CBSE CLASS 12 BUSINESS STUDIES

CHAPTER – I
NATURE AND SIGNIFICANCE OF MANAGEMENT
REVISION NOTES

1. DEFINITION OF MANAGEMENT:

“Management is the process of working with and through others to effectively achieve the
organizational objectives by efficiently using limited resources in the changing environment.”
Kreitner

2. MEANING/CONCEPT OF MANAGEMENT:
Management is the process of getting things done with the aim of achieving goals effectively and
efficiently.

a. Process: refers to the primary function like planning, organising, staffing, directing and
controlling performed by the management to get things done.

b. Effectiveness: means completing the right task to achieve the deputed goal within the time
frame.

c. Efficiency: means completion of task using minimum resources

3. EFFECTIVENESS VS EFFICIENCY

• Effectiveness is about doing the right task, completing the assigned job on time, no matter
whatever the cost.
• Efficiency is about doing the job in cost effective manner i.e. getting maximum output
with minimum input

Basis Effectiveness Efficiency

 It refers to the It refers to the completion of
Meaning completion of work work correctively with
on time. minimum cost and maximum
profit

It simply means doing things

In simple It simply means
correctly in a faster and cost
words doing right things
efficient manner.

Performing task with least

To achieve end
Objective wastage of time and
results on time
effort(cost)

Main
Is on time Is on cost
Focus

4. CHARACTERISTICS OF MANAGEMENT:
 I. Management is a goal-oriented process: An organisation has a set of simple and clearly
stated goals, which are the basic reason for its existence. Management unites the efforts of
the individuals in the organisation towards achieving these goals.

II. Management is all pervasive: Management is common to all organisations whether

economic, social or political. For e.g. management is applicable for a government
company, school, private company or a NGO.

III. Management is multidimensional:

Management is a complex activity that has three main dimensions:
(a) Management of work
(b) Management by people
(c) Management by operation

IV. Management is a continuous process: It is a series of continuous, composite, but separate

functions, performed by all managers all the time.

V. Management is a group activity: All the individuals in the organisation contributes

towards achieving the goals set by the organization.

VI. Management is a dynamic function: It has to adapt itself to its changing external
environment, which consists of various social, economic and political factors.

VII. Management is an intangible force: It cannot be seen but its presence can be felt from
the way organization functions.

5. MANAGEMENT OBJECTIVES:
 Organisational Objectives: Organizational Objectives can be divided into Survival (Earning
enough revenues to cover cost); Profit (To cover cost and risk); and Growth (To improve its
future prospects).

(a) Survival: Earning enough revenues to cover cost. Management by taking positive
decisions with regard to different business activities ensures survival of business for long
term.

(b) Profitability: Earning adequate profit in order to survive and grow. Profits provide a vital
incentive for the continued successful operation of the enterprise

(c) Growth: Growth indicates how well it exploits the potential opportunities. Growth of a
business can be measured in terms of sales volume increase, number of employees,
products etc.

Social Objectives:
Is to provide quality products at reasonable rates and generating employment opportunities for
disadvantaged sections of society. To provide basic amenities like schools and crèches to
employees and by using environmental friendly methods of production.

Personal Objectives:
Includes meeting the financial needs like competitive salaries and perks and Social and safety
needs of the employee like basic amenities, peer recognition etc.

6. IMPORTANCE OF MANAGEMENT
1. Management helps in achieving group goals: Management creates teams and coordinates
with individuals to achieve individual goals along with organizational goals
2. Increases efficiency: Management increases efficiency by using resources in the best possible
manner to reduce cost and increase productivity.
3. Creates dynamic organization: Management helps the employees overcome their resistance
to change and adapt as per changing situation to ensure its survival, growth and its competitive
edge.
4. Achieving personal objectives: Through motivation and leadership management helps the
individuals in achieving personal goals while working towards organizational objective.
5. Development of society: Management helps in the development of society by producing good
quality products, creating employment opportunities and adopting new technologies.

7. NATURE OF MANAGEMENT

1. Management as an Art
Art refers to skillful and personal application of existing knowledge acquired through study,
observation and experience. The features of art are as follows:

a. Existence of theoretical knowledge: In every art, Systematic and organized

study material is available to acquire theoretical knowledge and experts in the
respective fields apply these principles to their respective art forms.
b. Personalized application: The use of basic knowledge differs from person to
person and thus, art is a very personalized concept.
 c. Based on practice and creativity: Art involves creativity and practice of the
experts. For e.g. the music created by musicians are different though the musical
notes used are the same.

Every manager has his own unique style of managing things and people. He/she uses his
creativity in applying management techniques and his skills improve with regular application.
Since all the features of art are present in management. So it can called an art.

2. Management as a Science
Science is a systematized body of knowledge that is based on general truths, which can be tested
anywhere, anytime. The features of Science are as follows:

a. Systematized body of knowledge: Science has a systematized body of knowledge based

on cause and effect relationship.

b. Principles based on experiments and observation: Scientific principles are developed

through experiments and observation.

c. Universal validity: Scientific principles have universal validity and application.

Management has systematic body of knowledge and its principles are developed over a period of
time based on repeated experiments & observations which are universally applicable but they
have to be modified according to given situation.
As the principles of management are not as exact as the principles of pure science, so it may
be called-an inexact science. The prominence of human factor in the management makes it a
Social Science.

3. Management as Profession
Profession means an occupation for which specialized knowledge and skills are required and
entry is restricted. The main features of profession are as follows:

a. Well-defined body of Knowledge: is complete set of principles, concepts, terms and

activities that make up a professional domain.
b. Restricted Entry: The entry in every profession is restricted through examination or
through educational degree.
c. Professional Associations: All professions are affiliated to a professional association,
which regulates entry and frames code of conduct relating to the profession. Eg. IMA, ICAI
d. Ethical Code of Conduct: All professions are bound by a code of conduct, which guides
the behavior of its members.
e. Service Motive: The main aim of a profession is to serve its clients.

Management does not fulfill all the features of a profession and thus it is not a full-fledged
profession like doctor, lawyer, etc.
8. LEVELS OF MANAGEMENT

Top Management: Designations and Functions

Comprises of CEO, Board of Directors, MD, GM, VP. Main task is conceptualizing of
organizational goal, policy and strategy formulation and organising, controlling and monitoring
activities and resources. Controlling the work performance of individuals and approving Budgets.

Middle Management : Designations and Functions

Comprises of Departmental, Sub‐Departmental and Divisional heads, its main task is execution of
plans, policies framed by the top level management and preparing organisational set up &
appointing employees and issuing instructions and motivating employees. Ensuring
interdepartmental cooperation as well.

Supervisory and operational Level : Designations and Functions

Consists of Foremen and supervisor etc. Main task is to ensure actual implementation of the
policies as per directions of top and middle level managers and also to Bring workers’ grievances
before the management & maintain discipline among the workers.

9. FUNCTIONS OF MANAGEMENT:
 I. Planning : Setting objectives and targets and formulating an action plan. It bridges the
gap between where we are and where we want to reach.

II. Organising: Involves assigning duties, grouping tasks, establishing authority and
responsibility relationships and allocating the resources required to perform a specific
plan.

III. Staffing: Finding and placing the right person for the right job at the right time. It
involves recruitment, selection, placement, induction and development of employees.

IV. Directing: Refers to leading, influencing, motivating the staff chosen to perform the
assigned task efficiently and effectively.

V. Controlling: Refers to monitoring organizational activities towards the attainment of

organizational goals. It involves setting standards measuring current performance,
comparing with the standards, and taking corrective action for any deviations.

10. COORDINATION
Coordination is the force which synchronizes all the functions of management and activities of
different departments. Lack of coordination results in overlapping, duplication, delays and chaos.
It is concerned with all the three levels of management as if all the levels of management are
looked together, they become a group and as in the case of every group, they also require
coordination among themselves. Coordination is implicit and inherent in all functions of an
organisation.
 PLANNING

CONTROLLING ORGANISING

COORDINATION

DIRECTING STAFFING

FEATURES OF COORDINATION:

I. Coordination Integrates Group Effort: It is an orderly arrangement of group effort to

ensure that performance is at par with the plans and schedules.

II. Coordination Ensures unity of action: It is a binding force between various departments
and ensures that all efforts are focused towards achieving the organizational goal.

III. Coordination is a Continuous Process: It is a never-ending process as its needs are felt
at all levels and in all activities in the organisations. It begins at the planning stage and
continues until controlling.

IV. Coordination is the responsibility of all managers: coordination is equally important at

all levels of management. It is the responsibility of all the individuals in an organisation to
carry out their work in a responsible manner and coordinate with each other to achieve
organizational goals.

V. Coordination is a deliberate function: A manager has to coordinate the efforts of

different people in a conscious and deliberate manner. In other words, coordination is never
established by itself rather it is a conscious effort on the part of every manager.

VI. Coordination is all pervasive function: It is needed in all departments and at all levels.
Lack of coordination can lead to overlapping of activities.
IMPORTANCE OF COORDINATION:
The reasons that bring out the importance or the necessity for coordination are

I. Growth in the Size: An organisations growth results in the increase in the number of
people employed with varied individual aspirations and culture. So it is important to
harmonize individual goal with the organizational goals through coordination.

II. Functional Differentiation: All the departments and divisions may have their own,
objective, policies and their own style of working. However all departments and
individuals are interdependent and cannot work in isolation. Thus, coordination is
necessary for linking the activities of various departments.

III. Specialization: Mostly specialists have a feeling of superiority and prioritize their zone of
activities. Coordination seeks to sequence and integrate all the specialists’ activities into a
wholesome effort.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 2
PRINCIPLES OF MANAGEMENT
REVISION NOTES

PRINCIPLES OF MANAGEMENT

Principle

A principle is a fundamental truth or proposition that serves as the foundation for a system
of belief or behavior or for a chain of reasoning

Principles of Management

Principles of management are broad and general guidelines for managerial decision-making
and behavior. Management principles are not as rigid as principles of science as this deals
with human behavior and thus are to be applied creatively given the demands of the situation.

Nature of Principles of Management

The nature of principles of management are as follows:

1. Universal applicability: Principles of management is applicable in all types of
organizations, business as well as non-business, small as well as large enterprises depending
on the nature of the organisation.

2. General Guidelines: They are general guidelines to action but do not provide straight
solution to all managerial problems, as the business situations are complex and dynamic.

3. Formed by practice and experimentation: They are formed from the knowledge,
experiences and experiments of the managers.

4. Flexible: These principles are not rigid and can be adapted and modified by the practicing
managers depending upon the situation.

5. Mainly Behavioral: Since the principles aim at influencing complex human behavior they
are behavioral in nature.

6. Cause and Effect relationship: They are intend to establish relationship between cause &
effect so that they can be used in various situations.

7. Contingent: Their applicability depends upon the prevailing situation at a particular point
of time. The application has to be changed as per the situation.

Significance of the Principles of Management

1. Providing managers with useful insights into reality: Principles of management guide
managers with useful insights into real world situations, adherence to these principles will
improve their knowledge, ability and understanding of various managerial situations and
circumstances.

2. Optimum utilization of resources and effective administration: The resources with the
company are limited. Management principles equip the managers to see the cause and
effect of their decisions and actions and thus reduce wastage. Optimum utilization of
resources means maximum benefit with minimum cost.

3. Scientific decisions: Decisions must be based on facts, thoughtful and justifiable in terms
of intended purpose. Management principles must be timely, realistic and subject to
measurement and evaluation. Principles are free from bias and prejudice.
 4. Meeting the changing environmental requirements: Management principles are
effective and dynamic and thus help the organization to meet the changing requirements of
the environment.

5. Fulfilling social responsibility: Due to the increased awareness of the public forces all
companies are required to fulfill social responsibilities. Principles of management not only
help in achieving organizational goals but also guide managers in performing social
responsibilities.

6. Management training, education and research: Management principles are the core of
management and are helpful in increasing knowledge, which forms the basis for
management training and research.

Taylor’s Scientific Management

Meaning: It implies conducting of business activities according to standardized tools, methods

and trained personal in order to increase output improve its quality and reduce costs and wastes
through effective and optimum utilization of resources. Hence, it stresses that there is always one
best method to maximize efficiency. This method can be developed through study and analysis.

Principles of Scientific Management

 Science, not rule
of Thumb

Development of
each and every
PRINCIPLES OF
person to his or
her greatest SCIENTIFIC Harmony, Not
discord
Efficiency and
Prosperity MANAGEMENT

Cooperation not
individualism

(1) Science, not rule of Thumb: There should be scientific study and analysis of each element of
a job in order to replace the old rule of thumb approach or hit and miss method. We should be
constantly experimenting to develop new techniques, which make the work much simpler, easier
and quicker. Scientific method involved investigation of traditional methods through work-study.

(2) Harmony, Not discord: There should be complete harmony between management and
workers I achieving organizational goals. It implies that there should be mental revolution on part
of managers and workers in order to respect each other’s role and eliminate any class conflict to
realize organizational objectives.

(3) Cooperation not individualism: It is an extension of the Principle of Harmony not discord,
there should be complete cooperation between the labour and management instead of
individualism. Constructive suggestions from employees must be encouraged and desist workers
from going on strike and making unreasonable demands.

(4) Development of each and every person to his or her greatest Efficiency and Prosperity:
It implies taking actions for the development of competencies of all persons of an organization
after their scientific selection and assigning work suited to their temperament and abilities. This
will increase the productivity by utilizing the skills of the workers fully.
Techniques of Scientific Management

Functional
Foreman-ship

Standardization
Differential piece and
wage system Simplification of
work

Techniques
of Scientific
Management

Fatigue study Method Study

Time study Motion Study

1. Functional Foreman-ship: Functional foreman-ship is a technique in which planning and

execution are separate.
• Supervision is divided into several specialized functions and each functions is to be
entrusted to a foreman.
• There are eight foreman in the related process or function of production.
• Four each under planning and execution who keep a watch on all workers performance.
2. Standardization and Simplification of work: Standardization refers to developing standards
for every business activities to maximize output. Whereas simplification refers to eliminating
unnecessary varieties, sizes and grades of products or services. It results in savings of cost of
labour, machines and tools. It leads to fuller utilization of equipment and increase in turnover.

3. Method Study: The objective of method study is to find out one best way of doing the job to
maximize efficiency in the use of resources and to reduce cost of production and to maximizing
quality and satisfaction of customers.

4. Motion Study: Refers to the study of productive movements. It is the science of identifying
and eliminating wasteful movements resulting from unnecessary, incidental and unproductive
motions of the workers so that it takes less time to complete the job efficiently.

5. Time study: It determines the standard time taken to perform a well-defined job. The objective
of time study is to determine the number of workers to be employed, frame suitable incentive
schemes & determine labour costs.
6. Fatigue study: Fatigue study seeks to determine time and frequency of rest intervals in
completing a task. The rest interval will enable workers to regain their lost stamina thereby
avoiding accidents, rejections and industrial sickness.

7. Differential piece wage system: This differentiates efficient and inefficient workers and links
wages and productivity. The standard output per day is established and two-piece rates are used:
higher for those who achieve upto and more than standard output i.e. efficient workers and lower
for inefficient and slow workers. Thus, efficient workers will be rewarded & inefficient will be
motivated to improve their performance.

Fayol’s Principles of Management

According to Henri Fayol’s specialization promotes efficiency of the workforce and increases
productivity. In addition, the specialization of the workforce increases their accuracy and speed.
This 14 principles of management is applicable to both technical and managerial activities

Principles of Management developed by Fayol

1. Division of work: Work is divided in small tasks/job and a trained specialist who is
competent enough to perform that job does each work. Thus it leads to greater efficiency,
specialization, increased productivity.

2. Authority and Responsibility: Authority means power to take decisions and

responsibility means obligation to complete the job assigned on time. There should be a
balance between authority and responsibility. Mere responsibility without authority makes
an executive less interested in discharging duties. Similarly, giving authority without
assigning responsibility makes him arrogant and there is fear of misuse of power.

3. Discipline: Is the obedience to organizational rules and employment agreement, which are

necessary for the working of the organisation. Discipline requires good supervisors at all levels,

clear and fair agreements and judicious application of penalties.

4. Unity of Command: According to Fayol there should be one and only one boss for every
individual employee. It implies that every worker should receive orders from one superior
only, otherwise it will create confusion, conflict and duplication of work.

5. Unity of Direction: All the units of an organisation should move 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 coordination.

Difference between Unity of Command and Unity of Direction

 BASIS FOR
UNITY OF COMMAND UNITY OF DIRECTION
COMPARISON

Meaning Unity of command refers to a Unity of direction is a management

principle of management that principle, which implies that all the
states that one should get orders activities with same objective must
from and report to only one boss. have one head and one plan.

Purpose To prevent dual subordination. To prevent duplication of activities.

Implications It effects an individual employee It effects the entire organization

Outcome The principle leads to effective The principle results in coordination

functioning of the subordinates. of work of various employees and
managers.

Relationship Represents relationship between Represents relationship of activities,

superior and subordinate. as per organizational plans and
goals.

Need To fix the responsibility of each For efficient functioning of

person in the organization. organizational activities.

6. Subordination of Individual Interest to general interest: The interest of an organization

should take priority over the interest of any individual employee. In simple words the
organisation interest to be prioritized over individual interest.

7. Remuneration of Employees: The overall pay and compensation should be, fair to both
employees and the organization. The employees should be given fair wages so that they can have
a reasonable standard of living. Wages should be within the paying capacity of the organisation.
8. Centralization and Decentralization: Centralization means concentration of decisions
making authority with some, whereas its dispersal among more than one person is
Decentralization. Both should be balanced, as no organization can be completely centralized
or completely decentralized.

9. Scalar Chain: The formal lines of authority and communication between superiors and
subordinates from the highest to the lowest ranks is known as scalar chain. This chain should not
be violated but in case of emergency employees at same level can contact through Gang Plank by
informing their immediate superiors.

10. Order: According to Fayol “ People and material should be in suitable places at
appropriate time for maximum efficiency”. A place for everything and everyone and
everything and everyone should be in its designated place

11. Equity: Good sense and experience are needed to ensure fairness to all employees who
should be treated as fairly as possible. The working environment of any organization should
be free from all forms of and principles of justice and fair play should be followed. No worker
should be unduly favoured or punished.

12. Stability of Personnel: Employee turnover should be minimized to maintain

organizational efficiency. A personnel should be selected and appointed after rigorous
procedure and the selected person should be kept at the post for a minimum tenure to show
results.
 13. Initiative: Workers should be encouraged to develop and carry out their plan for
improvements. Initiative means taking the first step with self-motivation. It is thinking out
and executing the plan.

14. Espirit De Corps: Management should promote team spirit, unity and harmony among
employees.

Fayol versus Taylor

Basis Henry Fayol F.W Taylor

Observations and
Basis of formation Personal Experience experimentation
Improvement in the overall Concentrates on improving the
Focus administration. productivity.
Applicable only to specialized
Applicability Universal applicability situations. Such as in factories

Perspective Top level management Lower level ‐ shop floor level

Researcher and practioner and
was called as ‘father of general Scientist and was called as ‘father
Personality management. of scientific management.
More importance is attached to More importance is given to
increase the production rather human element e.g., principle of
Human element than to the human element. equity, stability of tenure.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 3
BUSINESS ENVIRONMENT
REVISION NOTES

MEANING OF BUSINESS ENVIRONMENT:

The term business environment means the sum total of all individuals, institutions and other
forces that are outside the control of a business enterprise but that may effect its performance.
• The economic, social, political, technological and other forces, which operate outside a
business enterprise, also form part of the business environment.
• The organisation must be aware of the external forces and institutions and must be
dynamic to adapt itself to the changing external environment.
• The organisation must set goals and formulate plans and procedures based on the
changing external business environment.

FEATURES OF BUSINESS ENVIRONMENT

1. Totality of external forces: Business environment is the sum total of all the forces and
factors external to a business firm.
2. Specific and general forces: Business environment includes both specific and general
forces. Specific forces include investors, competitors, customers etc. who influence
business firm directly while general forces include social, political, economic, legal and
technological conditions, which affect a business, firm indirectly.

3. Inter-relatedness: Different elements or parts of a business environment are closely

interrelated. For example, increased awareness for health care has raised the demand for
healthy oil free food and healthy lifestyle.

4. Dynamic: Business environment is dynamic in which it keeps on changing with the

change in technology, shift in consumer preferences etc.

5. Uncertainty: Business environment is largely uncertain, as it is difficult to predict the

future happenings. Such as, frequent environmental changes in the field of technology
and fashion industry.

6. Complexity: Business environment is complex phenomenon, which is easier to

understand in parts, but it is difficult to understand in totality. Since the business
environment consists of various interrelated and dynamic forces, it is difficult to
understand the constituents of a given environment.

7. Relativity: Business environment is a relative concept whose impact differs from country
to country, region to region and firm to firm.
IMPORTANCE OF BUSINESS ENVIRONMENT

Identification of
opportunities to
get first mover
advantage

Assistance in
planning and Identification of
policy threats
formulation
IMPORTANCE
OF BUSINESS
ENVIRONMENT

Coping with Tapping useful

Rapid changes: resources

1. Business environment enables the firm to Identify opportunities to get the first
mover advantage: Environment provide various opportunities for business success.
Understanding it helps an organization in identifying advantageous opportunities and
exploiting benefits prior to competitors.

2. It helps the firm to Identify threats and early warning signal: Environmental
awareness can help managers of an organization to identify various threats on time and
serve as an early warning signal. For example, Bajaj Auto made considerable
improvements in its two wheelers when other companies entered the auto industry.

3. It helps in tapping useful resources: Business Environment is a source of various

resources such as man, machine, money, raw material, power etc. to a business firm. By
understanding the business environment an enterprise can design policies to acquire the
required resources and convert them into output that environment desires.
 4. It helps in coping with rapid changes: Business environment is very dynamic were
changes are taking place at a fast pace. Changes such as turbulent market conditions, less
brand loyalty etc. In order to cope with significant changes managers must understand,
examine, and develop a suitable course of action.

5. It helps in assisting in planning and policy formulation: Understanding and analysis

of business environment can be the basis for planning & policy formulation in an
organisation.

6. It helps in improving performance: The enterprise that continuously monitor the

environment and adopt suitable business practices are the ones, which not only improve
their performance but also continue to succeed in the market for a long period.

DIMENSIONS OF BUSINESS ENVIRONMENT

1. Economic Environment: It has immediate and direct impact on a business. Rate of

interest, inflation rate, change in disposable income of people, monetary policy, stock
market indices etc. are some economic factors, which could affect business firms.
 Increase or decrease of the economic factors result in opportunities or constraints on a
business enterprise.

2. Social Environment: Business environment includes various social forces such as

customs, beliefs, literacy rate, educational levels, lifestyle, values etc. Social trends
present various opportunities and threats to business enterprise.

Example the celebration of Diwali, Eid and Christmas in India provide financial
opportunities for confectionery manufacturers, garments businesses and many other
related businesses.

3. Technological Environment: It includes forces relating to scientific improvements and

innovations, which provide new ways of producing goods and services and new methods
and techniques of operating business. A businessman must closely monitor the
technological changes taking place in the industry as it helps in facing competition and
improving quality of the product.
Example, demand for LED smart HD tv’s instead of LCD tv’s, Use of artificial
intelligence in various companies etc.

4. Political Environment: It includes political conditions such as general stability and

peace in the country and the attitude of the elected government representatives hold
towards businesses. Political stability builds confidence among business community
while political instability and bad law & order situation may bring uncertainty in business
activities.
Example: Bangalore is called as the silicon valley of India due to the favorable political
conditions provided by the state government to the IT industries.

5. Legal Environment: It includes various laws and legislations passed by the Government,
administrative orders, court judgements, decisions of various commissions and agencies
at every level of the government center, state or local. Businessmen have to act according
to various legislations and their knowledge is very necessary.
Example: Advertisement of Alcoholic beverages is prohibited.

ECONOMIC ENVIRONMENT IN INDIA

 As per the economic planning the government gave lead role to the public sector for
infrastructure industries whereas the private sector was broadly given the responsibility of
developing consumer goods industry. At the same time, the government imposed several
restrictions, regulations and controls on the working of private sector enterprises. India’s
experience with economic planning has delivered mixed results. In 1991 the economy faced a
serious foreign exchange crisis, high government deficit and a rising trend of prices despite
bumper crops.
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 for the development of the
country.

The features of economic policy 1991 are as follows:

1. Reduced number of industries to six, under compulsory licensing scheme.

2. The role of public sector was limited to four industries of strategic importance.

3. Disinvestment was carried out in case of many public sector enterprises.

4. Policy towards foreign capital was liberalized and in many sectors, 100% direct foreign
investment was allowed.

5. Automatic permission was granted for signing technology agreements with foreign
companies.

6. Foreign investment promotion board (FIPB) was setup to promote & channelize foreign
investment in India.

The main strategies of new economic policy of 1991:

1. LIBERALISATION:

The economic reforms that were introduced aimed at liberalizing the Indian business and
industry from all unnecessary controls and restrictions. It relaxed the rules and regulations which
restricted the growth of the private sector and also allowed the private sector to take part in the
economic activities that were exclusively reserved for the government sector.

Liberalisation of the Indian industry has taken place with respect to:

a. Abolishing licensing requirement in most of the industries except a short list,

b. Freedom in deciding the scale of business activities i.e., no restrictions on expansion or

contraction of business activities,

c. Removal of restrictions on the movement of goods and services

d. Freedom in fixing the prices of goods services

e. Reduction in tax rates and lifting of unnecessary controls over the economy,

f. Simplifying procedures for imports and experts, and

 g. Making it easier to attract foreign capital and technology to India.

2. PRIVATISATION:
The new set of economic reforms aimed at giving greater role to the private sector in the nation
building process and a reduced role to the public sector. The government adopted the policy of
divestment and transfer of ownership.
• To achieve privatization in India, the government redefined the role of the public sector
in the new industrial policy of 1991, adopted the policy of planned disinvestments of the
public sector, and decided to refer the loss making and sick enterprises to the Board of
Industrial and Financial Reconstruction.

• Divestment means transfer of ownership of a public sector enterprise to a private

enterprise.

• If there were dilution of Government ownership beyond 51 percent, it would result in

transfer of ownership and management of the enterprise to the private sector.

3. GLOBALISATION:
Integration of the various economies of the world leading towards the emergence of a cohesive
global economy. In simple words globalization means interaction and interdependence of a
country with the economies of other countries to facilitate free flow of goods and services,
capital and technology across borders.
Till 1991, the Government of India had followed a policy of strictly regulating imports in value
and volume terms. These regulations were with respect to (a) licensing of imports, (b) tariff
restrictions and (c) quantitative restrictions.
A truly global economy implies a boundary less world where there is:
a. Free flow of goods and services across nations;
b. Free flow of capital across nations;
c. Free flow of information and technology;
d. Free movement of people across borders;
e. A common acceptable mechanism for the settlement of disputes;
f. A global governance perspective.
DEMONETISATION:
The Government of India, made an announcement on November 8, 2016 with profound
implications for the Indian economy. The two largest denomination notes, `500 `1,000, were
‘demonetised’ with immediate effect, ceasing to be legal tender except for a few specified
purposes such as paying utility bills. This led to eighty six per cent of the money in circulation
invalid. The people of India had to deposit the invalid currency in the banks, which came along
with the restrictions placed on cash withdrawals. In other words, restrictions were placed on the
convertibility of domestic money and bank deposits. The main aim was to curb corruption, black
money and illegal activities.

FEATURES OF DEMONETISATION:
1. Demonetisation is viewed as a tax administration measure. Cash holdings arising from
declared income was readily deposited in banks and exchanged for new notes. But those
with black money had to declare unaccounted income and pay tax penalty was imposed.

2. Demonetisation is also interpreted as a shift on the part of the government indicating that
tax evasion will no longer be tolerated or accepted.

3. Demonetisation also led to tax administration channelizing savings into the formal
financial system.

4. Another feature of demonetization is to create a less-cash or cash-lite economy, i.e.,

channeling more savings through the formal financial system and improving tax
compliance.
IMPACT OF GOVERNMENT POLICY CHANGES ON BUSINESS AND INDUSTRY

IMPACT OF GOVERNMENT
POLICY CHANGES ON BUSINESS
AND INDUSTRY
• Increasing Competition
• More Demanding Customers:
• Rapidly Changing Technological
Environment:
• Necessity for Change:
• Need for Developing Human Resources:
• Market Orientation:
• Loss of budgetary Support to the Public
Sector:

1. Increasing Competition: Changes in the rules of industrial licensing and entry of foreign
firm’s Indian market has increased market competition in India.

2. More Demanding Customers: Well-informed customers are more demanding.

Increased competition in the market gives customer wider choice of quality products at
reasonable price.

3. Rapidly Changing Technological Environment: Increased competition forces the firms

to develop new ways to survive and grow in the market.

4. Necessity for Change: After 1991, the market forces have become turbulent, as a result
of which the enterprises have to continuously modify their operations.

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.
6. Market Orientation: Earlier firms followed production oriented marketing operations.
Today firms produce those goods & services as per the requirements of the customers.

7. Loss of budgetary Support to the Public Sector: The budgetary support given by the
central government to the public sector had declined to a considerable extend. Thus in
order to survive, the public sector have to be more efficient generate their resources and
profits.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 4
PLANNING
REVISION NOTES

DEFINITION
“Planning is an intellectual process, conscious determination of course of action, the basing of
decision on purpose, facts and considered estimates.”.
Koontz and O‘Donnell

MEANING
• Planning is deciding in advance what to do and how to do. It is one of the basic
managerial functions.
• It involves setting objectives and developing appropriate courses of action to achieve
these objectives.
• The plan that is developed has to have a given time frame but time is a limited resource.
It needs to be utilised judiciously.
IMPORTANCE OF PLANNING

1. Planning provides directions: By stating in advance, how the work is to be done planning
provides direction for action. Planning ensures that objectives are clearly stated in order to
develop appropriate course of action. If the plans are set, the department and individuals can
work in coordination.
2. Planning reduces the risk of uncertainty: Planning is an activity, which enables a manager
to look ahead and anticipate changes. Changes or events cannot be eliminated but by deciding
the plans and course of action in advance managers can anticipate it and adjust the plans
according to the situation.
3. Planning reduces overlapping and wasteful activities: Planning serves as the basis of
coordinating the activities and efforts of different divisions departments and individuals. It
reduces useless and redundant activities, avoids confusion and misunderstanding, and ensures
clarity in thought and action.
4. Planning promotes innovative ideas: Planning is the first function of management.
Managers get the opportunity to develop new ideas and new ideas can take the shape of concrete
plans. It guides all future action leading to growth and prosperity of the business.
5. Planning facilitates decision making: Planning involves setting targets and predicting future
conditions, thus helping in taking rational decisions from alternative courses of action.

6. Planning establishes standards for controlling: Planning provides the standards against
which the actual performance is measured. Therefore planning is a prerequisite for controlling.

FEATURES OF PLANNING

Planning
focuses on
achieving
objectives:
Planning is a
Planning is a
primary
mental
function of
exercise:
management:

FEATURES
OF
Planning PLANNING
involves Planning is
decision pervasive:
making:

Planning is Planning is
futuristic: continuous:

1. Planning focuses on achieving objectives: Organisations set up with general goals and
specific goals along with the plans and activities to be undertaken to achieve these goals.

2. Planning is a primary function of management: Planning lays down the base for other
functions of management.

3. Planning is pervasive: Planning is required at all levels of management as well as in all

departments of the organisation. The scope of planning is different at different levels and
for different departments.

4. Planning is continuous: Continuity of planning is related with the planning cycle. It

means that a plan is framed, it is implemented, and is followed by another plan, and so
on.
 5. Planning is futuristic: The purpose of planning is to meet future events effectively to the
best advantage of an organisation. Planning involves forecasting future events and
conditions and drafting the plans accordingly.

6. Planning involves decision making: Planning essentially involves choice from among
various alternatives and activities. If there is only one possible goal or a possible course
of action, there is no need for planning because there is no choice.

7. Planning is a mental exercise: Planning requires application of the mind involving

foresight. Planning is an intellectual activity, which requires logical and systematic
thinking rather than guess work.

LIMITATIONS OF PLANNING

1. Planning leads to rigidity: In an organisation, a well-defined plan is drawn up with specific

goals to be achieved within a specific time but managers may not be in a position to change it.
As the business environment is dynamic managers need to be given some flexibility to cope up
with the changed circumstances.
2. Planning may not work in dynamic environment: Planning is based on anticipation of
future happenings and since future is uncertain and dynamic so the organisation needs to adapt
itself to changes. However planning cannot foresee the future events effectively.
3. Planning reduces creativity: Top management does planning and middle management does
implementation of plan but they are not allowed to deviate from plan and thus creativity of these
managers get reduced.
4. Planning involves huge costs: Huge costs are involved in the formulation of the plan.
Detailed plans require scientific calculations to a ascertain data. Sometimes costs incurred on
planning doesn’t justify the benefits derived
5. Planning is a time consuming: Many aspects need to be considered while formulating a plan,
hence it is a very time consuming process.
6. Planning does not guarantee success: The success of an enterprise is possible only when
plans are properly drawn and implemented. Managers tend to apply the previously tried and
tested plans but a plan successful before may not be successful for all situations.

PLANNING PROCESS

Follow Up Setting
Action Objectives

Implementing Developing
The Plan Premises
PLANNING
PROCESS

Identifying
Selecting The
Alternative
Best
Courses Of
Alternative
Action

Evaluating
Alternative
Courses Of
Action

1. Setting Objectives:

• Specify the objectives that the organization wants to achieve.

 • Set objectives for the entire organisation and each departments, units and employees.
State the objectives of the organisation very clearly, and determine how all departments
would contribute towards overall objectives.
• Objectives have to percolate down to each unit and employees at all levels so that they
understand how their actions would contribute towards achieving objectives.
• Managers must contribute ideas and participate in the objective setting process.
• E.g. Setting sales target, new product launch, business expansion to new territories.

2. Developing Premises:

• Planning is a future oriented activity and the future is uncertain therefore the managers
are required to make certain assumptions while drafting plans for the organisation.
• These assumptions about the future are called premises, these are the base material upon
which plans are drawn.
• All managers involved in planning should be familiar with the same assumption and they
all must agree to it.
• For e.g. forecasting is a technique used for gathering information to develop premises. An
organisation uses various forecasts such as policy changes, new markets, demand of a
product etc. for various purposes.
• Accuracy of forecast is necessary for successful plans.

3. Identifying Alternative Courses Of Action:

• Once objectives are set, assumptions are made and then alternative courses of action is
determined.
• Managers must identify all the alternative courses of action for achieving the objectives
of the organisation.
• The course of action may be routine or innovative. Innovative course can be adopted by
involving more people and sharing their ideas.

4. Evaluating Alternative Courses Of Action

• The next step is to evaluate the pros and cons of each and every alternative course of
action.
• Positive & negative aspects of each proposal is to be evaluated keeping in view the
objectives to be achieved
 • E.g. In financial decisions, risk-return trade-off are important. Riskier the investment,
higher the returns. To evaluate such proposals, detailed calculation of earnings, taxes,
earnings per share, dividends are made and then decision is taken.

5. Selecting The Best Alternative

• The best plan from all the alternatives is selected and implemented.
• The ideal plan is the most feasible, profitable and with least negative consequences.

• In most plan drawing a mathematical analysis is not possible hence manager‘s

experience, judgment and intuition plays an important role in selecting the most viable
alternative.
• Sometimes a combination of plans may be selected instead of one best course.

6. Implementing The Plan

• In this step the selected best plan is implemented ie putting plan into action.
• Managers start organizing & assembling resources for implementing the plans.
• E.g. If there is a plan to increase production, then more labour, more machinery will be
required. This step would also involve organizing more labour and purchase of
machinery.

7. Follow Up Action

• Involves monitoring the implemented plans and ensuring that the activities are being
performed according to the schedule.
• Continuous monitoring is required to find out deviations from plans and corrective action
has to be taken to achieve organizational objectives

TYPES OF PLAN

A plan is a commitment to a particular course of action for achieving specific results. Plans can
be classified into several types depending on the use and the length of the planning period. These
plans can be classified into single-use plans and standing plans.

1. SINGLE USE PLAN

• A single use plans are specific plans which are meant to solve a nonrecurring particular
problem. It was developed for a one-time project or event that has one specific objective.

• Such plan is developed to meet the needs of a unique situation in hand.

• The duration of a single use plan differs depending upon the type of project, as a single
event plan may last for one day while a single project may last for one week or months.
 • For example, an outline for an advertising campaign. After the campaign runs its course,
the short term plan will lose its relevance except as a guide for creating future plans.

2. STANDING PLANS
• Standing plans are used for those activities, which occur regularly over a period of time.
• It is designed once and retain their value over a period of time while undergoing revisions
and updates.
• It is developed once but modified from time to time to meet business needs.
• Standing plans include policies, procedures methods and rules

Based on what the plans seek to achieve, plans can be classified as

I. Objectives:
• Objectives are the end results, which the management seeks to achieve, by its
operations.

• They may be designed as the desired future position that the management would
like to reach. The first and foremost step of the planning process is setting
organizational objectives.

• Objectives need to be expressed in specific terms i.e., they should be measurable

in quantitative terms, in the form of a written statement of desired results to be
achieve within a given time period.

• E.g. Getting 20% return on Investment, increase sales target by 10% etc.
Objectives should be clear and achievable.

II. Strategy:
• Strategy refers to future decisions defining the organisations direction and scope
in the long run.
• Are those plans which an organization prepares to face various situations, threats
and opportunities.
• When the managers of an organization prepare a new strategy for the business it is
called internal strategy and when some strategies are prepared to respond to the
strategies of the competitors, then such strategies are called external strategies.
• E.g. selection of the medium of advertisement, selection of the channels of
distribution etc.

III. Policy:
• Policies are general statements that guide thinking or channelize energies towards
a particular direction. It provides a basis for interpreting strategy.
• There are policies for all the levels and departments in an organisation, such a s
major policies and minor policies.
• Policies define the parameters within which a manager can function.
 • They are flexible as they may be changed as per requirement.
• E.g. selling goods on cash basis only, purchasing decisions etc.

IV. Procedure:
• Procedures are routine steps, detailing the exact manner in which a work is to be
performed.
• They indicate which work is to be done in which sequence.
• The sequence of actions to be taken are generally to enforce a policy and to attain
pre-determined objectives.
• E.g. Recruitment process of a company.

V. Rule:
• Rules are specific statement that inform what is to be done and what not to be
done in various circumstances.
• Rules are rigid and doesn’t allow flexibility and thus ensures discipline in the
organization.
• E.g. ‘No smoking in the office premises’

VI. Method:
• Methods provide the prescribed ways or manner in which a task can be performed
considering the objective.
• Selection of proper method saves time, money, efforts and increases efficiency.
• Methods are flexible.
• E.g. various methods of training adopted by an organization to train its employees
like apprenticeship training, induction programmes etc.

VII. Programme:
• A programme may consist detailed list of project outlining, the objectives,
policies, procedures, rules, tasks, physical and human resources required to
implement any course of action.

VIII. Budget:
• A budget is a statement of expected results expressed in numerical terms for a
definite period in the future.
• E.g. sales budget, production budget
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 5
ORGANISATION
REVISION NOTES

Meaning of Organizing
The organising function leads to the creation of an organisational structure which includes the
designing of roles to be filled by suitably skilled people and defining the inter relationship
between these roles so that ambiguity in performance of duties can be eliminated. The aim of
organizing is to enable people to work together for a common purpose.

STEPS IN THE PROCESS OF ORGANISING

 Identification &
Division Of Work

Departmentalization

Assignment
Of Duties

Establishing
Reporting
Relationships

1. Identification & Division Of Work:

The first step in the process of organizing involves identifying and dividing the work in
accordance with the predetermined plans. The work is divided into manageable activities so that
duplication of work can be avoided and the burden of work can be shared among the employees.

2. Departmentalization:
• Once work is divided into small activities, similar and related jobs are grouped together.
This grouping is called departmentalization.
• E.g. departmentalization on the basis of territory, products etc.

3. Assignment Of Duties:
• It is important to state clearly the work of different job positions and allocate work
accordingly to employees.
• Once departments are formed, individual department heads are appointed for each
departments.
• The work must be assigned to those who are best fitted to perform it well.
• E.g. finance job should be assigned to persons having qualifications and experience in
finance e.g. C.A‘s or MBA finance.

4. Establishing Reporting Relationships:

 • Establishing authority and responsibility relationship helps to create a hierarchal structure
and also helps in coordination amongst various departments.
• Superior subordinate relations between different people and job positions is to be created,
so that everybody knows from whom he/she is to taking orders and to whom he/she can
issue orders.

IMPORTANCE OF ORGANISING

Benefits of
specialization

Clarity in
Expansion and
working
growth
relationships

IMPORTANCE
OF
ORGANISING
Optimum
Development of
utilization of
Personnel
resources

Adaption to Effective
Change Administration

1. Benefits of specialization:
• Organising leads to a systematic allocation of jobs amongst the work force.
• The division of work into smaller jobs reduces workload and enhance productivity and
repetitive performance leads to specialization.

2. Clarity in working relationships:

• Organising helps in defining all the jobs and also clarifying the limits of authority and
responsibility of each job.
 • It helps in creating a hierarchical order thereby enabling the fixation of responsibility and
specification of the extent of authority to be exercised by an employee.

3. Optimum utilization of resources:

• Organisation leads to usage of all natural resources, financial resources and human
resources.
• The proper assignment of jobs avoids duplication of work and minimizes wastage of
resources.

4. Effective Administration:
• It provides a clear description of jobs and related duties, which helps to avoid confusion
and duplication of work.
• Clarity in working relationships enables proper execution of work, which results
ineffective administration.

5. Adaption to Change:
• The process of organising is flexible which allows a business enterprise to accommodate
changes in the business environment.
• It also provide stability to an enterprise.

6. Development of Personnel:
• A well designed organization structure encourages initiative and relative thinking on part
of the employees.
• When managers delegate their authority, it reduces their workload and thus can give time
on important areas of growth and opportunity to innovate thereby.

7. Expansion and growth:

• Organising helps in growth & diversification of an enterprise.
• By adding more job positions, departments, products lines, new geographical territories
etc. and thus will help to increase customer base, sales and profit.

ORGANISATIONAL STRUCTURE
The organisation structure can be defined as the framework within which managerial and
operating tasks are performed. It specifies the relationships between people, work and resources
in an organisation.
Under the organizational structure, various posts are created to perform different activities for the
attainment of the predetermined objectives of the enterprise. The structure provides a basis or
framework for managers and other employees to perform their functions.
Span of management refers to the number of subordinates that can be effectively managed by a
superior. The Span of management largely gives shape to the organization structure. This
determines the levels of management in the structure.

1. FUNCTIONAL STRUCTURE:
In functional structure activities are grouped and departments are created on the basis of specific
functions to be performed. For example, all the jobs related to production are grouped under
production department, sales departments etc.
 ADVANTAGES DISADVANTAGES SUITABILITY

• Functional structure • A Functional structure

leads to occupational gives more imortance • Organizations which
specialisation since to the objectives of require high degree of
emphasis is placed on functional head than functional
specific functions. the objectives of specialization with
• Promotes efficiency in organisation diversified activities.
the utilisation of man • Lack of coordination • Large organizations
power. among different producing one line of
• Promotes control and departments. product.
coordination within a • A conflict of interests
department. will arise within
• It helps in increasing different departments.
managerial and • It may lead to
operational efficiency. inflexibility due to
• it reduces duplication narrow perspective of
of work. employees.
• It helps in training
employees easily.
• It ensures that
different functions get
due attention.

2. DIVISIONAL ORGANIZATION STRUCTURE

Dividing the whole enterprise according to the major products to be manufactured (like metal,
plastic, cosmetics etc.) is known as divisional organization structure.
 •Product specialisation helps in the overall development of the skills of
departmental heads.
•It helps in the fixation of responsibility and accountability of departmental heads
•provides a proper basis for assessing performance and results of each division.
ADVANTAGES •It facilitates expansion and growth, as new divisions can be added without
interupting existing divisions

•Conflicts may arise among different divisions on allocation of resources.

•It may lead to increase in costs since there may be a duplication of activities in
different product divisions.
•It provides managers with the authority to supervise all activities related to a
DISADVANTAGES particular division.

•This structure is suitable in organizations producing multi product or different lines of

products requiring product specialization.
•Growing companies which intend to add more lines of products in future adopt this
structure.
SUITABILITY
Comparative view: Functional and Divisional Structure

Basis Functional Structure Divisional Structure

Formation Formation Is based on Formation is based on
functions product lines and is
supported by functions
Specialisation Functional specialisation Product specialization
Responsibility Difficult to fix on a Easy to fix responsibility for
department performance
Managerial Development Difficult, as each functional Duplication of resources in
manager has to report to the various departments, hence
top management costly
Cost Functions are not duplicated Duplication of resources in
hence economical various departments, hence
costly.
Coordination Difficult for a multiproduct Easy, because all functions
company. related to a particular product
are integrated in one
department.

3. FORMAL ORGANISATION

Formal organisation refers to the organisation structure that is designed by the management to
accomplish organizational goals. In a formal organisation the boundaries of authority &
responsibility is clearly defined and there is a systematic coordination among the various
activities to achieve organizational objectives.
 Features Advantages Disadvantages

• It clearly defines the • Easier to fix • May lead to

lines of authority and responsibility since procedural delays as
responsibility for mutual relationships chain of command has
every individual in an are clearly defined to be followed.
organisation. • It helps in avoiding • Rigid policies reduces
• It is a means to duplication of work creativity.
achieve the objectives • Unity of command is • More emphasis is on
specified in the plans. maintained structure and work
• It is impersonal and • Effective than on human
doesn’t take into accomplishment of relationships.
consideration goals.
emotional aspect of • Provides stability in
the employees. organisation.
• it is designed by the
top management.
• It is created with the
motive of achieving
organizational
objectives.

4. INFORMAL ORGANISATION
Interaction among people at work gives rise to a ‘network of social relationships among
employees’ called the informal organisation. The main purpose of this organization structure is
the psychological satisfaction of the employees with common interests. For example, employees
with similar interest in books, films, religion etc. may form their own informal groups.
 FEATURES ADVANTAGES LIMITATIONS

• It originates from the • It leads to faster • Informal organisation

personal interaction of spread of information spread rumours,
employees within a and feedback as sometimes it goes
organisation. formal channels of aginst the interests of
• The standards of communication is not the organisation.
behaviour evolve from followed. • It resists change and
group norms. • It enhances job lays stress on adopting
• It doesnt have fixed satisfaction and a the old techniques.
channels of sense of • members of the
communication. belongingness in the group may give more
• It emerges organisation. priority to group
spontaniously and not • It provide quick interests over the
created by solutions to the organisational
management. problems. objectives.
• It is a complex
network of social
relationships among
members.

Difference between Formal Informal Organisation

Basis Formal organisation Informal Organsiation
Meaning It refers to the structure of It refers to the network of
well defined authority and social relationships arising
out of interaction among
employees
Origin As a result of company rules Arises as a result of social
and policies interaction
Authority Arises by virtues of positions Arises out of personal
in management qualities.
Adherence to rules Violations of rules may lead No such penalties and
to penalties and punishments. punishments.
Flow to Communication Communication takes place Not through a planned route,
through the scalar chain it can take place in any
direction.
Purpose To achieve planned To satisfy social and cultural
organizational objectives. needs and fulfill common
interests
Nature Rigid Flexible
 Structure Well defined structure of No clear cut structure because
tasks and relationships. of complex network of
relationships.
Flow of Authority Authority flows from top to Authority flows vertically as
bottom i.e. downwards. well as horizontally.
Leadership Managers are leaders Leaders may or may not be
managers. They are chosen
by the group.

DELEGATION

“Delegation of authority merely means the granting of authority to subordinates to operate within
prescribed limits.”
Theo Haimman
Delegation refers to the downward transfer of authority from a superior to a subordinate
employees. It is a pre-requisite to the efficient functioning of an organisation because it enables a
manager to use his/ her time on high priority activities. Importance of delegation is that it helps
in effective management, employee development, motivation, growth and coordination.

ELEMENTS OF DELEGATION
1. Authority: Authority refers to the right to take decisions in order to guide the activities of
others. Authority determines the superior subordinate relationship. Laws and the rules and
regulations of the organisation restrict authority. Authority flows downward.

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

assigned duty. If the subordinate has the responsibility for a job, he/ she must be given necessary
authority to carry out that task.

3. Accountability: Accountability implies being accountable for the final outcome. When a
superior assigns a work to a subordinate, he/she is answerable to the superior for its outcome.

Difference between Authority, Responsibility and Accountability

 Basis Authority Responsibility Accountability
Meaning Right to command Obligation to perform Answerable for the
an assigned task. outcome of the
assigned task.
Origin Arises from formal Arises from delegated Arises from
position authority responsibility
Delegation Can be delegated Cannot be entirely Cannot be delegated
delegated at all
Flow Downward flow from Upward flow from Upward flow from
superior to subordinate to subordinate to
subordinate. superior. superior.

IMPORTANCE OF DELEGATION

1. Reduction of Executives’ work load: It reduces the work load of officers. They can thus
utilize their time in more important and creative works instead of works of daily routine.

2. Employee development: Employees get more opportunities to utilize their talent which
allows them to develop those skills which will enable them to perform complex tasks.

3. Quick and better decision are possible: The subordinate are granted sufficient authority so
they need not to go to their superiors for taking decisions concerning the routine matters.

4. High Morale of subordinates: Because of delegation of authority to the subordinates they get
an opportunity to display their efficiency and capacity.

5. Better coordination: The elements of delegation – authority, responsibility and accountability

help to define the powers, duties and answer ability related to various job positions which results
in developing and maintaining effective coordination.

DECENTRALISATION

“Decentralisation refers to systematic efforts to delegate to the lowest level, all authority except
the one which can be exercised at central points”.
 Louis Allen
Decentralisation means delegation of authority throughout all the levels of the organisation. This
empowers lower levels to take decisions regarding problems faced by them without having to go
to the upper levels. In other words decision making authority is given to all the employees at all
levels depending on the job each one of them are handling
An organisation is centralized when the decision making authority is retained by the top level
management.

IMPORTANCE OF DECENTRALISATION

1. Develops initiative among subordinates: It helps to promote confidence and self reliance in
the subordinates as they are given freedom to take their own decisions.
2. Develops managerial talent for future: Training given by the organisation and the
experience gained from handling the projects increases the talent of the managers and
employees.
3. Quick decision making: Since the managerial decisions are taken at all levels nearest to the
point of action helps them to take better and quick decisions.

4. Relieves the top management: By the delegation of work, the daily managerial jobs are
assigned to the subordinates, which leaves enough time with the superiors to look into priority
areas.

5. Facilitates growth: It allows the departmental heads and employees to perform in the best
possible manner considering all the aspects of their department, which in turn increases
productivity, efficiency and facilitates growth.

6. Better Control: Evaluation of performance is possible at each level, which results in

complete control over all the other activities.

Difference between Delegation and Decentralization

Basis Delegation Decentralisation
Nature It is a compulsory act. Decentralisation is an
optional policy decision.
Freedom of action Less freedom to take Less control over executives
decisions due to more control hence greater freedom of
by the superiors. action.
Status It is a process followed to It is the result of the policy
share tasks. decision of the top
management.
Scope It has narrow scope, as it is It has wide scope as it implies
limited to superior and his extension of delegation to the
immediate subordinate. lowest level of management.
Purpose Narrow as it is confined to a To increase the role of the
superior and his immediate subordinates in the
and subordinate. organisation by giving them
more autonomy.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 6
STAFFING
REVISION NOTES

MEANING OF STAFFING
Staffing has been described as the managerial function of filling and keeping filled the positions
in the organisation structure. Staffing is process of recruiting right people for the right job.

IMPORTANCE OF STAFFING

1. Discovering Competent Personnel: Proper staffing helps in discovering and obtaining

competent personnel for various jobs.

2. High Performance: Proper staffing ensures higher performance by putting right person on the
right job.

3. Continuous growth of enterprise: Proper staffing ensures continuous survival and growth of
the enterprise.
4. Optimum utilization of human resources: It prevents under-utilization and overmanning of
personnel and thus reduces labour cost.

5. Higher job satisfaction: It improves job satisfaction and morale of employee.

STAFFING AS A PART OFHUMAN RESOURCE MANAGEMENT (HRM)

• Staffing function deals with human element, this plays an important role in the success of an
organisation.
• As an organization grow the number of people employed increases and a separate department
called the human resource department is formed which consists of specialists and experts in
dealing with people.
• Human Resource Management Involves procuring, developing, maintaining and appraising
competent and satisfied workforce to achieve the goals of the organization efficiently and
effectively.
PROCESS OF STAFFING
Estimating Manpower
Requirement

Recruitment

Selection

Placement and
Orientation

Training and
Development

Performance
Appraisal

Promotion and career

planning

1. Estimating Manpower Requirement:

• Drafting work force requirements in an organisation, defining the job related activities
and recruiting personnel’s with a specific set of skills, knowledge, qualification and
experience.
• Work force analysis enable the enterprise to assess the number and type of employees
necessary for the completion of a work.
• It helps in determining whether an enterprise is overstaffed or under staffed and also
enables an organisation to make necessary steps to take corrective action.

2. Recruitment:

• Recruitment may be defined as the process of searching for prospective employees and
stimulating them to apply for jobs in the organisation.
• Both internal and external sources may be used for searching employees.
3. Selection:
• It is the process of choosing and appointing the right candidates for right job in an
organization by conducting various exams, tests and interviews.
• It ensures that the organisation gets the best candidate.
• The selection process enhances the self-esteem and prestige of the selected candidates.

4. Placement and Orientation:

• Orientation is, thus, introducing the selected employee to other employees and
familiarising him with the rules, regulations and policies of the organisation.
• Placement refers to the employee occupying the position or post for which the person
has been selected.

5. Training and Development:

• Systematic training helps in increasing the skills and knowledge of employees in doing
their jobs through various methods.
• Development involves growth of an employee in all aspects such as performance,
knowledge etc.

6. Performance Appraisal:
• Performance appraisal means evaluating an employee’s current and/or past
performance as against certain predetermined standards.
• Once an employee has undergone a training, his/ her performance is evaluated.
• It is concerned with continuous evaluation of the performance of employees in an
organisation.

7. Promotion and Career Planning:

• Promotion means being placed in positions increased responsibility.
• Promotion and career planning is very important to boost the morale of employees and
motivate them to utilize their full potential.

8. Compensation:
Compensation refers to all forms of payment made by an enterprise to their employees. E.g.
salaries, incentives, commission etc.
RECRUITMENT

Recruitment may be defined as the process of searching for prospective employees and
stimulating them to apply for jobs in an organization.

SOURCES OF RECRUITMENT

1. Internal Sources of Recruitment:

Internal sources refer to inviting candidates from within the organization.

TYPES ADVANTAGES LIMITATION

•Transfers: It involves the •Employees are motivated •The scope of induction of

shifting of an employee to improve their fresh talent is reduced.
from one job to another, performance. •The employee may
from one department to •Internal recruitment also become lethargic.
another or from one shift simplifies the process of •The spirit of competition
to another shift. selection & placement. among the employees
•No wastage of time on may be hampered.
• Promotions: It means the employee training •Frequent transfers of
placing an employee to a and development. employees may often
higher position carrying •Filling of jobs internally is reduce the productivity
higher responsibilities, cheaper. of the organization.
prestige, facilities and
pay.

External Sources of Recruitment

When the candidates from external sources are invited to fill in the vacant job position then it is
known as external recruitment.
The common methods of external sources of recruitments are:
1. Direct Recruitment: Under the direct recruitment, a notice is put up on the notice board
of the enterprise specifying the details of the jobs available.
2. Casual callers: Many reputed business organizations keep a data base of unsolicited
applicants in their office. This list can be screened and best candidate is selected.

3. Advertisement: Advertisement media is used when a wider range of candidates to choice

are required. Example– Newspapers, Internet, Radio, Television etc.

4. Employment Exchange: Employment exchange run by government is regarded as a

good source of recruitment for unskilled and skilled operative jobs.

5. Placement Agencies and Management consultants: Placement agencies provide a

nationwide service in matching personnel demand and supply.

6. Campus Consultants: Campus recruitment means recruitment of candidates directly

from management and technical institutions and universities.

7. Labour Contractors: Labour contractors maintain close contacts with labourers and
they can provide the required number of unskilled workers at short notice.

8. Advertising on Television: The practice of telecasting of vacant posts over Television is

gaining importance these days.

9. Web Publishing: There are certain websites specifically designed and dedicated for the
purpose of providing information about both job seekers and job opening.

10. Recommendations of Employees: Applicants introduced by present employees, or their

friends and relatives may prove to be a good source of recruitment.
 ADVANTAGES LIMITATIONS

• Qualified Personnel: By using • Dissatisfaction among existing

external source of recruitment the employees: Recruitment from
management can attract qualified outside may cause dissatisfaction
and trained people to apply for the among the employees of the o. They
vacant jobs in the organization. may feel that their chances of
promotion are reduced.
• Wider Choice: The management has
a wider choice in selecting the • Costly process: A lot of money has to
people for employment. be spent on advertisement therefore
this is costly process.
• Fresh Talent: It provides wider
choice and brings new blood in the • Lengthy Process: It takes more time
organization. than internal sources of recruitment.

• Competitive Spirit: If a company

taps external sources, the staff will
have to compete with the outsiders.

SELECTION

Selection is the process identifying and choosing the best candidate from within the organization
or from outside, the most suitable person for the current position or for the future position.

PROCESS OF SELECTION
 PRELIMINARY EMPLOYMENT
SELECTION TESTS
SCREENING INTERVIEW

REFERENCE AND
SELECTION MEDICAL
BACKGROUND
DECISION EXAMINATION
CHECK

CONTRACT OF
JOB OFFER
EMPLOYMENT

1. Preliminary Screening:
Preliminary screening helps the manager eliminate unqualified or unfit job seekers based on the
information supplied in the application forms.

2. Selection Tests:
These tests include:
(a) Intelligence Tests: It tests a person’s ability to make decisions and adjustments.
(b) Aptitude Tests: It is a measure of individuals potential for leaning new skill.
(c) Personality Tests: personality tests provide clues to a person’s emotion.
(d) Trade Tests: It measures the existing skills of an individual.
(e) Interest Tests: It allows to know the Pattern of interests and involvement of a person.
3. Employment Interviews:
It is an in-depth formal conversation conducted
• to find out suitability of the candidate for a specific post.
• to seek more information about the candidate.
• to give the candidate an accurate picture of job with details of terms and conditions and to
clarify his doubts.
4. Reference Checks:
• The prospective employer checks the authenticity of the references given by the
applicant.
• They conduct a search into candidate’s family background, past employment, education,
police records etc.

5. Selection Decisions:
A list of candidates who clear the tests and interviews are generally considered for the final
selection based on managers opinion.

6. Medical/Physical Examination:
• A medical expert or a certified clinic appointed by organization has to certify whether
the candidate is physically fit to the requirements of a specific job.
• A proper physical exam will ensure higher standard of health & physical fitness of
employees thereby reducing absenteeism.

7. Job Offer:
After selection procedure and medical examination, he/she is formally appointed by issuing him
an Appointment Letter.

8. Contract of Employment:
• After getting the job offer, the candidate has to give his acceptance.
• Both employer and employee has to sign a contract of employment which contains terms
& conditions, pay scale, leave rules, hours of work, mode of termination of employment
etc.

TRAINING AND DEVELOPMENT

Training: Training is an act of increasing the knowledge and technical skills of an employee for
doing a particular job efficiently. Both existing employees and new employees get acquainted
with their jobs and this increases the job related skills.
 BENEFITS TO ORGANISATION BENEFITS TO EMPLOYEE

• Systematic learning leads to • Better career opportunities

wastage of efforts and money. due to improved skills and
• Increases productivity therey knowledge.
leading to increase in profit. • Higher earning leads to higher
• Equips the future managers to earnings.
handle emergencies. • Improves efficiency in handling
• Increases employeemorale and machines.
reduces absenteeism. • Improves satisfaction and
• Effective response to changing morale of employees.
environment.

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.

TRAINING DEVELOPMENT
It is a process of increasing knowledge and It is a process of learning and growth.
skills.
It is to enable the employee to do the job It is to enable the overall growth of the
better. Employee
It is a job-oriented process. It is a career-oriented process.

TRAINING METHODS
(A) On the Job Method:
It refers to the methods that are applied at the work place, where the employee is actually
working. It means learning while doing.
1. Apprenticeship Programme:
• Apprenticeship programmes put the trainee under the guidance of a master worker.
• The trainee receives stipend while learning so that he/she can enjoy “earn while you
learn” scheme.
2. Coaching:
 • In this method, the superior guides and instructs the trainee as a coach.
• The trainee works directly with a senior manager and the manager takes full
responsibility for the trainee’s coaching.

3. Internship Training:
The educational institutes enters into a contract with business firms or corporates for providing
practical knowledge to its students by sending them to business organizations for gaining
practical experience.

4. Job Rotation:
• This kind of training involves shifting the trainee from one department to another or from
one job to another.
• Job rotation allows trainees to interact with other employees facilitating future
cooperation among departments.

(B) Off the job methods:

1. Class Room Lectures/Conferences: The lecture or conference approach is well adapted to

conveying specific information and rules, procedures or methods.
2. Films: They can provide information and explicitly demonstrate skills that are not easily
represented by the other techniques.
3. Case Study: cases are developed from the actual experiences of organisations, cases represent
attempts to describe, as accurately as possible real problems that managers have faced.
4. Computer Modelling: It simulates the work environment by programming a computer to
imitate some of the realities of the job and allows learning to take place.
5. Vestibule Training: Employees learn their jobs on the equipment they will be using, but the
training is conducted away from the actual work floor.
6. Programmed Instruction: This method incorporates a prearranged and proposed acquisition
of some specific skills or general knowledge.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 7
DIRECTING
REVISION NOTES

MEANING

Directing refers to giving instructions, guidance and motivation to the staff in an organization to
work efficiently in order to achieve organizational goals. Directing is a key managerial function
performed by the manager along with planning, organizing, staffing and controlling. Directing is
a continuous process initiated at top level and flows to the bottom through organizational
hierarchy.

CHARECTERISTICS OF DIRECTING

1. Directing Initiates Action: Directing is required at all stages, a manager has to perform this
function along with planning, organizing, staffing and controlling.
2. Directing Takes Place at all Levels of Management: every manager has to perform this
function and thence it takes place at all levels of management.
3. Directing is a Continuous Process: Directing takes place at all levels of the organisation so
that all activities are directed towards the achievement of organizational goals
4. Directing Flows from Top to Bottom: Directing initiates at top level and flows to the bottom
of organisation through organizational hierarchy.

IMPORTANCE
1. Directing Initiates Action: It helps in initiating action by the people in the organization
towards attainment of desired objectives.
2. Directing Integrates Employee’s Efforts: Coordination of all the activities of an
organization is very necessary. A manger .is required to motive employees and work as team.
3. Motivation and Leadership: It motivates the subordinates by showing leadership qualities to
work efficiently and to contribute their maximum efforts towards the achievement of
organizational goals.
4. Directing Facilitates Change: Employees often resist changes due to fear of adverse effects
on their employment and promotion. Effective directing through motivation, communication and
leadership help employees to cope with changes in the environment.
5. Directing helps in Stability and Balance in the organization: Effective directing fosters
cooperation and commitment among employees and helps I striking a balance between various
activities and departments.

PRINCIPLES OF DIRECTING

Effective directing is a challenging task as it involves many complexities. A manager has to deal
with people with diverse background, and expectations. This complicates the directing process.

The following are the basic principles of effective direction:

1. Maximum Individual Contribution:
• Directing techniques must be applied towards maximizing individual contribution of
employees for the achievement of organizational objectives.
• It should bring out untapped energies of employees for the efficiency of organisation.

2. Harmony of Objectives:
 • It is an important function of management to motivate people and direct their efforts
towards the achievement of enterprise objectives and their personal goals.
• The interest of the group must always prevail over individual interest. The principle
implies harmony of personal interest and common interest.

3. Unity of Command:
• This principle states that one person should receive orders from only one superior, in
other words, one person should be accountable to only one boss.
• If a person receives orders from more than one superior, it creates chaos, confusion,
conflict and disorder.

4. Appropriateness of Direction Technique:

Appropriate motivational and leadership technique should be used by a manger while directing
the people based on subordinate needs, capabilities, attitudes and other situational variables.

5. Managerial Communication:
• Directing should convey clear instructions to subordinates and proper feedback ensure
that they understood the instructions clearly.
• To have effective direction, it is very essential to have an effective communication
which provides for free flow of ideas, information, suggestions, complaints and
grievances.

6. Use of Informal Organisation:

A manager must be aware of the informal groups in a organisation and use it for effective
directing.

7. Leadership:
Managers should exercise good leadership as it can influence the subordinates positively without
causing dissatisfaction among them.

8. Follow through:
A manager not only issue orders and instructions, but also follow-up the performance employees
so as to ensure that work is being performed as desired. He should intelligently oversee his
subordinates at work and correct them whenever they go wrong.

ELEMENTS OF DIRECTING

(i) Supervision: Implies overseeing the work of subordinates by their superiors. It is an act of
watching & directing worker’s activities.
(ii) Motivation: It means the process of making subordinates to act in a desired manner to
achieve certain organisational goals.
(iii) Leadership: Leadership is the process of influencing the behaviour of people by making
them strive voluntarily towards achievement of organisational goals.
(iv) Communications: is the process of passing information, experience, opinion etc. from one
person to another.

I: SUPERVISION
• It is a process of guiding the efforts of employees and other resources to accomplish
desired objectives.
• Overseeing the work and activities of workers and employees
• Involves instructing, observing, monitoring and guiding employees.

• It is an important function at the lower levels of management therefore the term

'Supervisor’ is used at the operatives level of management

IMPORTANCE OF SUPERVISION
1. Supervisor maintains good contact with workers. A good supervisor acts as a guide, friend
and philosopher to the workers.
2. Supervisor acts as a link between workers and management as he/ she explains
management policies to workers and brings workers problems to the notice of the management.
3. Supervisor plays a key role in maintaining group unity among workers placed under his
control.
4. Supervisor ensures performance of workers is according to the set targets.
5. Supervisor provides good on the- job training to the workers and employees.
6. Supervisory leadership plays a key role in influencing the workers in the organisation.
7. A good supervisor analyses the work performed by workers and gives feedback to the
workers.

II. Motivation

• Motivation means incitement or inducement to act or move.

• Motivation is the process of stimulating people to action to accomplish desired goals.

Three key terms = motive, motivation, motivators

Motive : Inner state that energizes, activates and directs behaviour towards goals. Arises out of
unsatisfied needs and causes restlessness.
Motivation : Process of stimulating people to action to accomplish desired goals.
Motivators: Technique used to motivate people. E.g. = bonus, promotion, recognition etc.

FEATURES OF MOTIVATION

1. Motivation is a Psychological Phenomenon:

Motivation is an internal feeling, such as urge, drives and desires which means it cannot be
forced on employees.

2. Motivation is a Goal Oriented Behaviour:

It induces people to behave in a particular manner so that they can achieve their goals. A
motivated person works towards the achievement of desired goals.

3. Motivation can be either positive or Negative:

• Positive motivation means inspiring people to work better and appreciating a work that
is well done e.g., pay increase promotion recognition.
• Negative motivation means forcing people to work by threatening or punishing them.
e.g., issue of memo, demotion, stopping increments etc.
4. Motivation is a Complex Process:
• It is a complex and difficult process as human factor is involved.
• Individuals differ in their needs and wants and moreover human needs change from time
to time.

Motivation Process:
An unsatisfied need of an individual creates tension which stimulates his or her drives. These
drives generate a search behaviour to satisfy such need. If such need is satisfied, the individual is
relieved of tension.

UNSATISFIED
NEED

REDUCTION
TENSION
OF TENSION

SATISFIED
DRIVES
NEED

SEARCH
BEHAVIOUR

IMPORTANCE OF MOTIVATION
1. Motivation improves performance:
Good motivation in the organisation helps to achieve higher levels of performance as motivated
employees contribute their maximum efforts for organisational goals.
2. Motivation helps to change negative attitude:
By motivating the employees and praising them for the good work positive attitude can be
developed in workers.
3. Motivation helps to reduce employee turnover:

The main reason for the high turnover is employee motivation, so by motivating employees new
recruitment and training cost can be reduced.
4. Motivation helps to reduce absenteeism in the organistion:
If sound motivation, good working conditions, rewards etc. are adequately provided, work
becomes a source of pleasure and workers absenteeism can be reduced.
5. Motivation facilitate change:
Motivation helps managers to introduce changes smoothly without much resistance from
workers.

MASLOWS’S NEED HIERARCHY THEORY OF MOTIVATION

Maslow‘s need hierarchy is considered as a fundamental theory in understanding motivation

phenomenon.
•Every human being have a wide range of needs like physiological needs, social needs, safety
needs, esteem needs and self actualisation needs which motivate them to work.
•The manager must understand the needs and wants of people in order to motivate them and to
improve their performance levels.
•For the satisfaction of these needs, managers must offer different incentives (monetary and non-
monetary) to employees depending on the level in which the person belongs.
1. Basic Physiological Needs: These are the most basic need such as food, shelter, sleep etc. In
the organisational context, basic salary helps to satisfy these needs.
2. Safety/ Security Need: Provide security from physical and emotional harm E.g. Job security,
stability Etc.
3. Affiliation/ Belonging Need: These needs refer to affection, sense of belongingness,
acceptance and
Friendship for mental satisfaction.
3. Esteem Needs: These include factors such as self-respect, prestige, autonomy status,
recognition and attention.
4. 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.
FINANCIAL AND NON- FINACIAL INCENTIVES

Incentive means all measures which are used to motivate people to improve their
performance.

I. Financial incentives: refer to incentives which are measurable in monetary terms and
serve to motivate people for better performance.

Types of Financial incentives:

1. Pay and allowances: For every employee/ worker, salary is the basic monetary
incentive.

2. Productivity linked wage incentives: In this the payment of wages is determined on the
basis of the goods produced. This is used for increasing productivity.
3. Bonus: Bonus is an incentive offered over and above the wages/ salary for the services
provided by the employees.

4. Profit Sharing: Profit sharing is meant to provide a share to employees in the profits of
the organisation in order to motivate them.

5. Co-partnership/ Stock option: Under these incentive schemes, employees of the

company are given an option to buy the company shares at a set price which is lower than
market price.

6. Retirement Benefits: Retirement benefits are the benefits received either at the time of
retirement or afterwards, such as provident fund, pension, and gratuity. These provide
financial security to employees after their retirement.

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: It refers to reward that doesn’t form part of salary/

wage of the employee. It provides psychological satisfaction to an employee.

Some of the important non-financial incentives are discussed below:

1. Status: In the organizational context, status means ranking of positions in an

organisation, in other words status given to a person holding a managerial position.

2. Organisational Climate: Organisational climate indicates the characteristics which

describe an organisation and distinguish it from an another one.

3. Career Advancement Opportunity: A company must provide employees appropriate

skill development programmes, and a sound promotion policy to achieve promotions.
4. Job Enrichment: Job enrichment is concerned with designing jobs that include greater
variety of work content and require higher knowledge and skill.

5. Job security: Employees want job security and stability about future income and work
so that they don’t have to worry on these aspects and work with greater zeal.

6. Employee Recognition programmes: Recognition means acknowledgment with a show

of respect and appreciation. Most people have a need for evaluation of their work and due
recognition.

7. Employee participation: It means involving employees in decision making of the

issues related to them. This gives them a sense of belonging in the company.

8. Employee Empowerment: Empowerment means giving more autonomy and powers to

Subordinates in the completion of their work.

LEADERSHIP

Leadership indicates the ability of an individual to maintain good interpersonal relations with
followers and motivate them to contribute for achieving organisational goals. It is a process of
interaction and communication between the leader and his followers.

Features Importance

• Ability to influence others • Influences the behaviour of

• Influence others behaviour people positively
• Interpersonal relationship • A leader maintains personal
between leader and followers relationship with followers.
• Excercised to achieve goals • Plays key role in introducing
• Is a continous process changes in an enterprise.
• Handles conflicts effectively
• Provide training to subordinate.
QUALITIES OF GOOD LEADER & LEADERSHIP STYLE

QUALITIES OF GOOD LEADER LEADERSHIP STYLE

• Physical features: appearance, • Autocratic or Authoritarian Leader:

personality, heath and endurance an autocratic leader give orders and
inspire subordinates/ followers. expect others to obey them. The
• Knowledge: knowledge and decision making power is
competence to direct and influence centralised. It is best applied in
subordinates. situations where there is little time
• Integrity: the leader should be a role for group decision making or where
model regarding ethics, values, the leader is the most
integrity and honesty. knowledgeable member of the
group.
• Initiative: grab opportunities instead
of waiting for them. • Democratic or Participative Leader:
A democratic leader gives order after
• Communication: capacity to explain
consulting the group and works out
his ideas and also be a good listener.
the policies with the acceptance of
• Motivation skills:understand the group. It works best in situations
followers needs and motivate them. where group members are skilled
• Self-confidence: so that he can and competant to share their
provide confidence to followers knowledge.
• Decisiveness: should be firm and not • Laissez Faire or Free Rein Leader:
change opinions frequently The followers are given a high
• Social skills: sociable, friendly and degree of independence to
maintain good relations with formulate their own objectives and
followers. ways to achieve them. The leader
gives complete freedom to the
subordinates.

COMMUNICATION
Communication is transfer of information from the sender to the receiver with the information
being understood by the receiver.
Harold Koontz and Heniz Weihric
Meaning
Communication is understood as a process of exchange of ideas, views, facts, feelings etc. It is
transfer of information from the sender to the receiver. Communication plays key role in the
success of a manager

ELEMENTS OF COMMUNICATION PROCESS

1. Sender: the person who conveys his thoughts or ideas to receiver.

2. Message: Ideas, feelings, suggestions, order etc. intended to be communicated.
3. Encoding: the process of converting the message into communication symbols such as
words/pictures etc.
4. Media: Path or channel through which encoded message is transmitted to receiver.
5. Decoding: Converting encoded symbols of the sender.
6. Receiver: Who receives the communication of the sender.
7. Feedback: All the actions of receiver indicating that he has received and understood the
message of the sender.
8. Noise: Some obstruction or hindrance to communication like poor telephone connection,
inattentive receiver.
IMPORTANCE OF COMMUNICATION

1. Acts as a basis of coordination: Facilitates Coordination between various departments and

sections thus creating a unity of purpose and action.
2. Helps in smooth working of an enterprise: By effective communication a manger can
coordinate all the human and physical elements of an organisation and thus enable smooth
functioning.
3. Acts as a basis for decision making: Provides necessary data for decision making and thus
information is effectively and efficiently communicated to management.
4. Increases managerial efficiency: All individuals in the organization is assigned a job or task.
The employee must know clearly whom he/ she has to report and what part of total job they are
expected to perform and what are their decisions.
5. Promotes cooperation and Industrial Peace: Efficient and effective communication
promotes cooperation and mutual understanding between the management and workers and
brings peace in the organization.
6. Establishes effective leadership: Communication helps to influence subordinates. A leader
should possess good communication skills to influence subordinates. Boosts morale and provides
7. Motivation: An efficient system of communication enables management to motivate,
FORMAL AND INFORMAL COMMUNICATION

FORMAL COMMUNICATION
Formal communication flows through official channels designed in the organisation chart. There
is a two-way information flow between the superior and subordinates. The communications may
be oral or written
The pattern through which communication flows within the organisation is called as
communication network.

Some of the popular communication networks are:

1. Single chain: in this communication exists between a supervisor and his subordinates.
2. Wheel: In wheel network, all subordinates under one superior communicate through him only
as he acts as a hub of the wheel.
3. Circular: The communication moves in a circle.
4. Free flow: Free flow of communication with each and every one in an organisation.
5. Inverted V: A subordinate is allowed to communicate with his immediate superior as well as
his superiors superior.

INFORMAL COMMUNICATION
Communication that takes place without following the formal lines of communication is said to
be informal communication.
Informal communication is sometimes called the grapevine as it spreads throughout the
organisation and might be observed occurring in conversations, electronic mails, text messages
and phone calls between socializing employees.

GRAVEVINE COMMUNICATION NETWORK

Single strand network: each person communicates to the other in a sequence.

Gossip network : each person communicates with others on a nonselective basis.
Probability network: the individual communicates randomly with others.
Cluster network: A person communicates with only those people whom he trusts.

BARRIERS TO COMMUNICATION

I. Semantic Barriers: Concerned with comunication problems and obstructions in the process of
encoding or decoding of message into words or impressions. Semantic barriers are as follows:
1. Badly expressed message: Sometimes intended meaning may not be conveyed by the usage
of inadequate vocabulary, wrong meaning words etc.
2. Symbols with different meaning: Words with different meanings confuses the receiver.
3. Faulty translations: The meaning of a message in one language if translated will be different
in other language.
4. Unclarified assumption: Different assumptions may have different interpretations, which
result in confusion.
5. Technical Jargon: Usage of technical words by specialists will result in misunderstanding
among workers.
6. Body language and gesture decoding: Every movement of body communicates a meaning.

II. Psychological/Emotional barriers: Emotional or psychological factors acts as barriers to

communicators.

Some of the psychological barriers are:

1. Premature evaluation: judgement before listening leads to misunderstanding.
2. Lack of attention: poor listening due to preoccupied mind of the receiver may disappoint the
sender.
3. Loss by transmission and poor retention: When oral communication passes through various
channels of communication, it destroys the structure of the message or leads to transmission of
inaccurate message.
4. Distrust: If the parties do not believe each other, they cannot understand each other’s message
in its original sense.

III. Organizational Barriers: If the organisation policy is not supportive of free flow of
communication it disrupts effectiveness of communication.

1. Organizational policy
2. Rules & Regulations
3. Status
4. Complexity in the organisation structure
5. Organisational facilities
IV. Personal Barriers: Personal factors of both superior and subordinate may influence an
effective communication.

Some of the personal barriers of superiors and subordinates are given below:
1. Fear of challenge to authority
2. Lack of confidence of superior on his subordinate
3. Unwillingness to communicate
4. lack of proper incentives
IMPROVING COMMUNICATION EFFECTIVENESS
Some efforts to improve communication and to overcome barriers are given below

1. Clarify the ideas before communication.

2. Communicate according to the needs of receiver.
3. Consult others before communicating.
4. Be aware of language, tone and content of message.
5. Convey things of help and value to listeners:
6. Ensure proper feedback
7. Communicate for present as well as future
8. Follow up communication: helps to remove hurdles, misunderstanding of
instructions given by managers to subordination.
9. Be a good listener.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 8
CONTROLLING
REVISION NOTES

CONTROLLING
“Managerial Control implies the measurement of accomplishment against the standard and
the correction of deviations to assure attainment of objectives according to plans.”
Koontz and O’ Donnel

MEANING
Controlling is one of the management function, which involves setting standards, measuring
actual performance and taking corrective action. Controlling involves comparison of actual
performance with the planned performance

IMPORTANCE OF CONTROLLING
1. Controlling helps in achieving organizational goals: The controlling function measures
progress towards the organizational goals and indicates deviations if any to take corrective
action.
2. Judging accuracy of standards: An efficient control system enables management to verify
whether the standards set are accurate or not by carefully checking the changes taking place in an
organizational environment.

3. Making efficient use of resources: Efficient utilization of resources through controlling

process enables a manager to reduce wastage of resources.

4. Improving employees motivation: An efficient control system ensures that employees know
well in advance what they are expected to do & also the standards of performance. It thus
motivates & helps them to give better performance.

5. Ensuring order and discipline: Controlling function creates an atmosphere of order and
discipline in the organization by keeping a close check on the activities of its employees.

6. Facilitating Coordination in action: Predetermined standards are set for governing each
department and employee in an organisation.

LIMITATIONS OF CONTROLLING

1. Difficulty in setting quantitative standards: Control system loses some of its effectiveness
when standards cannot be quantified.

2. Little control on external factors: An organisation cannot control external factors such as
government policies, technological changes, competition etc.

3. Resistance from employees: Mostly employees resist controlling by managers.

4. Costly affair: Control is a costly process as it involves a lot of expenditure, time and effort.
FEATURES OF CONTROLLING

1. Goal oriented
2. Pervasive
 3. Continuous
4. Controlling is looking back the performance achieved by employees
5. Is a forward looking function
6. Depends on planning
7. Action oriented
8. Primary Function of Management
9. Brings back management cycle back to planning

RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

Planning and controlling are interrelated and in fact reinforce each other in the sense that-

• Planning is a pre-requisite for controlling. Plans set the standard for controlling. If the
standards are not set in advance managers have nothing to control.

• Planning is meaningless without controlling. It is fruitful when control is exercised. It

identifies deviations if any and initiates corrective measures.

• Controlling measures the effectiveness of planning and helps in taking corrective actions.

• Planning is looking ahead and controlling is looking back. Planning is a future oriented
function as it involves looking in advance and making policies for the maximum
utilization of resources in future that is why it is considered as forward looking function.
In controlling, we look back the performance already achieved by the employees and
compare it with the set standards. If there are any deviations in actual and standard
performance or output then controlling functions makes sure that in future actual
performance matches with the planned performances. Therefore, controlling is also a
forward looking function.

• Thus, planning & controlling are inter related. Planning makes controlling effective
whereas controlling improves future planning.
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

1. Setting Performance Standards:

• Standards are the criteria against which actual performance can be measured.
• Standards are the benchmarks towards which an enterprise strive to work.
• Due to changes in business environment the standards should be flexible enough to be
modified according to the situation

2. Measurement of Actual Performance:

• First performance standards are set and then actual performance is measured.
• Performance should be measured in an objective and reliable manner which includes
personal observation and sample checking.
• Performance is to be measured in the same terms in which standards have been
established, this will facilitate comparison.

3. Comparing Actual Performance with Standard:

• This step involves comparison of actual performance with the standard.
• Comparison will reveal the deviation between actual and desired performance.
 • If the performance matches the standards it may be assumed that everything is under
control.

4. Analysing Deviations:
The deviations from the standards are assessed to identify the acceptable range of deviations.

(a) Critical Point Control: Control should focus on key result areas (KRAs) which are critical
to the success of an organisation. These KRAs are set as the critical points.

(b) Management by Exception: Management by exception is often called as control by

exception, is an important principle of management control, based on the belief that an attempt to
control everything results in controlling nothing. In short, everything cannot be controlled at the
same times

5. Taking Corrective Action: The final step in the controlling process is taking corrective
action. No corrective action is required when the deviation are within the acceptable limits. But
where significant deviations occur corrective action is necessary.

TECHNIQUES OF MANAGERIAL CONTROL

Techniques of managerial control may be classified into two broad categories:
I. Traditional Techniques
II. Modern Techniques.

I. TRADITIONAL TECHNIQUES:

1. Personal Observation: It enables the manager to collect first hand information but it is very
time consuming and cannot be used in all kinds of job.
2. Statistical Reports: Statistical analysis in the form of averages, percentages, ratios,
correlation, etc., present useful information to the managers regarding performance of the
organisation.
3. Breakeven analysis: is a technique to study the relationship between costs, volume and
profits.
4. Budgetary Control: is a technique of managerial control in which all activities are planned
in advance in the form of budgets and actual results are compared with budgetary standards.

Types of budget
1. Sales budget
2. Production budget
3. Material budget
4. Cash budget
5. Capital budget
6. Research and development budget

Advantages of Budgeting
1. Helps in attainment of organisational objectives.
2. Is a source of motivation to the employees
3. Helps in optimum utilisation of resources
4. Is also used for achieving coordination among different departments

II. MODERN TECHNIQUES

1. Return on Investment:
Return on Investment (ROI) is a technique which provides the basic yardstick for measuring
whether or not invested capital has been used effectively for generating reasonable amount of
return.
Net income Sales
ROI= ×
Sales Total Investments

2. Ratio Analysis:
Ratio Analysis refers to analysis of financial statements by computation of various ratios.
1. Liquidity Ratios
2. Solvency Ratios
3. Profitability Ratios
4. Turnover Ratios

III. RESPOSIBILITY ACCOUNTING

1. Cost centre: A cost or expense centre is a segment of an organisation for which a manager is
held responsible for its operations. For e.g. production department for manufacturing unit.
2. Revenue Centre: is a segment of an organisation which is primarily responsible for
generating revenue. For e.g. Marketing department
3. Profit Centre: is a segment of an organisation whose manager is responsible for both
revenues and costs. For e.g. repair and maintenance department.
4. Investment Centre: is responsible not only for profits but also for all investments made in the
centre. e.g. assets.

IV. MANAGEMENT AUDIT

Management audit refers to systematic performance appraisal of the management of an
organisation.

V. PERT and CPM

• PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method)
are important management techniques used to plan, schedule and control complex
project.
• These techniques are especially useful for planning, scheduling and implementing time
bound projects involving performance of a variety of complex, diverse and interrelated
activities.
VI. MANAGEMENT INFORMATION SYSTEM
Management Information System (MIS) is a computer-based information system that provides
information and support for effective managerial decision-making. Its is an important control
technique.
MIS offers the following advantages to the managers:
1. It facilitates collection, management and dissemination of information
2. It supports planning and controlling at all levels
3. It improves the quality of information
4. It ensures cost effectiveness
5. It reduces information overload
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 9
FINANCIAL MANAGEMENT
REVISION NOTES

MEANING OF BUSINESS FINANCE

• Business Finance means money or funds available for a business for operations. It is
indispensable for survival and growth of business, for production and distribution of
goods and meeting day-to-day expenses etc.
• Finance is needed to establish a business, to run it, to modernise and expand, or diversify
it.

MEANING OF FINANCIAL MANAGEMENT

• Financial Management includes those business activities that are concerned with
acquisition and conservation of capital funds in meeting the financial needs and overall
objectives of a business enterprise.
• Financial Management is concerned with optimal procurement as well as the usage of
finance.
 IMPORTANCE OBJECTIVES

• The size and the composition of fixed • Primary objective: Is to maximize

assets of the business: A capital wealth of owners in the long run –
budgeting decision will increase the Wealth Maximization concept.
size of fixed assets of the company • All financial decisions aim at
by that amount. ensuring that each decision is
• The quantum of current assets and efficient and adds some value.
its break-up into cash, inventory and • ‘Owners’ of a company are the
receivables: increase in the fixed shareholders.
assts in turn increse the working • The objective of financial
capital requirement. management is to maximise the
• The amount of long-term and current price of equity shares of the
shortterm funds to be used: It company.
involves decision related to • The term wealth refers to wealth of
composition of long term and short owners as reflected by the market
term funds depending on the price of their shares.
profitability or liquidity goals of the
• The market price of shares is linked
enterprise.
to three basic financial decisions.
• Break-up of long-term financing into Investing decision, financing decision
debt, equity etc: The proportion of and dividend decision.
Debt and Equity is a financial
• Decision making is eficient if best
descision.
decision is selected out of all the
• All items in the Profit and Loss alternatives.
Account, e.g., Interest, Expense,
• Increase in the market price of
Depreciation, etc: Higher debt
shares is an indicator of the financial
increases interest expense and
health of a firm.
higher equity increases dividend.

FINANCIAL DECISIONS
The finance function is concerned with three broad decisions which are explained below:
I. INVESTMENT DECISION
• Investment decision means judicious investment of firm’s resources, from the available
alternative proposals and choosing the cheapest one, which earns highest possible return
for the investors.

• The various resources available with an organisation are scarce and can be put to
alternate use. A firm must choose where to invest, wisely so as to earn the highest
possible profits.

• Investment decisions are decisions about how the firm‘s funds are invested in different
assets that is, in different investment proposals

INVESTMENT DECISIONS CAN BE LONG TERM AND SHORT TERM

Short Term investment decisions.

Working Capital Decisions: are concerned with the decisions about the levels of cash,
inventory and receivables.
Long Term investment decisions
Capital Budgeting decisions: decisions related to evaluation of potential expenditures or
investments on a long term basis.

FACTORS AFFECTING CAPITAL BUDGETING DECISIONS:

1. Cash flows of the project: a series of cash receipts and payments over the life of an
investment proposal is considered and analyzed for selecting the best proposal.

2. The Rate of Return: The calculation of expected returns from each proposal and risk
involved is taken into account to select the best proposal.

3. The Investment Criteria Involved: Various investment proposals are evaluated, based on
capital budgeting techniques. These involve calculation regarding investment amount, cash
flows, rate of return etc.

II. FINANCING DECISION

• This decision is about the quantum of finance to be raised from various long-term sources
and short-term sources and selecting the cheapest one.

• Financing decisions involve: Decision related to the proportion of ownership (equity) and
borrowed (Debt) funds.

• Financing decision aids in identifying various sources of the funds and select the best one
by evaluating the different characteristics of the funds available and its impact on the
firm’s capital structure and returns.

• Firm/ companies needs a judicious mix of debt and equity as :

(a)Debt involves ‘Financial Risk‘ i.e. risk of default on payment of interest on borrowed
funds and the repayment of the principle amount. E.g. Debentures, Public deposits etc.
 (b) Shareholder’s funds involve no fixed commitment with respect to payment of returns
or repayment of capital. E.g. Equity, Preference shares

FACTORS AFFECTING FINANCING DECISION

1. Cost: The cost of raising funds from different sources are different. A prudent manager will
select the cheapest source.

2. Risk: The risk associated with different sources of fund is different. More risk is associated
with borrowed funds as compared to owner’s fund as fixed interest has to be paid and
redeemable as well after a fixed period of time.

3. Flotation Cost: The costs involved in issuing securities such as brokers commission,
underwriters’ fees etc. are called as flotation costs. Higher the flotation cost, less attractive is the
source of finance.

4. Cash flow position of the company: If a company has sound liquidity position then it can
easily use borrowed funds and pay interest on time.

5. Fixed Operating Costs: If a business has high fixed operating costs (e.g., building rent,
Insurance premium, Salaries, etc.), it must reduce fixed financing costs.

6. Control Considerations: If the existing shareholders want to retain complete management

control then raise finance through borrowed funds but if they are ready for dilution of control
over business, equity can be used for raising finance.

7. State of Capital Markets: The capital market conditions also affect the choice of source of
fund. If the capital market is raising, finance can easily be raised by issuing shares but during
depression period, issue of equity share is difficult.
III. DIVIDEND DECISION

• Dividend is that portion of divisible profits that is distributed to the shareholders. It

results in current income for the shareholders.

• Re-investment as retained earnings increases the firm’s future earning capacity.

• Dividend decision is whether to distribute earnings to shareholder as dividends or to

retain earnings to finance long-term projects of the firm.

• The dividend decisions are taken keeping in view the overall objective of maximizing
shareholder’s wealth

FACTORS AFFECTING DIVIDEND DECISIONS

1. Amount of Earnings: Dividends are paid out of profits, so earning of a company is very
important factor in determining dividend decision. Companies having high and stable earning
could declare high rate of dividends.

2. Stability of Dividends: Companies generally follow the policy of stable dividend. The
dividend per share is not altered in case increase in earnings is small or of temporary nature.

3. Growth Opportunities: In case there are good, growth prospects for the company in the near
future, then it will retain its earning and thus, no or less dividend will be declared.

4. Cash Flow Positions: The payment of dividends involve outflow of cash and thus,
availability of adequate cash is required for declaration of dividends.

5. Shareholders preference: While deciding about dividend the preference of shareholders is

also taken into account. If shareholders desire for dividend then company may go for declaring
the same.
6. Taxation Policy: A company is required to pay tax on dividend declared by it. If tax on
dividend is higher, company will prefer to pay less by way of dividends whereas if tax rates are
lower than the company can declare more dividends.

7. Stock Market Reaction: For Investors an increase in dividend is a good news and stock
prices react positively to it.

8. Access to Capital Market: Corporate companies and MNC’s retain less profit as they have
easy access to the capital market for project financing.

9. Legal constraints: Under provisions of Companies Act, all earnings can’t be distributed and
the company has to provide for various reserves. This limits the capacity of company to declare
dividend.
10. Contractual Constraints: sometimes the lender may impose certain restrictions on the
payment of dividends in future while granting loans to a company

FINANCIAL PLANNING

It involves the preparation of a financial blueprint of an organization. It is the process of

estimating the fund requirement of a business and determining the possible sources from which it
can be raised.
The objective of financial planning is to ensure that enough funds are available at right time.

Objectives of Financial Planning:

To ensure availability of funds whenever required: Includes proper estimation of the funds
required for different purposes (long term assets/working cap requirement). There is a need to
estimate the time at which these funds are to be made available. Financial planning also tries to
specify possible sources of these funds.

To see that the firm does not raise resources unnecessarily: Excess funding is as bad as
inadequate funding. Surplus funds reduces return and increases cost to a company.
IMPORTANCE OF FINANCIAL PLANNING

1. It helps in forecasting future happenings under different situations.

2. It helps in avoiding business shocks and surprises and volatilities and helps the company
in preparing for the future.

3. If helps in coordinating various business functions, e.g., sales, marketing, production etc.

4. Detailed plans of action is prepared under financial planning reduce waste, duplication of
efforts, and gaps in planning.

5. It tries to link the present with the future.

6. It provides a link between investment and financing decisions on a continuous basis.

7. By spelling out detailed objectives for various business segments, it makes the evaluation
of actual performance easier.

CAPITAL STRUCTURE
• One of the important decisions under financial management, that relates to the financing
pattern or the proportion of the use of different sources in raising funds.

• On the basis of ownership, the business finance is divided into

(a) Owners funds
(b) Borrowed funds.

• Owners funds/ Equity = equity share capital + preference share capital + reserves and
surpluses/ retained earnings

• Borrowed funds = loans + debentures + public deposits = DEBT

• Capital Structure is the mix of long-term sources of funds. It can be calculated as Debt/
Equity Ratio.ie. Debt/ Equity or Debt out of total capital ( Debt/ Debt + Equity)
 • Capital structure refers to the proportion of debt and equity used for financing the
operations/ activities of a business.

Debt Vs Equity:

1. Cost of Debt is lower than cost of equity but Debt is more riskier than equity.

2. Cost of debt is less than the cost of equity as lenders risk is more than owner’s risk.

3. Lender earns a fixed interest and assured repayment of capital.

4. Interest on debt is a tax-deductible expense so brings down the tax liability of a business
whereas dividends are paid out of profit after tax.

5. Debt is more risky for the business as it adds to the financial risk faced by a business.

6. Any default of payment of interest or repayment of principle amount may lead to

liquidation.

Capital structure affects both the profitability and the financial risk faced by a business.

• Optimal Capital Structure is that combination of debt and equity that maximizes the
market value of shares of that company
• Decisions relating to capital structure gives more importance on increasing shareholders
wealth.

• The proportion of debt in the overall capital is also called financial leverage. It is
calculated as Debt/ Equity Ratio.ie. Debt/ Equity or Debt out of total capital ( Debt/ Debt
+ Equity).
 • When the financial leverage increases, the cost of funds declines because of increased
use of cheaper debt but the financial risk increases.

• The impact of financial leverage on the profitability of a business can be identified

through EBIT-EPS (Earning before Interest and Taxes-Earning per Share).

• Trading on Equity refers to the increase in profit earned by the equity shareholders due
to the presence of fixed financial charges like interest. i.e benefits to the shareholder due
to financial leveraging.

FACTORS AFFECTING THE CHOICE OF CAPITAL STRUCTURE

1. Cash flow position:

The size of the projected cash flows should be considered before deciding the capital structure of
the firm. If there is sufficient cash flow, debt can be used but it must cover fixed payment
obligations.
The company has certain cash payment obligation such as ( I ) normal business operations (ii)
Investment in fixed assets ( iii) Meeting debt service commitments as well as provide a sufficient
buffer.

2. Interest coverage ratio :

• The interest coverage ratio refers to the number of times earnings before interest and
taxes of a company covers the interest obligation. Which is calculated as follows: EBIT/
Interest
• Higher the Interest coverage ratio, lower shall be the risk of the company failing to meet
its interest payment obligations.

3. Debt Service Coverage Ratio:

The cash profits generated by the operations are compared with the total cash required for the
service of the debt and the preference share capital. It is calculated as follows:

Profit after tax + Depreciation + Interest + Non Cash Expenses

Debt. service coverage ratio =
Preference Dividend + Interest + Repayment Obligation
4. Return On Investment
If return on investment of the company is higher, the company can choose to use trading on
equity to increase its EPS, i.e., its ability to use debt is greater.

5. Cost Of Debt
More debt can be used if cost of Debt is raised at a lower rate.

6. Tax Rate
A higher tax rate makes debt relatively cheaper and increases its attraction as compared to equity
as a company can avail tax benefit on interest payment.

7. Cost Of Equity
• If a company uses more debt, the financial risk faced by equity holders increase so their
desired rate of return may increase.

• If debt is used beyond a point, cost of equity may go up sharply and share price may
decrease in spite of increased EPS.

8. Floatation Cost
• Floatation cost is the cost involved for raising funds from the capital market.
• Cost of Public issue is more than the floatation cost of taking a loan.
• The floatation cost may affect the choice between debt and equity and hence the capital
structure.

9. Risk Consideration
The total risk of business enterprise depends upon both the business risk and financial risk. If a
firm‘s business risk is lower, its capacity to use debt is higher and vice versa.

10. Flexibility
 • If the firm uses its debt potential to its full capacity, it loses the flexibility to use more
debt.

• To maintain flexibility the company must maintain some borrowing power to take care of
unforeseen circumstances.

11. Control
Debt normally does not cause dilution of control whereas a public issue makes the firm more
vulnerable to takeovers. In order to retain control, firm should issue debt.

12. Regulatory Framework

Every company has to operate within a regulatory framework provided by the law e.g., public
issue of shares and debentures have to be made under SEBI guidelines.

13. Stock Market Conditions: If the stock markets are bullish, equity shares can be sold even at
a higher price.

14. Capital Structure of other Companies: A useful guideline in the capital structure planning
is the debt equity ratios of other companies in the same industry. For e.g, if the business risk of a
firm is higher, it cannot afford the same financial risk.

FIXED AND WORKING CAPITAL

I. FIXED CAPITAL
Fixed capital refers to investment in long-term assets. Investment in fixed assets is for longer
duration and must be financed through long-term sources of capital. Decisions relating to fixed
capital involve huge capital investments and are irreversible without incurring heavy losses.

FACTORS AFFECTING THE REQUIREMENT OF FIXED CAPITAL

1. Nature of Business: the type of business is a factor in determining the fixed capital
requirements. For e.g. manufacturing concerns require huge capital investment in fixed assets
but trading concerns need less fixed capital investment.

2. Scale of Operations: A larger organization operating on large scale requires more fixed
capital investment as compared to an organization operating on small scale.

3. Choice of Technique: An organization using capital-intensive techniques requires more

investment in fixed assets as compared to an organization using labour intensive techniques.

4. Technology upgradation: An organization using obsolete assets require more fixed capital as
compared to other organizations.

5. Growth Prospects: Companies having higher growth prospects require more fixed capital
investments, in order to expand their production capacity.

6. Diversification: If a company goes for diversification then it will require more fixed capital
Investment in plant and machinery etc.

7. Financing Alternatives: A developed financial market can provide leasing facilities as an

alternative to outright purchase.

8. Level of Collaboration: If companies are under collaboration, Joint venture etc. then they
need less fixed capital as they share plant & machinery with their collaborators.

WORKING CAPITAL

Working Capital refers to the funds required for the day to day operations of an organization.
Apart from the investment in fixed assets every business organization needs to invest in the
current assets, which can be converted into cash or cash equivalents within a period of one year.
Working capital is of two types:
(a) Gross working capital: Investment in all the current assets is called as Gross Working
Capital
(b) Net working capital : the excess of current assets over current liabilities is called Net
Working Capital.

FACTORS AFFECTING THE WORKING CAPITAL REQUIREMENTS

1. Nature of Business: The basic nature of a business enterprise influences the amount of
working capital required by it. For e.g. A trading organization needs a lower amount of working
capital as compared to a manufacturing organization.

2. Scale of Operations: An organization which is operating on large scale will require more
inventory as its working capital requirement will be more, compared to small organization.

3. Business Cycle: When there is a boom in the economy, more production will be undertaken
and so more working capital will be required during that time as compared to depression in the
economy.

4. Seasonal Factors: In peak season, demand for a product will be high and thus high working
capital requirements will be more as compared to lean season.

5. Production Cycle: Production cycle is the time span between the receipt of raw material and
their conversion into finished goods. working capital requirements will be higher in firms with
longer processing cycle and lower in firms with shorter processing cycle.

6. Credit Allowed: Different firms allow different credit terms to their customers depending on
their credit worthiness.

7. Credit Availed: Just as a firm allows credit to its customers it also may get credit from its
suppliers.
8. Operating Efficiency: Different enterprises manage their operations with varied degrees of
efficiency. Such efficiencies may reduce the level of raw materials, finished goods and debtors
resulting in lower requirement of working capital.

9. Availability of Raw Material: If the raw materials and other required materials are available
freely and continuously, enterprise can maintain adequate stock of materials.
If the lead time is more, larger the quantity of material to be stored and larger shall be the amount
of working capital required.

10. Growth Prospects: If the growth potential of a concern is perceived to be higher, it will
require larger amount of working capital.

11. Level of Competition: Higher level of competitiveness, necessitate larger stocks of finished
goods to meet urgent orders from prospective customers.

12. Inflation: With rising prices, larger amounts are required even to maintain a constant volume
of production and sales. For example, during inflation prices of raw material, wages also rise
resulting in increase in the working capital requirements.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 10
FINANCIAL MARKETS
REVISION NOTES

CONCEPT OF FINANCIAL MARKETS

• A business is a part of an economic system that consists of two main sectors
(a) Households/ individuals who save funds and
(b) Business enterprises, which invest these funds.

• A financial market helps to link the savers and the investors by mobilizing funds between
them.

• The process by which allocation of funds is done is called financial intermediation

• Two major intermediaries, by which allocation of funds can be done are:

(a) Banks or
(b) Financial markets
Financial Markets are the institutional arrangements by which savings generated in an economy
are channelized into avenues of investment by industry, business and the government.
Financial Market is a market for the creation and exchange of financial assets.

FUNCTIONS OF FINANCIAL MARKETS

1. Mobilization of savings and channelling them into the most productive uses:
• Facilitates transfer of savings from the savers to the investors.
• Financial markets help people to invest their savings in various financial instruments and
earn income.
• Facilitate mobilization of surplus funds into the most productive uses.
2. Facilitating Price Discovery:
• Price is determined from the forces of demand and supply, where business firms
represent the demand and the households represent the supply components.
• The interaction between demand and supply helps to establish a price for the financial
asset, which is being traded in that particular market.
3. Financial markets provide liquidity to financial assets:
• By providing a ready market for the sale and purchase of financial assets, it facilitate easy
liquidity to financial assets.
• Holders of the financial assets can readily sell and buy financial instruments from
financial market.

4. Reduce the cost of transactions:

• It provide valuable information to buyers and sellers of financial assets, and helps in
saving time, effort and money.
• Investors can buy/sell securities through brokers who charge a nominal commission for
their services. This way financial markets facilitate transactions at a very low cost.

TYPES OF FINANCIAL MARKETS

I. MONEY MARKET
• Money Market is a market for financial instruments with a maturity period of less than
one year.
• It is a market for low risk, unsecured and short term debt instruments that are highly
liquid and are traded everyday.
• It is conducted over the telephone and through internet.
• It helps in raising short term funds and temporary deployment of excess funds for earning
returns.
MONEY MARKET INSTRUMENTS

1. Treasure Bills:
• The RBI on behalf of the Central Government to meet its short-term requirement of funds
issues treasury bills.
• It is also known as Zero Coupon Bonds, and is issued in the form of a promissory note It
is issued at a price which is lower than their face value and are repaid at par.
• It is available for a minimum amount of Rs.25000 and in multiples thereof.

2. Commercial Paper:
• It is a short term unsecured promissory note issued by large credit worthy companies, in
order to raise short term funds at lower rates of interest than market rates.
• It is a negotiable instrument transferable by endorsement and delivery with a fixed
maturity period of 15 days to one year.
• The purpose of issuing commercial paper was to provide short-terms funds for seasonal
and working capital needs

3. Call Money:
• It is short term finance repayable on demand, with a maturity period of one day to 15
days.
• It is used for interbank transactions. Commercial banks are required to minimum cash
balance called as cash reserve ratio.
• Call Money is a method by which banks borrow from each other in order to maintain the
cash reserve ratio as per RBI rules. The interest rate paid on call money loans is known as
the call rate.

4. Certificate of Deposit:
• It is an unsecured negotiable instrument issued by Commercial Banks & Financial
Institutions.
• It can be issued to individuals, corporations and companies for raising money for a short
period.

5. Commercial Bill:
• It is a bill of exchange used to finance the working capital requirements of business firms.
 • A seller of the goods draws the bill on the buyer for a credit sale. When the buyer accepts
the bill it becomes marketable instrument and is called a trade bill. These bills can be
discounted with a bank if the seller needs funds before the maturity of the bill.
• When a trade bill is accepted by a bank it is known as a commercial bill.

CAPITAL MARKET
• A capital market is a component of a financial market that allows long-term trading of
debt and equity.
• The capital market consists of development banks, commercial banks and stock
exchanges.
• An efficient capital market delivers correct information, minimize transaction cost and
allocate capital.
• The Capital Market can be divided into two parts:
a. Primary Market
b. Secondary Market

DISTINCTION BETWEEN CAPITAL MARKET AND MONEY MARKET

BASIS CAPITAL MARKET MONEY MARKET
Participants Financial Institutions, Banks, RBI, Banks, financial Institutions
Corporate Entities, foreign investors, and finance companies.
ordinary retail investors and
individuals.
Instruments Equity shares, bonds, preferences Treasury Bills, Trade Bills
shares, debentures, call money etc. commercial paper, certificate of
deposit.
Investment Does not require a huge financial Entails huge sum of money as the
Outlay outlay. instruments are quite expensive.
Duration Deals in medium and long term Deals in short term funds having
securities. a maturity period upto one year or
may be even a single day.
Liquidity Securities are considered as liquid Money markets instruments are
investment as they are marketable in highly liquid as it is traded in The
stock exchange Discount Finance House of India.
Safety Capital Market Instruments are riskier Money market instruments are
with respect to return and principle generally much safer with a
repayment. minimum risk of default.
Expected Return High return Low return

The capital market can be divided into two parts:

1. Primary Market
2. Secondary Market

PRIMARY MARKET
The primary market is also known as the new issues market. It is a market for selling new
securities, issued for the first time.
Primary market facilitate transfer of investible funds from savers to entrepreneurs.
Funds raised from the primary market are mainly used for setting up new projects, expansion,
diversification, modernization of existing projects, mergers and take overs etc.

METHODS OF FLOATATION

1. Offer through Prospectus:

• It is the most popular method of raising funds which involves inviting subscription from
the public through the issue of prospectus.
• A prospectus makes a direct appeal to investors to raise capital through an advertisement
in newspapers and magazines.

2. Offer for Sale:

• In this method, securities to be issued are offered for sale through intermediaries like
issuing houses or stock brokers.
• The company sells securities to intermediary or broker at an agreed price and the broker
resells them to investors at a higher price.

3. Private Placements:
It refers to the process of allotment of securities by a company to institutional investors and
some selected individuals.

4. Rights Issue:
• It refers to a method of issue in which new shares are offered to the existing shareholders
in proportion to the number of shares they already possess.
• It is a right given to the existing shareholders to subscribe new shares.
5. e-IPOs:
• It is a method of issuing securities through an on-line system of stock exchange.
• A company proposing to issue capital to the public through the on-line system of the
stock exchange has to enter into an agreement with the stock exchange. This is called an
e-initial public offer.
• Registered brokers of SEBI, have to be appointed for the purpose of accepting
applications and placing orders with the company.

SECONDARY MARKET
• The secondary market is also known as the stock market or stock exchange. It is a market
for the purchase and sale of existing securities, i.e securities already sold in the primary
market.
• It helps existing investors to disinvest and attract fresh investors to enter the market.
• Securities are required to be traded, cleared and settled within the regulatory framework
prescribed by SEBI.

DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKETS

Primary Market Secondary Market
(New Issue Market) (Stock Exchange)
(i) There is sale of securities by new (i) There is trading of existing shares only.
companies or further (new issues of securities
by existing companies to investors). (ii) Ownership of existing securities is
exchanged between investors. The company
(ii) Securities are sold by the company to the is not involved at all.
investor directly (or through an intermediary).
(iii) Enhances encashability (liquidity) of
(iii) The flow of funds is from savers to shares, i.e. the secondary market indirectly
investors, i.e. the primary market directly promotes capital formation.
promotes capital formation.
(iv) Both the buying and the selling of
(iv) Only buying of securities takes place in securities can take place on the stock
the primary market, securities cannot be sold exchange.
there.
(v) Prices are determined by demand and
(v) Prices are determined and decided by the supply for the security.
management of the company.
(vi) Located at specified places.
(vi) There is no fixed geographical location.
STOCK EXCHANGE

A Stock Exchange is an institution which provides a platform for buying and selling of existing
securities. It is a market which, facilitates the exchange of a securities i.e. share, debenture etc.
into money and vice versa.
“According to Securities Contracts (Regulation) Act 1956, stock exchange means any body of
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or
controlling the business of buying and selling or dealing in securities”.

FUNCTIONS OF STOCK EXCHANGE

1. Providing Liquidity and Marketability to Existing Securities: It gives investors a platform
to disinvest and reinvest their securities and thus provides both liquidity and easy marketability
to already existing securities in the market.

2. Pricing of Securities: The forces of demand and supply of shares determine the share prices
on a stock exchange.

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.

4. Contributes to Economic Growth: A stock exchange is a market in which existing securities

are traded, which leads to capital formation and economic growth.

5. Spreading of Equity Cult: The stock exchange 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: Speculative activities are performed within the provisions
of law and under restricted and controlled manner.

TRADING AND SETTLEMENT PROCEDURES

• Trading in securities is executed through an on-line, screen-based electronic trading
system.
 • Trading is done in the broker’s office through a computer terminal. A stock exchange has
its main computer system with many terminals spread across the country.
• Trading in securities is done through brokers who are members of the stock exchange.
• Every broker have access to a computer terminal that is connected to the main stock
exchange.
• In this screen-based trading, a member logs on to the site and any information about the
shares (company, member, etc.) and the price at which he/ she is willing to buy or sell is
fed into the computer.
• The software is so designed that the transaction will be executed when a matching order
is found from a counter party.
• The computer in the brokers office constantly matches the orders at the best bid and offer
price.
• Those that are not matched remain on the screen and are open for future matching during
the day.

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.
2.It increases efficiency of information being passed on, thus helping in fixing prices efficiently.
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
5. A single trading platform has been provided as business is transacted at the same time in all
the trading centres.

Steps in the Trading and Settlement Procedure

1. Selection of Broker : First a broker who is a member of a stock exchange has to be selected
as they can only trade on the stock exchange.
2. Placing the order: An investor specifies the type and number of securities they want to buy or
sell to a broker.

3. Executing the order: The broker will buy or sell the securities as per the instructions of the
investor.
4. Settlement: Transactions on a stock exchange are carried out on either cash basis or a carry
over basis (i.e. badla). The time period for which the transactions are carried forward is referred
to as accounts which vary from a fortnight to a month. All transactions made during one account
are to be settled by payment for purchases and by delivery of share certificates, which is a proof
of ownership of securities by an individual.

DEMATERIALISATION AND DEPOSITORIES

Dematerialisation: This is a 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 as
an electronic balance in an account. This process of holding securities in an electronic form is
called dematerialization.
Depository: The investor has to open a demat account with an organisation called a depository.
The Securities and Exchange Board of India (SEBI) has made it mandatory for the settlement
procedures to be in demat form for certain securities. Holding shares in demat form is very
convenient as it is just like a bank account, even transactions can be conducted online.

WORKING OF DEMAT SYSTEM

1. Identify a depository participant like bank, brokers etc.
2. Complete account opening formalities and documentation.
3. The physical certificate is to be given to the DP along with a dematerialisation request form.
4. If shares are applied in a public offer, simple details of DP and demat account are to be given.
5. If through broker, the DP is to be instructed to debit the account with the number of shares.
6. The broker then pay the person for the shares sold from the payment received.
7. All these transactions are to be completed within 2 days, in simple words, the settlement
period for the delivery of shares and payment received from the buyer is on a T+2 basis.

DEPOSITORY
Depository: SEBI has developed a new system, to overcome the difficulties related to the
transfer of shares in physical form. In this system trading in shares is made compulsory in
electronic form through Depository services system and DEMAT Account,

Depository services :
 • A bank keeps money of its customers in safely in the same way a depository also like a
bank and keeps securities(e.g. shares, debentures, bonds, mutual funds etc.) safely in
electronic form on behalf of the investors.
• In the depository a securities account can be opened and all shares can be deposited, they
can be withdrawn/ sold at any time and instruction to deliver or receive shares on behalf
of the investor can be given.
• At present there are two depositories in India: NSDL. (National Securities Depository
Ltd.) and CDSL (Central Depository Services Ltd.). which are known as “Depository
Participants”. (DPs)

Four players participate in this system.

1. The Depository: A depository is an institution, which holds the shares of an investor in

electronic form. There are two depository institutions in India, NSDL and CDSL.

2. The Depository Participant: He opens the account of Investors and maintains record of
securities

3. The Investor: Is a person who wants to invest in securities and other financial instruments.

4. The Issuing Company: The organization which issues the securities. This issuing company
sends a list of the shareholders to the depositories.

NATIONAL STOCK EXCHANGE OF INDIA (NSE)

The National Stock Exchange is the latest, most modern and technology driven exchange.
It was incorporated in 1992 and was recognised as a stock exchange in April 1993. It started
operations in 1994, with trading on the wholesale debt market segment.
The Board of NSE includes senior executives from promoter institutions and eminent
professionals, without having any representation from trading members.

OBJECTIVES OF NSE
NSE was set up with the following objectives:
a. Establishing a nationwide trading facility for all types of financial instruments.
b. Ensuring equal and easy access to investors all over the country through an appropriate
communication network.
c. Providing a fair, efficient and transparent securities market using electronic trading system.
d. Enabling shorter settlement cycles and book entry settlements.
e. Meeting international benchmarks and standards.

MARKET SEGMENTS OF NSE

(i) Whole Sale Debt Market Segment: It provides a trading platform for a wide range of fixed
income securities that include central government securities, floating rate bonds, zero coupon
bonds, treasury bills etc.

(ii) Capital Market Segment: The capital market segment of NSE provides an efficient and
transparent platform for trading in equity, debentures, preference shares etc.

BSE (BOMBAY STOCK EXCHANGE LTD.)

BSE LTD. was established in 1875 and was Asia’s first Stock
Exchange. It was granted permanent recognition under the Securities Contract (Regulation) Act,
1956
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SEBI was established by Government of India on 12 April 1988 as an interim administrative

body to promote orderly and healthy growth of securities market and for investor protection. It
was given a statutory status on 30 January1992 through an ordinance which was later replaced
by an Act of Parliament known as the SEBI Act, 1992. It seeks to protect the interest of investors
in new and second hand securities.

Purpose and Role of SEBI

1. To the issuers, it provide a market place.
2. To the investors, it should provide protection of their rights and interests.
3. To the intermediaries, it should offer a competitive, professionalized and expanding market
Objectives of SEBI

1. To regulate stock exchange and the securities market for its efficient functioning.

2. To protect the rights and interests of investors and to guide & educate them from fraudulent
activities.

3. To prevent trade malpractices such as insider trading etc.

4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers,
merchant bankers etc.

Functions of SEBI
SEBI has two main tasks of regulation and development of securities markets and some
protective functions also.
I. Regulatory Functions :

1. Registration of brokers and subbrokers and other players in the market.

2. Registration of collective investment schemes and Mutual Funds.
3. Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the
business in stock exchanges and any other securities market.
4. Regulation of takeover bids by companies.
5. Calling for information by undertaking inspection, conducting enquiries and audits of stock
exchanges and intermediaries.
6. Levying fee or other charges for carrying out the purposes of the Act.
7. Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as
may be delegated by the Government of India.

2. Development Functions :
1.Promotes training of intermediaries of the securities market .
2. Investor education
3. Promotion of fair practices code of conduct of all SRO‘s.
4. Conducting research & publish information useful to all market participants

III. Protective Functions

1. Prohibit fraudulent & unfair trade practices in secondary market (e.g. Price rigging &
misleading statement).
2. Prohibit insider trading.
3. Educate investors Promote fair practice & code of conduct in securities market.

The Organisation Structure of SEBI

The SEBI also formed two advisory committees. They are the Primary Market Advisory
Committee and the Secondary Market Advisory Committee. They provide the guidelines and
policies of SEBI
The objectives of the two Committees are as follows:
a. To advise SEBI on issues relating to the regulation of intermediaries for ensuring investors
protection in the primary market.
b. To advise SEBI on matters related to the development of primary market in India.
c. To advise SEBI on the disclosure requirements for companies.
d. To advise for changes in legal framework and to introduce simplification and transparency in
the primary market.
e. To advise the board members in matters relating to the development and regulation of the
secondary market in the country.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 11
MARKETING
REVISION NOTES

MEANING OF MARKET
The term ‘market’ refers to the place where buyers and sellers gather to enter into transactions
involving the exchange of goods and services. The term ‘Market’ has been derived from the
Latin word ‘Marcatus’ which means ‘to trade’.

MARKETING
Marketing as “a human activity directed at satisfying needs and wants through exchange
process”.
Philip Kotler
Marketing concept holds that a key to achieving organizational goals consists in determining
the needs and wants of target markets and delivering the desired satisfactions more efficiently
and effectively by competitors.
FEATURES OF MARKETING
1. Needs and Wants:
• The process of marketing helps consumers in obtaining what they need and want.
• A need is a state of deprivation or a feeling of being deprived of something.
• Needs are basic to human beings and do not pertain to a particular product.

2. Creating a Market Offering:

Market offering refers to a process of offering and introducing a product or service, having given
features like size, quality, taste, etc. for the purpose of selling.

3. Customer Value:
The process of marketing facilitates exchange of products and services between the buyers and
the sellers.

4. Exchange Mechanism:
• The process of marketing works through the exchange mechanism.
• Exchange refers to the process through which two or more parties come together to
obtain the desired product or service from someone, offering the same by giving
something in return. For E.g. money is the mode of exchange used to buy/ sell a product
or a service.
• Conditions to be satisfied for exchange:
a. At least two parties
b. offering something of value to the other
c. communication
d. Freedom to accept or reject offer
e. Parties willingness to enter into a transaction

What can be Marketed?

1. Physical product
2. Services
3. Ideas
4. Person
5. Palace
6. Experience
7. Properties
8. Events
9. Information
 10. Organisation

Marketer
• Marketer refers to any person who takes more efforts in identifying the needs of the
consumers, offer the product / service and persuade them to buy the product in the
process of exchange.
• Sellers as marketer are the providers of satisfaction. They makes available
products/services and offers them to customers with an intention of satisfying customer
needs and wants.
• They can be divided into:
a. Goods marketers (such as Hindustan Lever)
b. Services marketers (such as Indian Airlines)
c. Others marketing experiences (such as Walt Disney) or places (like tourist destinations).

• Marketing activities are the activities carried on by the marketers to facilitate exchange of
goods and services between the producers and the consumers.

MARKETING MANAGEMENT

Marketing management means management of the marketing functions. It is the process of

organizing, directing and controlling the activities related to marketing of goods and services to
satisfy customers’ needs & achieve organizational goals.
“Marketing management as the art and science of choosing target markets and getting, keeping
and growing customers through creating, delivering and communicating superior customer of
management.”
Philip Kotler

The process of management of marketing involves:

a. Choosing a target market

b. Demand creation by producing products as per the customers’ requirements and interests.
c. Create, develop and communicate superior values to the customers: To provide superior
value products/ services to prospective customers and they communicate these values to
other prospective buyers and persuade them to buy the product/ service.
MARKETING AND SELLING

Marketing: It refers to a large set of activities of which selling is just one part. A marketer
before making the sale does a lot of other activities such as planning the type, design of the
product, fixing the price and selecting the distribution channels and choosing the right
promotional mix for the target market.

Selling: refers to the sale of goods or service through publicity, promotion and salesmanship.
The title of the product is transferred from seller to buyer. The main purpose of selling is to
convert product into cash.

DIFFERENCE BETWEEN MARKETING

Basis Marketing Selling
Scope It is a wide term consisting of a number It is only a part of process of
of activities such as identification of marketing.
customer needs, product development,
fixing of price, distribution and
promotion and selling.
Focus Achieving maximum satisfaction of the Transfer of the title from seller to
customers needs and wants. consumer.
Aim Profits through customer satisfaction. Profits through maximising sales
volume.
Emphasis Bending the customer according to the To develop the products as per the
product. customer needs.
Start and It start before a product is produced. It starts after a product is developed.
end
Activities
Strategies Involves efforts like product, promotion Involves efforts like Promotion and
pricing and physical distribution. persuasion

MARKETING MANAGEMENT PHILOSOPHIES

Marketing concept/ philosophies holds that a key to achieving organizational goals consists in
determining the needs and wants of target markets and delivering the desired satisfactions more
efficiently and effectively by competitors.
1. Production concept:
In the earlier days of the industrial revolution, the number of producers were limited, so the
industrialists believed that, the consumers are only interested in easily and extensively available
goods at an affordable price.

2. Product concept:
• With passage of time, the supply improve and the customers started favouring the
products that were superior in performance, quality and features.
• Thus, product improvement became the key to profit maximization of a firm.

3. Selling concept:
• Increase in scale of production led to competition among the sellers. Product quality and
availability alone did not ensure survival, as a large number of firms were selling similar
products.
• The consumers on their own will not buy any products unless the enterprise take
aggressive sales and promotional activities.

4. Marketing concept :
• Marketing begins with finding what the consumers want and thus satisfy consumers and
make profits.
• Customer satisfaction is the precondition for realizing the firm’s goals and objectives.

5. Social marketing concept:

• Under this concept customer satisfaction is supplemented by social welfare.
• A company that adopts the societal concept has to balance the company’s profits,
consumer satisfaction and society’s interests.

Differences in the Marketing Management Philosophies

Philosophies/ Production Product Selling Marketing Societal
Basis concept concept concept concept concept

Starting Point Factory Factory Factory Market Market,

Society
Main focus Quantity of Quality, Existing Customer Customer
product performance, product needs needs and
 features of society’s
product well being
Means Availability Product Selling and Integrated Integrated
and improvements promoting marketing marketing
affordability
of product
Ends Profits Profits Profits Profits Profits
through through through through through
volume of product sales customer customer
production quality volume satisfaction satisfaction
and social
welfare

FUNCTIONS OF MARKETING

1. Gathering And Analyzing Market Information:

• Systematic accumulation of facts and analysis of information.
• Analysing the strengths, weakness, opportunities, and threats of a business environment.
• Identifying customer needs and wants, identifying buying motives, choice of a brand
name, packaging and media used for promotion etc.
• Data is available from primary as well as secondary sources.

2. Marketing planning :
• To develop an appropriate marketing plan so that the marketing objectives can be
achieved.
• It should specify the action programs to achieve these objectives .
• E.g if a marketer tries to achieve a bigger market share in the country in the next three
years, then his marketing plan should include various important aspects like plan for
increasing level of production, promotion of products etc.

3. Product designing and development:

• Involves decisions regarding the product to be manufactured and it‘s attributes such as its
quality considerations, packaging, models and variations to be introduced etc.
• A good design can improve performance of a product and also give it a competitive
advantage in the market.
• Anticipate customer needs and develop new products or improve existing products to
satisfy their needs.
4. Standardization and grading:
• Standardisation refers to producing goods of predetermined specifications, which helps in
achieving uniformity and consistency in the output E.g. ISI Mark etc.
• Grading is the process of classification of products into different groups, based on some
of its important characteristics such as quality, size, etc.

5. Packaging and labeling:

• Packaging‘ refers to designing and developing a package for a product.
• It protects the products from damage , risks of spoilage, breakage and leakage. It also
makes buying convenient for customers and serves as a promotional tool.
• Labeling refers to designing a label to be put on the package. It may vary from a
simple tag to complex graphics. For e.g. colgate, lays etc.

6. Branding
• It helps in differentiation of the product, builds customer loyalty and promote its sale.
• Important decision area is branding strategy, whether each product will have a separate
brand name or the same brand name to be used for all products.
7. Customer Support Services:
• Customer support services are very effective in increasing sales from the prospective
customers and developing brand loyalty for a product.
• It aims at providing maximum satisfaction to the customer and building brand loyality.
• Eg. sales services, handling customer complaints and adjustments, procuring credit
services, maintenance services, technical services and consumer information.

8. Pricing of Product:
• Price of product refers to the amount of money customers have to pay to obtain a product.
• It is an important factor in the success/ failure of a product.
• Demand for a product/ service is related to its price, so price should be fixed after
analysing all the factors determining the price of the product.

9. Promotion:
• Promotion of products and services involves informing the customers about the firm’s
product, its features, etc. and persuading them to buy the products.
• Methods of promotion are advertising, Personal Selling, Publicity and Sales Promotion.

10. Physical Distribution:

• The two major decision areas under this function are
(a) Decision regarding channels of distribution or the marketing intermediaries to be used
e.g. wholesalers, retailers
(b) Physical movement of the product from where the place of production to the place of
consumption.
11. Transportation:
• Transportation means physical movement of goods from one place to the other.
• Various factors like nature of the product, cost, location of target market etc. should be
considered in choosing the mode of transport.

12. Storage or Warehousing:

• To maintain smooth flow of products in the market, there is a need for proper storage of
the products.
• Storage and warehousing is used to protect against unavoidable delays in delivery or to
meet out contingencies in the demand.

MARKETING MIX

• A large number of factors affect the marketing decisions they are ‘Non-controllable
factors and Controllable factors’.
• Controllable factors are those factors, which can be influenced at the level of the firm.
• Certain factors which affect the decision but are not controllable at the firm’s level are
called environmental variables.
• To be successful, a firm needs to take sound decisions after analysing controllable factors
while keeping the environmental factors in mind.
• The set of marketing tools that a firm uses to pursue its marketing objectives in the target
market is described as Marketing Mix.
• Success of a market offer depend upon how well these ingredients are mixed to create
superior value for customers, simultaneously achieve their sales, and profit objective.

ELEMENTS OF MARKETING MIX

The marketing mix consists of four main elements

A. Product
B. Price
C. Place/Physical Distribution
D. Promotion
These elements are more popularly known 4 P’s of the marketing.
1. Product: Product means goods or services or ‘anything of value’, which is offered to the
market for sale. E.g. colgate, Dove etc.
2. Price : is the amount of money a customer has to pay in order to obtain a product/ service.
3. Place : Physical distribution of products ie. Making the product available to the customers at
the point of sale.
4. Promotion: Informing the customers about the products and persuading them to buy the same

Marketing mix elements

•PROMOTION MIX •PRODUCT MIX
•ADVERTISING •PRODUCT QUALITY
•PERSONAL SELLING •NEW PRODUCT
•SALES PROMOTION •DESIGN AND
•PUBLICITY DEVELOPMENT
•PUBLIC RELATIONS •PACKAGING
•LABELLING
•BRANDING

PROMOTION PRODUCT

PLACE PRICE

•CHANNEL STRATEGY •PRICE LEVEL

•CHANNEL SELECTION •MARGINS
•CHANNEL CONFLICT •PRICING POLICY
•CHANNEL COOPERATION •PRICING STRATEGIES
•PHYSICAL DISTRIBUTION •PRICE CHANGE

I. PRODUCT
From the customer’s point of view, a product is a bundle of utilities, which is purchased because
of its capability to provide satisfaction of certain need.
CLASSIFICATION OF PRODUCTS
Products can be classified into two categories:
(i) Consumers ‘products,
(ii) Industrial products.

A. Shopping Efforts Involved

On the basis of the time and effort of the buyers.
1. Convenience Products: Those consumer products, which are purchased frequently, for
immediate use are referred to as convenience goods. Medicines, newspaper, stationery items,
toothpaste. etc.
2. Shopping Products: Shopping products are those goods, in which buyers devote considerable
time, to compare the quality, price, style, suitability, etc., at several stores, before making final
purchase. E.g. electronic goods, vehicles etc.
3. Specialty Products: Specialty products are those goods which have certain special features
because of which people make special efforts in their purchase. E.g. art work, antiques etc.
B. Durability of Products
1. Non-durable Products: The consumer products, which are consumed in a short span of time.
E.g. milk, soap, stationary etc.
2. Durable Products: Those tangible products which normally survive many uses, for e.g.
refrigerator, radio, bicycle etc.
3. Services: Services are intangible, it means those activities, benefits or satisfactions, which are
offered for sale, e.g., dry cleaning, watch repairs, hair cutting, postal services, services offered by
a doctor etc.

INDUSTRIAL PRODUCTS
Industrial products are those products, which are used as inputs in the production process.
 Characteristics Classification

• Number of Buyers • Materials and Parts: goods that

• Channel Levels enter the manufacture’s
• Geographic Concentration products completely.
• Derived Demand • Capital Items: production of
finished goods, E.g.
• Role of Technical
installations and equipments.
Considerations
• Supplies and Business Services:
• Reciprocal Buying
short lasting goods and
• Leasing Out services that facilitate
developing or managing the
finished product. For e.g.
repairs and maintenance.

BRANDING:
Branding is creating a corporate brand identity for consumer, and getting that brand identity
imprinted on the minds of consumer, and this requires brand positioning and brand management.
Jeff Bezos
The process used to create a distinct identity of a product. It is the process of using a name, term,
symbol or design individually or in some combination to identify a product.

Brand : Name, term, sign, design or some combination of the above used to identify the products
of the seller and to differentiate them from those of competitors.
 Characteristics of Good
Advantages to the Advantages to the Brand
Marketers Customers
Name
•Enables Marking Product •Helps in Product •Short, easy to pronounce,
Differentiation: It helps Identification:helps the spell, recognise and
in distinguishing its customers in identifying remember
product from that of its the products •Suggest the product’s
competitors. •Ensures Quality : Ensures benefits and qualities
•Helps in Advertising and quality of product •Distinctive from other
Display Programmes •Status Symbol: brands products
•Differential Pricing: It become status symbols •Adaptable to packing or
helps a firm to charge because of their quality labelling requirements, to
different price for its Eg: Benz cars different advertising
products. media and to different
•Ease in Introduction of languages.
New Product • Versatile to
accommodate new
products.
• Registered and
protected legally

PACKAGING

Packaging: An act of designing and developing the container or wrapper of a product. Good
packaging often helps in selling the product so it is called a silent salesman.

Levels of Packaging
1. Primary Package: refers to the product’s immediate container/ covering e.g. toffee in a
wrapper, a match box, a wrapper of soap etc.

2. Secondary Package: refers to additional layers of protection that are kept till the product is
ready for use e.g. a Colgate toothpaste usually comes in a red card board box.

3. Transportation Package: refers to further packaging components necessary for storage,

identification and transportation e.g. package of toffees are put into cardboard boxes for storing
at a manufacturer’s warehouse and for transportation.
 Functions of Packaging

• Product Identification: Packaging • Rising Standards of Health And

helps in identification of the Sanitation: It is believed that,
product. there is minimum adulteration in
• Product Protection: The main packed goods
function of the packing is to • Self-Service Outlets: A product
provide protection. can be promoted by good and
• Facilitating Use of the product: It attractive packaging.
provides convenience in carriage, • Innovational Opportunities:
stocking and in consumption. Innovation in the area of
• Product Promotion: Packaging packaging has increased the shelf
simplifies the work of sales life of the products.e.g. tetra
promotion. packs for milk.
• Product differentiation: Colour,
size, material etc of packaging
makes a difference in perception
of customers about the quality of
the product.

LABELLING

Labelling means putting identification marks on the package. Label is a carrier of information &
provides information like - name of the product, name of the manufacturer, contents of the
product, expiry and manufacturing date, general information for use, weight etc.

Labels perform following functions:

1. Identify the product: It helps the customers to identify the product from different types of
product available. For e.g. We can easily identify a Cadbury chocolate from the various
chocolates by purple color of its label.

2. Describe the product and specify its contents: The manufacturer give all information related
to the contents of the product etc.
3. Grading of products: With the help of label, products can be graded in to different categories
based on quality, nature etc. for example: Brook Bond Red Label, Brook Bond Yellow Label,
Green Label etc.
4. Helps in promotion of products: Attractive and colorful labels excite the customers and
induce them to buy the products. For example: 40%extra free, mentioned on detergent, buy 2 get
one free etc.
5. Providing information required by law: There is a legal compulsion to print batch no.
contents, max retail price, weight/volume on all the products and statutory warning on the packet
of cigarettes, “Smoking is injuries of health”: In case of hazard on/poisonous material
appropriate safety warnings should be put.

II. PRICING

Meaning of Price:
Sum of the values that consumers exchange for the benefit of having or using the product. Price
may therefore be defined as the amount of money paid by a buyer (or received by a seller) in
consideration of the purchase of a product or a service

FACTORS DEERMINING PRICE DETERMINATION:

1. Pricing Objectives

• The objective of the marketing firm is to maximize profits. Pricing objective can be
determined in the short run and in the long run.
• If the firm decides to maximise profits in the short run, it would charge maximum price
for its products. But if it is to maximise its total profit in the long run, it would opt for a
lower per unit price so that it can capture larger share of the market and earn greater
profits through increased sales.

2. Product cost:

• Price cover all costs and aim to earn a fair return over and above cost.
• It includes the costs of producing, distributing and selling the product.
• Costs sets the floor price that is the minimum price at which the product may be sold.
 • Price should recover Total costs (Fixed costs/overheads + Variable costs+ Semi-variable
costs) in the long run, but in certain circumstances (introduction of a new product or due
to entry into a new market) product price may not cover all the costs for a short while.

3. Utility and demand:

• Utility provided by the product and the demand for the product set the upper limit of
price that a buyer would be willing to pay for a product.
• Buyers would be ready to pay to till the point, where the utility of the demand is more
than or equal to the utility derived from it.
• Law of demand states that consumers purchase more at a lesser price.
• Elasticity of demand is the responsiveness of demand to change in prices of a product.
Demand is elastic if a small change in price results in a large change in quantity
demanded.
• If demand is inelastic, firm can fix higher prices.

4. Extent of Competition in Market:

Prices of competitors and their anticipated actions need to be considered before fixing prices.

5. Government Policies:
In public interest, the government can intervene regulates the price of the products.
6. Marketing Methods Used:
Price fixation process is also affected by other elements of marketing such as distribution system,
sales promotion efforts, the type of packaging, product differentiation, credit facility etc.

III. PHYSICAL DISTRIBUTION

• A set of decisions needs to be taken to make the product available to customers for
purchase and consumption.
• The marketer needs to make sure that the product is available at the right quantity, at the
right time and at the right place.
• Channels of Distribution are set of firms and individuals that take title, or assist in
transferring title, to particular goods or services as it moves from the producers to the
consumers.
 • Choice of appropriate channel of distribution is a very important marketing decision,
which affects the performance of an organisation. Whether the firm, adopt a direct
marketing channels or long channels involving a no. of intermediaries is a strategic
decision.

Components of physical distribution:

1. Order Processing: Provide accurate & speedy order processing in the absence of which
orders would reach late or in wrong quantity. As a result it will lead to customer dissatisfaction,
with the danger of loss of business and goodwill.
2. Transportation: It make the product available at the point of sale by transporting goods from
the manufacturers to the consumers.
3. Inventory control: Important decision in respect of inventory is deciding about the level of
inventory. Additional demand can be met in less time and the need for inventory will be low.
4. Ware housing: Warehousing refers to the act of storing and assorting products in order to
create time utility in them. It is required to fill the gap between the time when the product is
produced & time when it is distributed for consumption.

Functions of Distribution Channels

1. Sorting: Middlemen procure supplies of goods from a variety of sources, which is often not of
the same features.
2. Accumulation: accumulation of goods into larger homogeneous stocks, which help in
maintaining continuous flow of supply.
3. Allocation: breaking homogenous stock into smaller, marketable lots.
4. Assorting: assortment of products for resale.
5. Product Promotion: Middlemen participate in certain activities such as demonstrations,
special displays etc.
6. Negotiation: Manufacturers, intermediaries and customers negotiate the price, quality and
other matters.
7. Risk Taking: merchant middlemen take title of the goods and thereby assume risks on
account of price and demand fluctuations, spoilage, destruction, etc.
CHANNELS OF DISTRIBUTION

• Includes a series of firms, individuals, merchants and functionaries who form a network, which
helps in the transfer of title to a product from the producer to the end consumer.

• The intermediaries help to cover a large geographical area and bring efficiency in distribution,
including transportation, storage and negotiation. And they also bring convenience to customers
as they make various items available at one store and also serve as authentic source of market
information as they are in direct contact with the customer.

TYPES OF CHANNELS:

Direct Channel ( Zero Level)

A direct relationship is established between the manufacturer and the customer.
Manufacturer-Customer. Eg. mail order, internet, door to door selling.

Indirect Channel
When a producer employs one or more intermediary to move goods from the point of production
to the point of sale, the distribution network is called indirect.
1. Manufacturer-Retailer-Customer (One Level Channel).
In this one intermediary i.e., retailers is used between the manufacturers and the customers.
Usually used for specialty goods like expensive watches, appliances, Cars( Maruti Udyog) etc.

2. Manufacture-wholesaler-Retailer-customer (Two Level Channel):

This channel is mainly used for the distribution of consumer goods. Usually used for consumer
goods like soaps , salt etc.

3. Manufacture → Agent → Wholesaler → Retailer → Customer (Three Level Channel):

In this case, manufactures use their own selling agents or brokers who connect them with
wholesalers and then the retailer and the consumers.

Factors Determining Choice of Channels of Distribution

Choice of appropriate channel of distribution is a very important marketing decision.
1. Product Related Factors: the nature of the product, whether it’s a industrial goods or
consumer goods, perishable or a nonperishable product etc. determine the channels used in the
distribution.
2. Company Characteristics: The financial strength of the company and the degree of control it
wants to hold on other channel members. Short channels are used to have greater control on
intermediaries and vice versa.
3. Competitive Factors: Companies may imitate the channels used by its competitors.
4. Market Factors: Size of market and geographical concentration of potential buyers affects
the channel selection.
5. Environmental Factors: Legal constraints and economic condition of a country. In a
depressed economy marketers use shorter channels to distribution.

IV. PROMOTION
• Promotion refers to the use of communication with the twin objective of informing
potential customers about a product/ service and persuading them to buy it.
• Promotion is an important element of marketing mix by which marketers uses various
tools of communication to encourage exchange of goods and services in the market.
 • It refers a combination of promotional tools/ techniques used by an organization to
induce and persuade customers to buy its products.

PROMOTION MIX
Promotion mix refers to combination of promotional tools used by an organisation to achieve its
communication objectives.
Promotion mix tools:
(i) Advertising,
(ii) Personal Selling,
(iii) Sales Promotion,
(iv) Publicity.

1. ADVERTISING
An identified sponsor can define advertising as a paid form of non- personal presentation and
promotion of goods, services or ideas.
Most commonly used tool of promotion. It is an impersonal form to communication, which is
paid by the marketers (sponsors) to promote goods and services. Common mediums are
newspaper, magazine, television & radio.
 FEATURES MERITS LIMITATIONS

• Paid form: sponser • Mass Reach: a large • Less Forceful: there

has to bear a cost of number of people is no compulsion on
communicating with can be reached over the prospects to pay
consumers. a vast geographical attention to the
• Impersonality: No area. message.
direct face-to-face • Enhancing Customer • Lack of Feedback:
contact between the Satisfaction and • Inflexibility: It is
prospect and the Confidence. less flexible as the
advertiser. • Expressiveness: It is message is
• Identified sponser: one of the most standardised and
Advertising is done forceful medium of not tailor made.
by some identified communication. • Low Effectiveness:
individual or • Economy: is a very It is difficult to make
company. economical mode of advertisingmessages
communication heard by the target
because of its mass prospects.
reach.

OBJECTIONS TO ADVERTISING
Some opponents say that the expenditure on advertising is a social waste as it adds to the cost,
multiplies the needs of people and undermines social values.
1. Adds to Cost: Advertising unnecessarily adds to the cost of product which is passed on to the
buyer in the form of high prices.
2. Undermines Social Values: It undermines social values and promotes materialism.
3. Confuses the Buyers: Product of similar nature/ quality confuses the buyer.
4. Encourages Sale of Inferior Products: It does not distinguish between superior and inferior
products.
5. Some Advertisements are in Bad Taste: These show something which in not approved by
some people.

2. PERSONAL SELLING
Personal selling consists of contacting prospective buyers of product personally i.e by getting
involved in a face to face interaction between seller and buyer for the purpose of sale.
Features of the Personal Selling
1. Personal contact is established under personal selling.
2. Development of relationship with the prospective customers which are important in making
sale.
3. Oral conversation.
4. Quick solution of queries.

Merits of Personal Selling

1. Flexibility
2. Direct Feedback
3. Minimum wastage

ROLE OF PERSONAL SELLING

Importance to Business Importance to
Importance to Society
Organisation Customers
• i) Effective • (i) Help in Identifying • (i) Converts Latest
Promotional Tool Needs Demand
• (ii) Flexible Tool • (ii) Latest Market • (ii) Employment
• (iii) Minimises Information Opportunities
Wastage of Efforts • (iii) Expert Advice • (iii) Career
• iv) Consumer • (iv) Induces Customers Opportunities
Attention • (iv) Mobility of Sales
• (v) Lasting People
Relationship • (v) Product
• (vi) Personal Rapport Standardisation
• (vii) Role in
Introduction Stage
• viii) Link with
Customers

3. SALES PROMOTION
Sales Promotion refers to short term incentives or other promotional activities that seek to
stimulate interest in purchasing a product.
 Limitations Of Sales Commonly used Sales
Merits of Sales Promotion
Promotion Promotion Activities
•Attention Value: Attract •Reflects Crisis: A firm that •Product Combination:
attention of people through frequently relies on sales Offering another product as
the usage of incentives. promotion activities may gift along with the purchase
•Useful In New Product give the impression that it is of a product.
Launch: Sales promotion unable to manage its sales •Rebate: Offering products at
tools induce people to break and there are no takers for special prices
away from their regular its products. •Instant draws and assigned
buying behavior and try new gift: Scratch a card and
products. •Spoils Product Image: instantly win a prize with
•Synergy in Total Consumers may feel that the purchase of a TV, Tea,
Promotional Efforts: Sales the products are not of good Refrigerator etc.
promotion activities add to quality or arenot •Lucky Draw: lucky draw
the overall effectiveness of appropriately priced. coupon for free petrol on
the promotional efforts of a purchase of certain quantity
firm. etc.
•Usable Benefit: ‘Purchase
goods worth Rs 3000 and
get a holiday package worth
Rs 3000 free etc.
•Full finance @ 0%: Many
marketers of consumer
durables such as Electronic
goods, automobiles etc.
offer easy financing schemes
such as‘24 easy instalments
etc.
•Contests: Conducting
competitive events involving
application of skills or
lucketc.
•Quantity Gift: Offering extra
quantity of the product e.g.,
Buy three and get one free.
•Refunds: Refunding a part
of price paid by customer on
production of some proof of
purchase.
•Discount: Offering products
at less than list price.
•Sampling: Offer of free
samples of the product to
potential customers.
Generally used at the time
of introduction of a product.

4. PUBLICITY:
Publicity generally takes place when favourable news is presented in the mass media about a
product or service. For example, if a manufacturer achieves a breakthrough by developing a car
engine and if this news is covered by television or radio or newspapers in the form of a news
item.
Features of publicity are:
I. Publicity is an unpaid form of Communication
II. No identified sponsor

5. PUBLIC RELATIONS

Public relations covers a wide range of tactics and is usually involved in providing information
to independent media sources in the hope of gaining favorable coverage. It also involves a mix of
promoting specific products, services and events and promoting the overall brand of an
organization, which is an ongoing tact.
Role of Public Relations:

1. Press Relations: A press release is an announcement of an event, performance, or other

newsworthy item that is issued to the press by a public relations professional of an organization.
It is written in the form of a positive story with an attractive heading so that the media quickly
grasp and circulates the message.
2. Product publicity: The company tries to draw attention to new products by arranging sports
and cultural events like news conferences, seminars and exhibitions etc.
3. Corporate Communication: The image of the organisation is promoted with the help of
newsletters, annual reports, brochures etc.
4. Lobbying: The organisation maintain cordial relations with government officials and
ministers in charge of corporate affairs, industry, finance in respect to policies relating to
business and the economy.
5. Counselling: public relations department advises the management on general issues which
affect the public and the position the company.

Maintaining good public relations also helps in achieving the following marketing
objectives:
(a) Building awareness
(b) Building credibility
(c) Stimulates sales force
(d) Lowers promotion costs

DIFFERENCE BETWEEN ADVERTISING AND PERSONAL SELLING

ADVERTISING PERSONAL SELLING

• Impersonal form of communication • Personal form of communication

• Transmission of standardised • Non standardised messages
messages • Flexible
• Inflexible • limited reach
• Mass reach • Cost per person is quite high
• Cost per person reached is very low. • Efforts take a lot of time to cover the
• Cover the market in a short time. entire market.
• Makes use of mass media • Makes use of sales staff.
• Lacks direct feedback • Direct and immediate feed back
• Useful in creating and building • Plays important role at the
interest awareness stage
• Target market is mainly consumers • Taget market is industrial buyers.
 CBSE CLASS 12 BUSINESS STUDIES
CHAPTER – 12
CONSUMER PROTECTION
REVISION NOTES

MEANING
• Consumer protection refers to protecting the consumer against anti‐ consumer trade
practices by the producers or sellers.
• caveat emptor, which means “Let the buyer beware”
• caveat venditor which means “Let the seller beware”
• Consumers are be exposed to risks due to exploitative and unfair trade practices like
defective and unsafe products, adulteration, false and misleading advertising, hoarding,
black-marketing etc.
• Thus, there is a need to provide adequate protection to consumers against such practices

IMPORTANCE OF CONSUMER PROTECTION

(A )From Consumer’s point of view

1. Consumers Ignorance: Majority of consumers are not aware of their rights and reliefs
available to them as a result of which they are continuously exploited. In order to save
consumers from exploitation, consumer protection is needed.

2. Unorganized Consumers: In India consumers are still unorganized and there is lack of
consumer organizations, which would act in their interests.

3. Widespread Exploitation of Consumers: Consumers are exploited on a large scale by means

of various unfair trade practices and consumer protection is required to protect them from
exploitation.

(B) From the point of view of Business

1. Long term Business Interest: It is always in the interest of the business to keep its customer
satisfied. Global competition could be won only after satisfying customers. Satisfied customers
lead to repeat sales and thus helps in increasing customer base of the business.

2. Business uses Resources of Society: Every business uses the resources of the society and thus
it is their responsibility to work in the society’s interest .

3. Social Responsibility: A business has social responsibilities towards various groups like
owners, workers, government, customers etc. Thus, customers should be provided with quality
goods at reasonable prices.

4. Moral Justification: It is the moral duty of any business to act in favour of consumer’s
interest & avoid any form of exploitation & unfair trade practices like defective & unsafe
products, adulteration, false and misleading advertising, hoardings, black marketing etc.

5. Government Intervention: If a business engages in any form of unfair trade practices then
government takes action against it, which will adversely affect the goodwill of the company.

LEGAL PROTECTION TO CONSUMERS

CONSUMER PROTECTION ACT, 1986 (CPA, 1986)

Set up to protect and promote consumers interests through a speedy and inexpensive redressal of
grievances.
Recognizes consumer rights and safeguard their interests.
A three-tier redressal agency to address consumer grievances, has been set up constituting of
District Forums , State and national commissions.

Scope of the act:

It is applicable to all types of undertaking:

• Large and small scale

• Private, public and co-operative sector
• Manufacturer or trader
• Firms supplying goods as well as services

2. The Indian Contract Act, 1872:

The Act lays down the conditions on the applicability of an agreement signed by the parties to
the contract and specifies the remedies in case of breach of contract.

3. The Sale of Goods Act, 1930:

The Act provides some safeguards and reliefs to the buyers.

4. The Essential Commodities Act, 1955:

This Act provides for action against anti-social activities of profiteers, hoarders and black
marketers. It aims at controlling production, supply and distribution of essential commodities.

5. The Agricultural Produce (Grading and Marking) Act, 1937:

The Act prescribes grade standards for agricultural commodities and livestock products.
6. Adulteration Act, 1954:
This Act aims to check adulteration of food articles and ensure their purity so as to maintain
public health.

7. The Standards of Weights and Measures Act, 1976:

It provides protection to consumers against the malpractice of under-weight or under-measure.

8. The Trade Marks Act, 1999:

This Act prevents the use of fraudulent marks on the product.

9. The Competition Act, 2002:

The Act provides protection to the consumers in case of practices adopted by business firms.

10. The Bureau of Indian Standards Act, 1986:

The Bureau has two major activities: formulation of quality standards for goods and their
certification through the BIS certification scheme

CONSUMER RIGHTS

Consumer Protection Act, 1986 has provided six rights to the consumers, which are as follows:

1. Right to Safety:
Consumer has the right to be protected against products, & services which are hazardous to
health & life. E.g. ISI certification for electronic items.

2. Right to be Informed:
Consumer has right to have complete information about the product before buying it.

3. Right to choose:
Consumer has a right to choose any product out of the available products as per his/ her own
interests.

4. Right to be heard:
Consumer has the right to file a complaint to be heard in case of dissatisfaction with goods or
services (use of grievance cell).

5. Right to Seek Redressal:

Consumer has the right to get relief in case the product or service falls short of consumers
expectations or is dangerous. The consumer may be provided with replacement/removal of
defect or compensation for any loss.

6. Right to consumer education:

Consumer has the right to acquire knowledge and to be well informed throughout life. He should
be made aware of his rights and reliefs available to him in case of the product or service falls
short of his exceptions. The Govt. of India has included consumer education in the school
curriculum and is making use of mass media to make consumers aware of their rights.

CONSUMER RESPONSIBILITIES
A consumer has to follow certain responsibilities while purchasing, using and consuming goods.

1. Be aware about the various products available in the market so that an intelligent and wise
choice can be made.

2. Buy only standardized goods as they provide quality assurance. Thus, look for ISI mark on
electrical goods, FPO mark on food products, Hallmark on jewelry etc.

3. Follow instructions related to the product and learn about the risks associated with products,
and use it safely.

4. Read labels carefully to gain information about prices, net weight, manufacturing and expiry
dates, etc.
5. Assert yourself to ensure that you get a fair deal.

6. Be honest in your dealings and purchase only legal goods and services and discourage
unscrupulous practices like black marketing, hoarding etc.

7. Ask for a cash memo on purchase of goods or services. This would serve as a proof of the
purchase made.

8. 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.

9. Form consumer societies which would play an active part in educating consumers and
safeguarding their interests.

10. Respect the environment.

WAYS AND MEANS OF CONSUMER PROTECTION

1. Self Regulation by Business: Firms, which gives importance to corporate social

responsibility, follow ethical standards and practices in dealing with their customers.

2. Business Associations: FICCI and CII have laid down their code of conduct which lay down
for their members the guidelines in their dealings with the customers.

3. Consumer Awareness: A well-informed consumer would be in a position to raise his voice

against any unfair trade practices .

4. Consumer Organisations: It plays an important role in educating consumers about their

rights and providing protection to them.
5. Government: The government protects the interests of the consumers by enacting various
protective measures.

REDRESSAL AGENCIES UNDER CONSUMER PROTECT ACT

Who Can File A Complaint Under CPA, 1986

A complaint before the appropriate consumer forum can be made by:

1. Any consumer.

2. Any registered consumer association.

3. The central or state government.

4. One or more consumers on behalf of numerous consumers having same interest.

5. A legal heir or representative of a deceased consumer.

6. A complaint under Section 2 (b) of the Consumer Protection Act 1986

For the redressal of consumer grievances the act provides a three–tier machinery as:

1. DISTRICT FORUM

District forum are set up in each district by the state concerned. The important features are:
(a) It consists of a President and two members, one of whom should be a woman, duly appointed
by State Govt.

(b) The value of the goods or services in question, along with the compensation claimed, does
not exceed Rs. 20 lakhs.

(c) On receiving the complaint, the district forum shall refer the complaint to the opposite party
concerned and send the goods or sample for testing in a laboratory.

(d) The district forum after being satisfied that goods are defective or there is some unfair trade
practice can issue an order to opposite party directing to either replace or return the price or pay
compensation. In case the aggrieved party is not satisfied with the district forums order, they can
appeal before state forum within 30 days of passing an order.

2. STATE COMMISSION

It is set up in each state by the government. The salient features are:

(a) Each commission consists of a president and at least 2 members appointed by State
Government and one should be a woman.

(b) The value of the goods or services along with the compensation claimed, exceeds Rs. 20
lakhs but does not exceed Rs. 1 crore.

(c) On receiving the complaint, the state commission can also refer the complaint to opposite
party and send the goods for testing in laboratory.

(d) The state commission after being satisfied can order the opposite party to either replace or
repay or pay compensation. In case the aggrieved party is not satisfied, they can appeal before
national commission within 30 days of passing an order.

3. NATIONAL COMMISSION
It is setup by Central Govt. The provisions of act are:

(a) It consists of a President and at least 4 members appointed by Central Government, one of
them should be a woman.

(b) All complaints are pertaining to goods and services along with the compensation value of
more than Rs. 1 crore can be filed with national commission.

(c) On receiving the complaint, the national commission can also refer it to opposite party and
send goods for testing.
(d) The National Commission has the power to issue orders for replacing the product and to pay
the compensation for the loss etc.
RELIEF AVAILABLE

• Remove defect in goods and deficiency in services.

• Replace defective goods with a new one with no defects

• Refund price paid

• Pay a reasonable amount of compensation for any loss or injury suffered.

• Pay punitive damages in appropriate circumstances.

• Discontinue unfair/restrictive trade practice

• Not to offer hazardous goods and services for sale

• Withdraw hazardous goods from sale

• Cease manufacturing hazardous goods

• Pay an amount to consumer welfare fund (not less than 5%) to be utilized in the prescribed
manner

• Issue corrective advertisement to neutralize the effect of misleading ads.

• Pay adequate costs to parties.

Role of Consumer organizations and NGO’s

1. Educating the general public about consumer rights

2. Publishing periodical & other publications to educate consumers.

3. Providing legal assistance to consumers by providing legal advice etc.

4. Filing complaints in appropriate consumer courts on behalf of consumers.

5. Encouraging consumers to take on action against unfair trade practices.

6. Taking an initiative in filing cases in consumer courts on behalf of consumers.

Some of the important consumer organisations and NGOs engaged in protecting and
promoting consumers’ interests include the following.
(i) Consumer Coordination Council, Delhi
(ii) Common Cause, Delhi
(iii) Voluntary Organisation in Interest of Consumer Education (VOICE), Delhi
(iv) Consumer Education and Research Centre (CERC), Ahmedabad
(v) Consumer Protection Council (CPC), Ahmedabad
(vi) Consumer Guidance Society of India (CGSI), Mumbai
(vii) Mumbai Grahak Panchayat, Mumbai
(viii) Karnataka Consumer Service Society, Bangalore
(ix) Consumers’ Association, Kolkata
(x) Consumer Unity and Trust Society (CUTS), Jaipur