified date or make use of a bill of exchange .The seller
{drawer} of the goods draw the bill and the buyer accepts it .On being accepted ,the
bill becomes a marketable instrument and is called a trade bill .these bills can be
discounted with a bank if the seller needs funds before the bill matures when a trade
bill is accepted by a commercial bank it is knows as commercial bill.

CAPITAL MARKET: The term capital market refers to facilities and institutional
arrangements through which long term funds both debt and equity are raised and
invested. It consists of a series of channel through which savings of the community
are made available for industrial and commercial enterprises and for the public in
general. It directs these saving into their most productive use leading to growth and
development of the economy. The capital market consists of development banks
commercial banks and stock exchanges. It can be divided into two parts- Primary
market and Capital market.

Distinguish between capital market and money market

MONEY MARKET CAPITAL MARKET

A market where short-term funds are A market where long-term funds are
borrowed and lent borrowed and lent

The instruments like involved for The instruments involved for transactions are
transactions are: treasury bills, call money, stocks, shares, debenture, bond and
certificate of the deposit, commercial government securities
papers, commercial bills etc.

The major players are: RBI, commercial The major players are: companies, individual
banks , financial institutions. investors, instrumental investors, foreign
investors, banks and financial institutions.
Instruments are highly liquid Instruments are relatively less liquid

Rate of return is low Rate of return is high

Very low financial risk Very high financial risk
 It arranges small amount of funds It arranges large amount if funds

PRIMARY MARKET: It is also known as new issue market. It mobilises the fund from the
investor s by directly issuing the new securities. The funds are raised through equity shares,
preference shares, debentures, loans, deposits and bonds by companies or financial
institutions. The essential function of the primary market is to facilitate the transfer of
investible funds form savers to entrepreneurs seeking to establish new organization or to
expand existing one through the issue of securities for the first time.

METHODS OF FLOATATION

1. OFFER THROUGH PROSPECTUS: It is the most popular method of raising funds by

public companies in the primary market. This involves inviting subscription from the
public through issues of prospectus. A prospectus makes a direct appeal to investors to
raise capital through an advertisement in newspaper and magazines. The issues may be
underwritten and also are required to be listed on at least one stock exchange. The
contents of the prospects have to be in accordance with the provisions of the companies
act and SEBI discloses and investors protection guidelines.
2. OFFER FOR SALE: Under this method securities are not issued directly to the public
but are offered for sale through intermediates like issuing houses or stock brokers. In this
case, a company sells securities enbloc at an agreed price to brokers who , in turn , resell
them to the investing public.
3. PRIVATE PLACEMENT: It 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. some companies, therefore, cannot afford a
public issue and choose to use private placement.
4. RIGHTS ISSUE: This is a privilege given to existing shareholders to subscribe to a new
issue of shares according to 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: A company proposing a issue capital to the public through the on-line system of
the stock exchange ha to enter into an agreement with the stock exchange. This is called
an individual public offer (IPO). SEBI registered brokers have to be appointed for the
 purpose of accepting applications and placing orders with the company. The issuer
company should also appoint a registrar to the issue having electronic connectivity with
the exchange. The issue company can apply for listing of its securities on any exchange
other than the exchange through which it has offered its securities. The lead manager
coordinates all the activities amongst intermediaries connected with the issues.

Differences between primary and secondary market

PRIMARY MARKET SECONDARY MARKET

[ new issue market] [ STOCK EXCHANGE]
There is sale of securities by new companies There is trading of existing securities only.
or further (new issues of securities by
existing companies to investors) .
Securities are sold by the company to the Ownership of existing securities is
investor directly (or through intermediary). exchanged between investors. The company
is not involved at all.
The flow of funds is from savers to Enhances encashability of shares i.e the
investors i.e the primary market directly secondary market indirectly promotes
promotes capital formation. capital formation.

Only buying of securities takes place in the Both buying and selling of securities can
primary market securities cannot be sold take place on the stoke exchange.
there.
Prices are determined and decided by the Prices are determined by demand and
management of company. supply for the security.

There is no fixed geographical location. Located at specified places.

SEONADARY MARKET:
It is also known as the stoke market exchange. It is a market for the purpose for
purchase
and sale of existing securities. It helps existing investors to disinvest and fresh investors to
enter the market. It also provides liquidity and contributes to economic growth by
channelising funds towards the most productive investments through the press of
disinvestment and reinvestment. Securities are traded, cleared and settled within the
regulatory framework prescribed by SEBI

STOK EXHANGE: A stock exchange is an institution which provides a platform for buying
and selling of existing securities. As a market, the stock exchange facilities the exchange of a
security (shares, debentures, etc.,) into money and vice-versa.
Meaning: According to securities contacts (Regulation) Act 1956, stock exchange means
anybody 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 STOCK EXCHANGE:
1) Providing liquidity and marketability to existing securities: the basic function of a
stock exchange is the creation of 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. It is a mechanism of constant valuation through which the prices of
securities are determined. Such a 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 is a certain healthy speculation is necessary to ensure liquidity and
price continuity in the stock market.
 Major stock exchanges in India: National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE)

STOCK MARKET INDEX: It is a barometer of market behaviour. It measures overall

market sentiment through asset of stocks that are representative of the market. It reflects
market direction and indicates day-to-day fluctuations in stock prices. In India, major stock
market indices are

BSE-SENSEX

NSE-NIFTY

TRADING AND SETTLEMENT PROCEDURE IN STOCK EXCHANGES:

Electronic trading systems or screen-based trading has certain advantages:

1) It ensures transparency as 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 increases efficiency of information being passed on, thus helping in fixing prices
efficiently. The computer screens display information on prices and also capital market
developments that influence share prices.
3) It increases the efficiency of operations, since there is reduction in time, cost and risk of
error.
4) 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. That is, they can sit in the brokers office, log on to the computer at the same time
and buy or sell securities. This system has enabled a large number of participants to trade
with each other, thereby improving the liquidity of the market.
5) A single trading platform has been provided 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. Now, screen-
based trading or online trading is the only way in which you can buy or sell shares.

STEPS IN THE TRADING AND SETTLEMENT PROEDURE

It has been made compulsory to settle all trades within 2 days of the trade that is on a T+2
basis, since 2003.
Since 2003, all shares have to be covered under the rolling settlement implies fast movement
of shares. It requires effective implementation of electronic fund transfer and
dematerialization of shares.

The following steps are involved in screen-based trading for buying and selling of
securities:

1) If an investors 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. The investor has to sign a
broker-client agreement and a client registration form before placing an order to buy or
sell securities. He has also to provide certain other details and information. These
include:
 PAN – number (This is mandatory)
 Date of birth and address.
 Educational qualification and occupation.
 Residential status (Indian / NRI).
 Bank account details.
 Depositary account details.
 Name of any other broker with whom registered.
 Client code number in the client registration form
The broker then opens a trading account in the name of the investor.
2) The investors have to open a ‘demat account’ or ‘beneficial owner’ (BO) account with a
depository participant (DP) for holding and transferring securities in the demat form. He
will also have to open a bank account for cash transactions in the securities market.
3) The investors then place an order with the broker to buy or sell shares. Clear instructions
have to be given about the number of shares and the price at which the shares should be
bought or sold. The broker will then go ahead with the deal at the above-mentioned price
or the best price or the best price available. An order confirmation slip is issued to the
investor by the broker.
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. The broker will issue
a trade confirmation to the investor.
6) After the trade has been executed within 24hours the broker issues a contract note. The
note contains details of the number of shares bought and sold, the price, the date and time
of deal, and the broker charges. This is an important document as it is legally enforceable
and helps to settle disputes or claim between the investors and broker. A unique order
code number is assigned to each transaction by the stock exchange and is printed on the
contract note.
7) Now, the investors have to deliver the shares sold or pay cash for the shares bought. This
should be done immediately after receiving 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 as securities are delivered on pay-in-day, which is before the T+2 day as the
deal has to be settled and finalized on the T+2 day. The settlement cycle is on T+2 day on
a rolling settlement bases w.e.f from 1st April 2003.
9) On the T+2 day, the exchange will deliver the shares or make payment to the other
broker. This is called the pay-out–day. The broker then has to make payment to the
investor within 24 hours of the pay-out-day, since he has already received payment from
the exchange.
10) The brokers can make delivery of shares in demat form directly to the investors demat
account. The investor has to give details of his demat account and instruct his depositary
participant to take delivery of securities directly in his beneficial owner account.

DEMATERIALISATION

This is the process where securities held by the investor in the physical form are cancelled
and the investor is given an electronic entry or number, so that she/he can hold it in an
electronic balance in an account. This process of holding securities in an electronic form is
called dematerialization

Physical shares can be converted into electronic form or converted into electronic form is
called dematerialization

Physical shares an be converted into electronic form or electronic holdings can be

reconverted into physical certificate (re-materialisation). Dematerialization enables shares to
be transferred to some other account just like cash and ensures settlement of all trades
through a single account in shares. These demat securities can even be pledged /
hypothecated to get loans. There is no longer of loss, theft or forgery of shares certificates. It
is to the brokers responsibility to credit the investors account with the correct number of
shares.

Working of demat system:

1) A depository participant (DP), either a bank, broker, or financial services company,

may be identified.
2) An account opening form and documentation (PAN card details , photograph , power
of attorney 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 and the shares on allotment would automatically be credited to the demat
account.
5) If shares are to be sold through a broker, the DP is to be instructed of debit the acount
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 from the buyers and pay the person for the shares
sold.
8) All these transactions are to be completed within two days i.e. delivery of shares and
payment received from the buyer is on a T+2 Basis, settlement period.

DEPOSITORY

In India, there are two depositories

1) National Securities Depositories Limited (NSDL)

 It is the first and large depositary presently operational in India
 It was promoted as a joint venture of the IDBI, UTI and National Stock Exchange.
2) Central Depository Services Limited (CDSL)
 It is the second depository to commence operations.
 It was promoted by Bombay Stock Exchange and Bank of India.
 Both these national level depositories operates through intermediaries who are
electronically connected to the depositary and serve as contact points with the investors and
are called depositary participants.

Securities and Exchange Board of India (SEBI)

It was established by the government of India on 12th April 1988 as an interim administrative
body to promote orderly and healthy growth of securities market and for investors protection.
It was to function under the overall administrative control of the ministry of finance of the
government of India. The SEBI was given a statutory status on 30 January 1992.

Objectives of SEBI

1. To regulate stock exchanges and the securities industry to promote their orderly
functioning.
2. To protect the rights and interests of investors particularly individual investor and to
guide and educate them.
3. To prevent trading malpractice and achieve a balance between self-regulation by the
securities industry and its statutory regulation.
4. To regulate and develop a code of conduct and fair practices by intermediaries like
brokers, merchant bankers etc. with a view to making them competitive and
professional.

Functional of SEBI

Regulatory functions

1. Registration of brokers and sub –brokers and other players in the market.
2. Registration of collective investments schemes and mutual funds.
3. Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers
and business in stock exchanges and any other securities market.
4. Regulation of takeover bids by companies.
5. Calling for information by undertaking inspection, conducting enquires 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 (Regulation) 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 adopting a flexible approach.

PRODUTIVE 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 investors protection.
4. Promotion of fair practices and code of conduct in securities market.

***********************************************************

CHAPTER-11 - MARKETING

Marketing refers to all those business activities that direct the flow of goods and services
from producers to consumers.

American Management Association defined Marketing as “The process of planning and

executing the conception, pricing, promotion and distribution of ideas, goods and services to
create exchanges that satisfy individual and organizational goals.”

According to Philip Kotler, “Marketing Management is defined as the art and science of
choosing target markets and getting, keeping and growing customers through creating,
delivering and communicating superior customer values of management.”

Differences between Selling and Marketing:

Selling Marketing
It is only a part of the process of marketing. It is a wider term consisting of number of
It is concerned with promoting and activities such as identification of the
transferring possession and ownership of customer’s needs, developing the products
goods from the seller to the buyer. It is to satisfy these needs, fixing prices and
merely a part of marketing persuading the potential buyers to buy the
same.
 The main focus of selling is on transfer of The main focus of marketing activities is on
title and possession of goods from sellers to achieving maximum satisfaction of the
consumers. customer’s needs and wants.
All selling activities are directed at The objective of marketing is concerned
maximizing the sales, and therefore the with customer satisfaction and thereby
profits of the firm. increasing profits in the long run
Selling activities start after the product has Marketing activities start much before the
been developed product is produced and continue even after
the product has been sold

Marketing Management refers to planning, organising, directing and control of the activities
which facilitate exchange of goods and services between producers and consumers or users of
products and services.

The term marketing has been defined as “the process of planning and executing the
conception, pricing, promotion and distribution of ideas, goods and services to create
exchanges that satisfy individual and organisational goals” by American Management
Association.

Marketing management is the art and science of choosing target markets and getting, keeping
and growing customers through creating, delivering and communicating superior customer
values of management.

Marketing management involves performance of various functions such as analysing and

planning the marketing activities, implementing marketing plans and setting control
mechanism. These functions are to be performed in such a way that organisation’s objectives
are achieved at the minimum cost.

Marketing Management Philosophies

The Production Concept:

The focus of business activities was, on production of goods. It was believed that profits
could be maximised by producing at large scale, thereby reducing the average cost of
production. It was also assumed that consumers would favour those products which were
widely available at an affordable price.
The Selling Concept:

The focus of business firms shifted to pushing the sale of products through aggressive selling
techniques with a view to persuade, lure or coax the buyers to buy the products. It was
assumed that buyers can be manipulated but what was forgotten was that in the long run what
matters most is the customer satisfaction, rather than anything else.

The Marketing Concept:

Marketing orientation implies that focus on satisfaction of customer’s needs is the key to the
success of any organisation in the market. It assumes that in the long run an organisation can
achieve its objective of maximisation of profit by identifying the needs of its present and
prospective buyers and satisfying them in an effective way. All the decisions in a firm are
taken from the point of view of the customers.

The Societal Marketing Concept:

The societal marketing concept holds that the task of any organisation is to identify the needs
and wants of the target market and deliver the desired satisfaction in an effective and efficient
manner so that the longterm well-being of the consumers a the society is taken care of.

Thus, the societal marketing concept is the extension of the marketing concept as
supplemented by the concern for the long-term welfare of the society. Apart from the
customer satisfaction, it pays attention to the social, ethical and ecological aspects of
marketing. There are large number of such issues that need to be attended.

The various functions of marketing include:

i. Gathering and Analysing marketing information: One of the important functions

of a marketer is to gather and analyse market information. This is necessary to
identify the needs of the customers and take various decisions for the successful
marketing of the product and services.
ii. Marketing planning: Another important area of work of a marketer is to develop
appropriate marketing plans so that the marketing objectives of the organisation can
be achieved A complete marketing plan covering aspects like plan for increasing
production, promotion of the products etc, and action programmes to achieve these
objectives are to be developed.
iii. Product Designing and Development: The design of the product contributes to
making the product attractive to the target customers: A good design can improve
performance of a product and also give it a competitive advantage in the market.
iv. Standardisation and Grading: Standardisation refers to producing goods of Pre–
determined specifications, which helps in achieving uniformity and consistency in the
output. Standardisation ensures the buyers that goods confirm to the pre-determined
standards of quality, price and packaging. Grading is the process of classification of
products into different groups, on the basis of some of the important characteristics
such as quality, size ect,. Grading ensures that goods belong to a particular quality
and helps in realising higher prices for high quality output.
v. Packaging and Labelling: Packaging refers to designing and developing the
package for the products. Labelling refers to designing and developing the label to be
put on the package. Packaging and labelling have become so important in marketing
that these are considered as the pillars of marketing. Packaging protects the products
and also acts as an effective promotion tool.
vi. Branding: Brand name helps in creating product differentiation. It provides basis for
distinguishing the product of a firm with that of the competitor. Branding also helps
in building customer’s loyalty and promotes sales of a product.
vii. Customer support services: These include after sales services, handing customer
complaints, procuring credit services, maintenance services, technical services and
consumer information. All these services aim at providing maximum satisfaction to
the customers, which is the key to marketing success in modern days.
viii. Pricing of product: Price of product refers to the amount of money customers have
to pay to obtain a product the marketers have to properly analyse the factors
determining the price of a product and then take several other decisions such as
setting the pricing objectives, determining the pricing strategies, determining the
price and changing the prices etc.
ix. Promotion: It involves informing the customers about the firms’ product, its features
etc, and persuading them to buy these products. The four important methods of
promotion include advertising, personal selling, publicity and sales promotion.
Deciding the budget for promotion, promotional tools to be used etc, are important
decisions to be taken by a marketer in this area.
x. Physical Distribution: The two major areas under this function include a. Decision
regarding channels of distribution b. Physical movement of the product from the
 place of its production to the ultimate consumer’s place. Managing Inventory, storage
and warehousing, transportation etc, are key areas under this physical distribution
function.

Conclusion: The modern functions of marketing emphasise more on customer satisfaction.

Customer satisfaction itself leads to survival and growth of an organisations. From the view
point of management function, the above activities are referred to as the functions of
marketing.

Marketing Mix:

Marketing mix is described as the set of marketing tools that a firm uses to pursue its
marketing objectives in a target market. This term ‘marketing mix’ is given by Neil H
Borden. It refers to aggregate of strategies formulated to achieve various marketing
objectives.

The marketing mix consists of various elements, which have broadly been classified into four
categories, popularly known as four Ps of marketing. These are :

(i) Product
(ii) Price
(iii) Place
(iv) Promotion
Marketing mix is the combination of four inputs that revolve around the consumer
satisfaction as the focal point. These four elements are product, price, promotion and the
place/ physical distribution. These elements are popularly known as 4 Ps of marketing.
Element of marketing mix:

The marketing mix consists of various elements, which have been broadly classified into
four categories popularly known as four Ps of marketing which are as follows:

i. Product mix: Product means ‘anything of value’ which is offered to the market for sale.
Product is one of the main elements of marketing mix. In marketing terms, product refers to
anything that satisfies the needs of the consumers. It may be a good, a service or an idea. The
product mix has the following important components:

Brand, Style, colour, design, product line, Package, warranty etc. The concept of product also
includes the extended product or what is offered to the customers by way of after sale
services, handling complaints, availability of spare parts etc,

ii. Price mix: Price represents the value of a product expressed in terms of money it is the
amount of money customers has to pay to obtain the product. The price mix is concerned
with fixing a reasonable price to the product or services that covers the cost and distribution
expenses as well gets reasonable profits to the manufacture. The basic variables related to
price mix include pricing strategy, pricing policy, credit – terms,

discounts, allowances etc,

iii. Promotion mix: Promotion of product and services – include activities that communicate
availability, features, merits etc, of the products to the target customer and persuade them to
buy it. The promotion mix includes personal selling, publicity, advertising and sales
promotion. Most marketing organisations, undertake various promotional activities and spend
money on the promotion of their goods using promotional tools such as advertising, personal
selling etc, the success of a market offer will depend on how well these ingredients are mixed
to create superior value for the customers and also achieve their sale and profit objective.

iv. Place mix: Place or physical distribution include activities that make firm’s products
available to the target customers. It is concerned with making available of the goods and
services at right time, at right place, in right quantity. It enables for the smooth flow of goods
and services from the producers to the customers. It creates place, time and possession
utilities. The place mix includes distribution channels like agents, wholesalers’ retailers etc,
and physical distribution which includes transport, warehousing, inventory etc.
Conclusion: The process of marketing involves creating a market offering, to satisfy the
needs and wants of the present and potential buyers. From a number of alternatives available
a firm chooses a particular combination to develop a market offering the combination of
variables chosen by a firm to prepare its market offering is called as marketing mix.

Products: A product is a bundle of utilities, which is purchased because of its capability to

provide satisfaction of certain need.

Classification of Products: Products may broadly be classified into two categories

(i) Consumers’ products and

(ii) Industrial products.

Speciality products are those consumer goods which have certain special features because of
which people make special efforts in their purchase.

The following are the features of speciality products:

i. The demand for speciality products is limited as relatively small number of people
buy these products.
ii. These products are generally costly and their unit price is very high.
iii. These products are available for sale at few places as the number of customers is
small and are willing to take extra efforts in the purchase of these products.
iv. An aggressive promotion is required for the sale of speciality products, in order to
inform people about their availability, features etc. v. After sales services are very
important for many of the speciality products.
Industrial Products are those products, which are used as inputs in producing other
products.

The following are its important characteristic features:

i. Number of Buyers: As compared to the consumer products, the numbers of buyers

of industrial products are limited.
ii. Channel Levels: Because of limited number of buyers, the sale of industrial
products is generally made with the help of shorter channels of distribution, i.e.,
direct selling or one level channel.
iii. Geographic Concentration: Because of location of industries at certain points or
regions, industrial markets are highly concentrated geographically.
iv. Derived Demand: The demand for industrial products is derived from the demand
for consumer goods. For example, the demand for leather will be derived from
demand for shoes and other leather products in the market.

Branding:

The process of giving a name or a sign or a symbol etc., to a product is called branding. The
various terms relating to branding are as follows:

1. Brand: A brand is a name, term, sign, symbol, design or some combination of them, used
to identify the products— goods or services of one seller or group of sellers and to
differentiate them from those of the competitors.

2. Brand Name: That part of a brand, which can be spoken, is called a brand name. In other
words, brand name is the verbal component of a brand.

3. Brand Mark: That part of a brand which can be recognised but which is not utterable is
called brand mark.

4. Trade Mark: A brand or part of a brand that is given legal protection is called trademark.
The protection is given against its use by other firms.

Advantages of branding to the Marketers:

i. Enables Marking Product Differentiation: Branding helps a firm in distinguishing

its product from that of its competitors. This enables the firm to secure and control
the market for its products.
 ii. Helps in advertising and display programmes: A brand assists a firm in its
advertising and display programmes. Without a brand name, the advertiser can
only create awareness for the generic product and can never be sure of the sale for
his product.
iii. Differential Pricing: Branding enables a firm to charge different price for its
products than that charged by its competitors. This is possible because if
customers like a brand and become habitual of it, they do not mind paying a little
higher for it.
iv. Ease in introduction of new product: If a new product is introduced under a known
brand, it enjoys the reflected glory of the brand and is likely to get off to an
excellent start. Thus, many companies with established brand names decide to
introduce new products in the same name.

Advantages of branding to the Customers:

i. Helps in product identification: Branding helps the customers in identifying the

products. Branding facilitates repeat purchase of the products.
ii. Ensures Quality: Branding ensures a particular level of quality of the product.
Thus, whenever there is any deviation in the quality, the customers can have
recourse to the manufacturer or the marketer. This builds up confidence of the
customers and helps in increasing his level of satisfaction.
iii. Status symbol: Some brands become status symbols because of their quality. The
consumers of those brands of products feel proud of using them and add to the
level of satisfaction of the customers.

Following is some of the considerations, which should be kept in mind while choosing a
brand name:

i. The brand name should be short, easy to pronounce, spell, recognize and remember.
Eg: Ponds, Rin, Vim etc.
ii. A brand should suggest the product’s benefits and qualities. It should be appropriate
to the product’s function. Eg: Promise, My Fair Lady etc. iii. A brand name should be
distinctive. Eg: Liril, Safari etc. iv. The brand name should be adaptable to packing
or labelling requirements, to different advertising media and to different languages.
Packaging: Packaging refers to the act of designing and producing the container or wrapper
of a product.

Packaging has acquired great significance in the marketing of goods and services, due to the
following reasons:

a. Rising standards of health and sanitation: Because of the increasing standards of living
in the country, more and more people have started purchasing packed goods as the chances of
adulteration in such goods are minimised.

b. Self-service Outlets: The self-service retail outlets are becoming very popular,
particularly in major cities and towns. Because of this, some of the traditional role assigned to
personal selling in respect of promotion has gone to packaging

c. Innovation Opportunity: Some of the recent developments in the area of packaging have
completely changed the marketing scene in the country. The scope for marketing of many
products have increased due to modern packaging.

d. Product Differentiation: Packaging is one of the very important means of creating

product differentiation. The colour, size, material et of package makes real difference in the
perception of customers about the quality of the product.

Levels of Packaging: There can be three different levels of packaging. These are as below:

1. Primary Package: It refers to the product’s immediate container.

2. Secondary Packaging: It refers to additional layers of protection that are kept till the
product is ready for use,
3. Transportation Packaging: It refers to further packaging components necessary for
storage, identification or transportation.

Labelling:

A simple looking but important task in the marketing of goods relates to designing the label
to be put on the package. The label may vary from a simple tag attached to the product
indicating some information about the quality or price, to complex graphics that are part of
the package, like the ones on branded products. Labels are useful in providing detailed
information about the product, its contents, method of use, etc
The various functions performed by a label are as follows:

i. Describe the product and specify its contents: One of the most important functions
of labels is to describe the product, its usage, cautions in use, etc and specify its
contents.
ii. Identification of the product or brand: The other important function performed by
labels is to help in identifying the product or brand.
iii. Grading of products: Another important function performed by labels is to help
grading the products into different categories. Sometimes, marketers assign different
grades to indicate different features or quality of the product.
iv. Helps in promotion of products: An important function of label is to help in
promotion of the products. A carefully designed label can attract attention and give
reason to purchase. v. Providing information required by law: Label provides
information required by law.

Pricing:

Price is defined as the amount of money paid by a buyer in consideration of the purchase of a
product or a “Service pricing occupies an important place in the marketing of good and
services by a firm.

There are a number of factors which affect the fixation of the price of a product. Some of the
factors are:

i. Cost of the product: Cost of the product includes the cost of producing, distributing
and selling the product. The cost sets the floor price at which the product may be
sold. The firm aims at earning a margin of profit over and above the costs. Total costs
are the sum total of the fixed, variable and semi-variable costs for the specific level
of activity.
ii. Utility of a product: While the product costs set the lower limits of the price, the
utility provided by the product and the intensity of demand of the buyer sets the
upper limits of the price, which a buyer would be prepared to pay.
iii. Demand of a product: According to the law of demand, consumers usually purchase
more units at a low price than at high price. The price of a product is also affected by
the elasticity of demand of the product. If the demand of a product, is inelastic, the
firm can fix higher prices and vice versa.
iv. Government and legal regulations: In order to protect the interest of public against
unfair practices in the field of price fixing, Government can intervene and regulate
the price of commodities. Government can also declare a product as essential product
and regulate its price. Eg: essential commodities sold through public distribution
system.
v. Pricing Objectives: pricing objectives are generally stated to maximise the profits.
But maximising the profits in the short - run and in the long - run differs from each
other. If the firm decides to maximise its profits in the short - run, it would charge
maximum price for its products. If it wants to maximise its profits in the long run, it
would charge lower price per unit so that it can capture larger share of the market and
earn greater profits through increased sales.
vi. Maximisations of profit: Apart from profit maximisations, the pricing objectives of
a firm may include:
(a) Obtaining Market share leader ship.
(b) Surviving in a competitive market.
(c) Attaining product quality leadership.

Thus, the price of a firm’s products and services is affected by the pricing

vii. Marketing Methods used: Price fixation process is also affected by other elements
of marketing such as distribution system, quality of salesmen employed, quality and
amount of advertising, sales promotion efforts, the type of packaging, product
differentiation, credit facility and customer services provided objective of the firm.

Physical Distribution:

Once goods are manufactured, packaged, branded, priced, and promoted, these must be made
available to customers at the right place, in right quantity and at the right time. Physical
distribution covers all the activities required to physically move goods from manufacturers to
the customers. Important activities involved in the physical distribution include
transportation, warehousing, material handling, and inventory control. These activities
constitute major components of physical distribution.

Components of Physical Distribution The main components of physical distribution are

explained as follows:
1. Order Processing: A good physical distribution system should provide for an accurate
and speedy processing of orders.
2. Transportation: Transportation is the means of carrying goods and raw materials from
the point of production to the point of sale. It is one of the major elements in the physical
distribution of goods.
3. Warehousing: Warehousing refers to the act of storing and assorting products in order to
create time utility in them. The basic purpose of warehousing activities is to arrange
placement of goods and provide facilities to store them.
4. Inventory Control: Linked to warehousing decisions are the inventory decisions which
hold key to success for many manufacturers, especially those where the per unit cost is
high.

Promotion Mix:

Promotion mix refers to combination of promotional tools used by an organisation to achieve

its communication objectives. These include:

(i) Advertising,
(ii) Personal Selling,
(iii) Sales Promotion, and
(iv) Publicity. These tools are also called elements of promotion mix and can be used
in different combinations, to achieve the goals of promotion.

Advertising:

Advertising is the most commonly used tool of promotion. It is an impersonal form of

communication, which is paid for by sponsors to promote some goods or service.

Merits of Advertising

i. Mass Reach: Advertising is a medium through which a large number of people can be
reached over vast geographical area.

ii. Enhancing customer satisfaction and confidence: Advertising creates confidence amongst
prospective buyers as they feel more comfortable and assured about the product quality and
hence feel more satisfied.
iii. Expressiveness: with the help of computer designs, graphics, etc, advertising has
developed into one of the most forceful medium of communication. With the special effects
created, even simple product and messages look very attractive.

iv. Economy: Advertising is a very economical mode of communication. A large number of

people can be reached at a time. Because of its wide reach, the overall cost of advertising gets
spread over numerous communication links established. As a result, the per- unit cost of
reach comes low.

Limitations of advertising

i. Less Forceful: Advertising is an impersonal form of communication. It is less forceful than

personal selling as there is no compulsion on the prospects to pay attention to the message.

ii. Lack of feedback: The evaluation of the effectiveness of the advertising message is very
difficult as there is no immediate feedback mechanism of the message that is delivered.

iii. Inflexibility: Advertising is less flexible as the message is standardized and cannot be
altered according to the requirements of the different customer groups.

iv. Low Effectiveness: As the volume of advertising is getting more and more expanded, it is
becoming difficult to make advertising messages heard by the target customers. This affects
the effectives of advertising.

Objections to Advertising

i. Adds to cost: Advertising unnecessarily adds to the cost of product, which is ultimately
passed on to the buyers in the form of high prices. The money spent on advertising adds to
the cost, which is an important factor in the fixation of the price of a product. But
advertisement also helps to increase the demand for the product as large number of potential
buyers is persuaded to buy more product. Increased demand leads to higher production,
which brings in the economies of scale. As a result, the per unit cost of production comes
down. This reduces the burden of consumers.

ii. Undermines social values: People argue that advertising undermines social values and
promotes materialism. It encourages dissatisfaction among people as they come to known
about new products and feel dissatisfied with their present state of affairs. But, advertisement
in fact, helps buyers by informing them about the new products, which may be improvement
over the existing products. If the buyers are not informed about these products, they may be
using inefficient products.

iii. Confuses the buyers: So many advertisements create confusion among the buyers. All
advertisements make similar claims that the buyer gets confused as to which one is true and
which product should be purchased. But, the supporters of advertisement argue that buyers
can clear their confusion by analysing the information provided on the advertisements and
other sources before taking a decision to purchase a product.

iv. Encourages sale of inferior product: Advertising does not distinguish between superior
and inferior products. Hence, it persuades people to buy even the inferior products. But
superiority and inferiority depend on the quality, which is a relative concept. The desired
level of quality also depends on the economic status and preferences of the target customers.
Hence, advertisements are not solely responsible for the sale of inferior products.

v. Some advertisements are in bad taste: Another Criticism against advertising is that some
advertisements are in bad taste. These show something which is not approved generally, by
people some advertisement also distorts the human relationships. There can be some chances
of misuse of adverting as a tool, which can be properly safeguarded by the low or by
developing a code of conduct by the advertisers, for their self-regulation.

Conclusion: Most of the Criticism against advertising are not entirely true. In the changed
are economic environment of globalization, advertising is considered as an important tool of
marketing. It helps a firm in effectively communicating with its target market, increasing the
sale and thereby reducing the Per unit cost of production. It is not a social waste it adds value
to the social cause by increasing production and generating more employment opportunities.
Hence, advertising is a use and not a waste.

Differences between Advertising and Personal Selling:

Advertising Personal Selling

1. Advertising is an impersonal form of Personal selling is a personal form of
communication communication.
2. Advertising involves mass Personal selling involves face to face direct
communication personal communication.
3. Advertising involves transmission of In personal selling the sales talk is adjusted
standard messages i.e, same message is sent keeping view customer’s back ground and
 to all the customers in a market segment needs.
4. It involves one way communication It involves two-way communication
5. Advertising is inflexible because the Personal selling is highly flexible as the
message cannot be adjusted to the needs of message can be adjusted.
the buyer
6. It has a wider coverage at a time it It covers only individual or a small group of
reaches masses people at a time.
7. In advertising the cost per person reached The cost per person is quite high in the case
is very low of personal selling
8. It covers the market in a short – time Personal selling takes a lot of time to cover
the entire market
9. Advertising does not provide feedback It provides feedback immediately
immediately.
10. The object of advertising is to create It aims at selling the product or service.
customers.
11. Doubts cannot be clarified early Here, doubts can be clarified easily
12. Advertising user media /tools such as Sales representatives are the only tool here
TV, Radio, Newspapers, magazines etc.

Sales Promotion:

Sales promotion refers to short- term incentives, which are designed to encourage the buyers
to make immediate purchase of a product or service. These include all promotional efforts
other than advertising, personal selling and publicity, used by a company to boost its sales.
Sales promotion activities include offering cash discounts, sales contests, free gift offers, and
free sample distribution. Sales promotion is usually undertaken to supplement other
promotional efforts such as advertising and personal selling.

Commonly used sales Promotion activities:

1. Rebate: Offering products at special prices, to clear off excess inventory.

2. Discount: Offering products at less than list price.

3. Refunds: Refunding a part of price paid by customer on some proof of purchase

4. Product combinations: Offering another product as gift along with the purchase of a
product.

5. Quantity gift: Offering extra quantity of the product commonly used by marketer of
toiletry products.

6. Instant Draws and Assigned Gift: For example, ‘Scratch a Card’ or ‘Burst a Cracker’
and instantly win a refrigerator, Car, T-shirt, Computer, with the purchase of a TV.

7. Lucky Draw: For example, the offer of a bathing soap to win a gold coin on lucky draw
coupon for free petrol on purchase of certain quantity of petrol from given petrol pump or
lucky draw coupon on purchase of easy undergarment and win a car offer.

8.Usable Benefit: Purchase goods worth ` 3000 and get a holiday package worth ` 3000
free’ or ‘Get a Discount Voucher for Accessories on Apparel Purchase of ` 1000 and above.’

9. Full finance @ 0%: Many marketers of consumer durables such as electronic goods,
automobiles etc offer easy financing schemes .

10. Sampling: Offer of free sample of a product, say a detergent powder or tooth paste to
potential customers at the time of launch of a new brand.

11.Contests: Competitive events involving application of skills or luck, say salving a quiz or
answering some questions.

Publicity:

Publicity is similar to advertising, in the sense that it is a non-personal form of

communication. However, as against advertising it is a non-paid form of communication.

the two important features of publicity are that:

(i) Publicity is an unpaid form of communication. It does not involve any direct
expenditure by the marketing firm; and
(ii) There is no identified sponsor for the communication as the message goes as a
news item.

Public Relations Department:

Managing public opinion of an organisation is an important task which can be performed by
the marketing department. The business needs to communicate effectively to customers,
suppliers, and dealers, since they are instrumental in increasing the sales and profit.

The following are the important functions performed by public relations department of an
organization:

i. Press relations: Information about the organization needs to be presented in a positive

manner in the press. The public relations department is in contact with the media to
present true facts and a correct picture about the company.
ii. Product publicity: New products require special effort to publicise them and the
company has to sponsor such programmes. The public relations department manages
the sponsoring of such events like news conferences, seminars, exhibitions etc.
iii. Corporate communication: The image of the organization needs to be promoted
through communicating with the public and the employees within the organization.
This is generally done with the help of newsletter, annual reports, brochures, articles
and audio-visual materials.
iv. Lobbying: The organization has to deal with government officials and different
ministers in charge of corporate affairs, industry, finance with respect to policies
relating to business and the economy. The public relations department has to be
proactive in promoting or decoding regulations that affect their organization

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CHAPTER 12 - CONSUMER PROTECTION

Consumers are the general masses, households, government and even producers. Sufferings
of the consumers are the sufferings of the human being. As such, it becomes necessary that
consumers’ fights must be protected.

Importance of consumer protection.

From consumers’ point of view:

1. Ignorance of consumers
2. Unorganised Consumers
3. Widespread Exploitation of Consumers:

From the point of view of business

1. Control over business malpractices

2. Long-term Interest of Business
3. Business uses society’s Resources
4. Business must have social ethics.
5. Moral Justification
6. Government Intervention

The law relating to consumer protection is contained in the consumer Protection Act 1986.
The act applies to all goods and services.

Objects of the Act

1. Better protection of interests of consumers.

2. Protection of rights of consumers.
3. Consumers’ protection councils.
4. Quasi – judicial machinery for speedy redressal of consumer disputes.

Who is A Consumer?

Consumer Protection Act 2019, a consumer is a person who buys any goods or avails services
for a consideration, which has been paid or promised, or partly paid and partly promised, or
under any scheme of deferred payment.

Terms & Definitions

1. Complaint: Any allegation in writing made by the complainant for obtaining relief with
respect to restrictive trade practice, defect in goods or deficiency in services provided,
overcharging of price or offer of goods or service injurious to life and safety.

2. Complainant: means one or more consumers, or any voluntary consumer association,

central or state government or the central authority or a legal heir or legal representative or a
parent or legal representative in case of a minor.

3. Spurious goods: Goods that are falsely claimed to be genuine.

4. Unfair trade practice: A trade practice for the purpose of promoting sale, use or supply of
any goods or service falsely represents its quality, standard, quantity, composition, style or
model.

5. Restrictive trade practice: A trade practice which manipulates price or affect the flow of
supplies in the market relating to goods and services in such a manner that an unjustified cost
is imposed on the consumer.

6. Defect: Any fault, imperfection, shortcoming or inadequacy in quality, nature and manner
of performance in relation to goods or a product.

7. Deficiency: Any fault, imperfection, shortcoming or inadequacy in quality, nature and

manner of performance in relation to in relation to any service and includes act of negligence
or omission or commission or withholding relevant information which causes loss or injury to
the consumer.

8. Injury: Any harm illegally caused to any person in body, mind or property.

9. Product: Any article or goods or substance or raw material or any extended cycle of such
product either in gaseous, liquid or solid state possessing intrinsic value capable of delivery
either as assembled or a component produced or manufactured to trade. It does not include
human tissues, blood, blood products and organs.

10. Product Seller: Any person in the course of business imports, sells, distributes, leases,
installs, prepares, labels, markets, repairs, maintains or otherwise involved in placing the
product for commercial use or a service provider.

11. Product Liability: Responsibility of a product manufacturer or seller of any product or

service to compensate for any harm caused to a consumer by defective product manufactured
or sold or by deficiency in services.
Consumer rights:

According to the provisions of the act consumers have been granted the following six rights:

1. Right to be heard
2. Right to choose
3. Right to be informed
4. Right to safety
5. Right to consumer education
6. Right to seek redressal

Additional rights

1. Right to possess basic needs

2. Right to have healthy environment

Consumer responsibilities:

(i) Be aware about various goods and services available in the market so that an
intelligent and wise choice can be made.
(ii) Buy only standardised goods as they provide quality assurance. Thus, look for ISI
mark on electrical goods, FPO mark on food products, Hallmark on jewellery, etc.
(iii) Learn about the risks associated with products and services, follow
manufacturer’s instructions and use the products safely.
(iv) Read labels carefully so as to have information about prices, net weight,
manufacturing and expiry dates, etc.
(v) Assert yourself to ensure that you get a fair deal.
vi) Be honest in your dealings. Choose only from legal goods and services and
discourage unscrupulous practices like black-marketing, hoarding, etc.
(vii) Ask for a cash memo on purchase of goods or services. This would serve as a
proof of the purchase made.
(viii) File a complaint in an appropriate consumer forum in case of a shortcoming in
the quality of goods purchased or services availed. Do not fail to take an action even
when the amount involved is small.

Ways and means of consumer protection:

 a. Measures adopted by the consumers:
a. Consumer individual measures
b. Consumer collective measures
b. Measures adopted by NGO
a. Public interest litigation
b. Los adalats
c. Measures adopted by the business
a. Indian Chambers of Commerce India (FICCI)
b. Confederation of Indian Industries (CII) have laid down their code of conduct
which lay down for their members the guidelines in their dealings with the
customers.
d. Measures adopted by the government
a. The sale of goods act, 1930
b. Essential commodities act, 1955
c. Environment protection act
d. The drugs and cosmetics act, 1946
e. The contract act, 1982
f. The bureau of Indian standards act, 1986
g. The trade marks act, 1999
h. The competition act, 2002

Redressal Agencies Under the Consumer Protection Act

1. District Commission

2. State Commission

3. National Commission

1. District Commission: District commission has a jurisdiction to entertain complaints where

value of goods or services paid as consideration does not exceed one crore rupees.

2. State Commission: It is established by the respective state government and ordinarily

function at the state capital. State Commission has a jurisdiction to entertain complaints
where value of goods and services paid as consideration exceeds one crore but does not
exceed ten crore rupees.
3. National Commission: The National Commission has territorial jurisdiction over the whole
country. National Commission has a jurisdiction to entertain complaints where value of
goods or services paid as consideration exceeds ten crores of rupees.

Relief Available

Where District or State or National Commission is satisfied about defect in goods, or

deficiency in services on any unfair trade practice or claim for compensation under product
liability, issues an order:

(i) To remove the defect in goods or deficiency in service.

(ii) To replace the defective product with a new one, free from any defect.

(iii) To refund the price paid for the product, or the charges paid for the service.

(iv) To pay a reasonable amount of compensation for any loss or injury suffered by the
consumer due to the negligence of the opposite party.

(v) To pay punitive damages in appropriate circumstances.

(vi) To discontinue the unfair/ restrictive trade practice and not to repeat it in the future.

(vii) Not to offer hazardous goods for sale

(viii) To withdraw the hazardous goods from sale.

(ix) To cease manufacture of hazardous goods and to desist from offering hazardous
services.

(x) Compensate for any loss or injury suffered by consumer under product liability action and
withdraw hazardous products from being offered for sale etc.

Role of Consumer Organisations and NGOs

(i) Educating the general public about consumer rights by organising training programmes,
seminars and workshops.
(ii) Publishing periodicals and other publications to impart knowledge about consumer
problems, legal reporting, reliefs available and other matters of interest.

(iii) Carrying out comparative testing of consumer products in accredited laboratories to test
relative qualities of competing brands and publishing the test results for the benefit of
consumers.

(iv) Encouraging consumers to strongly protest and take an action against unscrupulous,
exploitative and unfair trade practices of sellers.

(v) Providing legal assistance to consumers by way of providing aid, legal advice etc. in
seeking legal remedy.

(vi) Filing complaints in appropriate consumer courts on behalf of the consumers.

(vii) Taking an initiative in filing cases in consumer courts in the interest of the general
public, not for any individual.

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