Jai Mata Di Jai Sai Ram

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 Chapter – 1
Nature and significance of Management
1) Introduction: Management is required in all kinds of organizations whether they are
manufacturing computers or Handlooms, trading in consumer goods or providing hair
style services and even in non business organizations.
No matter what the organization is what it goals might be, they all have something in
common- management and managers. Successful Organization do not achieve their
goals by chance, but by following a deliberate process called management.

2) Concept and Definition of management:

It is defined as the process of getting things done through others with the aim of
achieving goals, effectively and efficiently.
the above definition requires further explanation of the three terms used above they
are:
a) Process: It means the primary functions or activities that management performs to
get things done. These functions are planning, organizing, staffing, directing and
controlling.
b) Effective: It basically means doing/completing the given task.
c) Efficient: it means doing the task correctly with minimum cost.
3) An understanding of Effectiveness Vs Efficiency:
Effectiveness Efficiency
a) It refers to completion of task in It refers to completion of task correctly
time.
b) It is concerned with end result. It is concerned with cost benefit
analysis. i.e. using less resources and
getting maximum benefits.
c) Producing target production on Producing target production to its main.
time Cost.

4) Features/Characteristics of Management:
(i) Management is a goal oriented Process:
An organization has a set of basic goals which are the basic reason for its
existence. These should be simple and clearly stated. For example- (a) the
goals of a retail store may be to increase sales by 20%. (b) The goals of spastic
society are to impart education to children with special needs. Management
unites the efforts of different individual in the organization towards achieving
these goals. (c) If the objective of Airtel is to add 1 million mobile subscribers
in a particular year then all managerial activities are directed towards
achievement of this objective.
(ii) Management is all pervasive(Universal):
The activities involved in managing an enterprise are common to all
organization, whether economic social or political. A petrol pump needs to
manage as much as a school or hospital. What a mangers do in India, Japan
USA is the same. How they do it may be quite different because of difference
in culture, tradition and history.

(iii) Management is multidimensional:

Management is complex activity that has three main dimensions. These are

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 a. Management of work: All organization exists for the performance of
some work. In a factory, a product is manufactured, in a garment store a
customer need is satisfied and in a hospital patient is treated. Management
translates this work into goals and assigns the means to achieve it.
b. Management of people:
The task of management is to make people work towards achieving the
organization goal by making their strength effective and their weakness
irrelevant. Managing people has two dimensions:
(i) It implies dealing with employees as individuals with diverse
needs and behavior.
(ii) It means dealing with individual as a group of people.
c. Management of operation: it concentrates on mixing management of
work with management of people. I.e. what work has to be done, how it is
to be done and who will do it.

Finance
(iv) Management is a continuous process:
The process of management is a series of continuous, composite, but separate
functions. (P,O,S,D,C). These functions are simultaneously performed by all
the managers all the time.
(v) Management is a Group Activity:
When each individual performs his/her role at his/her status and department,
then only management functions can be executed. Even the result of
management affects every individual and every department of the
organization. So it always refers to group effort and not the individual efforts
of the person.
(vi) Management is a Dynamic Function:
An organization interacts with its external environment which consist of
various social, economical and political factors, In order to be successful an
organization must change itself and its goals according to the needs of the
organization. For example, McDonalds made major changes in its menu to
survive in the Indian market.
(vii) Management is an intangible force:
It is an intangible force that cannot be seen but its presence can be felt in the
way the organization functions.

5) Objectives of Management:
(i) Organizational objectives: the main objective of any organization should be to
utilize human material resources to the maximum possible advantage. i.e to fulfill
the economic objective of a business. These are survival, profit an Growth.
a. Survival: In order to survive an organization must earn enough revenues to
cover cost.
b. Profit: mere survival is not enough for business. Management has to ensure
that the organization makes profit. Profit provides a vital incentive for the

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 continued successful operation of the enterprise. Profit is essential for
covering cost and risk of the business.
c. Growth: To remain in industry, management must exploit fully the growth
potential of the organization. Growth can be measured in terms of sales
volume, increase in the no. of employees, the no. of products or the increase in
capital investment etc.
(ii) Social Objective: it refers to consistently creating economic values for various
constituent of society. This includes using environment friendly methods of
productions, giving employment opportunities to the disadvantage sections of the
society and producing basic amenities like schools, colleges for employees and
their families.
(iii) Personal Objectives: These vary from financial needs such as competitive
salaries and perqs to social needs such as peer recognition and higher level needs
such as personal growth and development.

6) Importance of Management:
(i) Management helps in achieving group goals: the task of manager is to give
a common direction to the individual efforts in achieving the overall goal of
the organization.
(ii) Management increases efficiency: The aim of manager is to reduce cost and
increase productivity through better planning, Organizing, directing, Staffing
and Controlling, the activities of the organization.
(iii) Management creates a dynamic organization: It is generally seen that
individual in an organization resist change as it often mean moving from a
familiar, secure environment into a newer and more challenging one.
Management help people to adopt to these changes so that the organization is
able to maintain its competitive edge.
(iv) Management helps in achieving personal objectives: Through motivation
and leadership the management helps individual to develop team spirit,
cooperation and commitment to group success.
(v) Management helps in development of society: management helps in the
development of the organization and through that it helps in the development
of society. It helps to provide good quality product and services, create
employment opportunity, adopt new technology for the greater good of the
people and lead the path towards growth and development.

7) Nature of Management:
A. Management as an Art:
Art can be defined as a systematic body of knowledge, which requires skill,
creativity and practice to get perfection.
The main features of art are:
1.) Systematic body of knowledge/existence of the theoretical knowledge.
In every art there is systematic and organizational study material available
to acquire theoretical knowledge of the art. For example- various books
on different ragas are available in music. In management also there is
systematic and organized body of knowledge available which can help in
acquiring managerial studies. So this feature of Art is present in
management also.

2.) Personalized Applications: In art every artist must have personal skill
and creativity to apply that knowledge. For example- all musicians learn
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 some ragas but they apply these ragas according to their personal skill and
creativity which makes them different.
In management also managers learn different theories and principle. But
their efficiency depends upon how well they utilize this under different
situations. So this feature is Present in management.

3.) Based on practice and creativity:

The artist requires regular practice of art to become more fine and perfect.
i.e. artist must add his creativity to the theoretical knowledge he has
learned. Same way experience managers also improve their managerial
skills and efficiency. So this feature of art is also present in management.
Conclusion: On comparing the features of art with management we find
all the features of art are present in management, so we can call
management as art of getting the things done by others.

B. Management as a Science:
Science can be defined as a systematic and organized body of knowledge
based on logically observed findings fact and events.
The main features of science are:
1) Systematic body of knowledge:
In science organized and systematic study material is available which is
used to acquire the knowledge of science. Like science in management
also, there is availability of organized study material. So first feature of
science is present in management.

2) Scientific principles are derived on the basis of logical and scientific

observations:
The scientist perform logical observation before deriving any principle or
theory. But when managers are observing they have to observe human
beings, and observations of human being cannot be purely logical and
objective. Some kind of subjectivity enters in the observations, so this
feature of science is not present in the management.

3) Principles are based on repeated experiments:

Before developing scientific principles, scientist test these principles under
different conditions and places, similarly managers also test and
experience managerial principles under different conditions in different
organization. So this feature is present.

4) Universal validity:
Scientific principles have universal applications and validity. Management
principles are not exactly like scientific principles, so their application and
use in not universal. This feature is not present in management.

5) Replication is possible:
In science replication is possible as when two scientist are undertaking the
same investigation working independently and treating the same data
under the same conditions, may derive or obtain the identical or same
result. But in management managers have to conduct research or

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 experiments on human being they will not get identical results. So this
feature of science is not present in management.

Conclusion: On comparing the above feature it is observed that

management is inexact science or social science and not as pure as
science.

C. Management as a profession:
The main feature of profession is:

i. Well defined body of knowledge:

In every profession there is practice of systematic body of knowledge
which helps the professional to gain specialized knowledge of that
profession.
In case of management also there is availability of systematic body of
knowledge. There are also large no of books available on management
studies. So this feature is also present in management.

ii. Restricted Entry:

The entry to a profession is restricted through an examination or degree.
For example- a person can practice as a doctor only when he is having a
MBBS DEGREE .Where as there are no legal restrictions on manager for
their appointment. Hence this feature of profession is not present in
management but very soon it will be.

iii. Service motive:

This basic motive of every profession is to serve the clients with
dedication. Whereas basic purpose of management is achievement is
achievement of management goals. So presently this feature of profession
is not present, but very soon it will be included.

iv. Existence of ethical codes:

All professionals are to register themselves before getting into practice. In
case of management also various management associations are setup at
national and international level which has some basic rules and regulations
For example- AIMA in NEW DELHI. But legally it is not compulsory for
management to become part of these organizations by registration. Thus
this feature of profession is presently not included but very soon it will
be.
Conclusion: On comparing the above features it was found that all features of
profession are not included and not mandatory on managers, rather they will
soon be included in a decade or so. Hence it can be said that management is
on the path of becoming profession.

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8) Levels of Management:

Operational/Lower

1) Top management: They consist of senior most executives of the organization by

whatever name they are called. They are usually referred to as the chairman, CEO
(Chief Executive Officer), chief operating officer, BOD (Board of Directors),
(General Manager) G.M. President, vice president M.D. etc.

Functions:
(a) These top level managers are responsible for survival and welfare of the
org.
(b) They analyze the business environment and its implications for the
survival of the firm.
(c) They are responsible for all the activities of the business and its impact on
the society.

2) Middle Management: It is the link between top and lower level managers. They
are the subordinate to superior or top managers and superior to first line managers.
They are usually known as division heads operational managers, or plant
superintendent.

Functions:
(a) To interpret the policies framed by top management.
(b) To ensure that their department has necessary personnel.
(c) To assign necessary duties and responsibilities to subordinates.

3) Supervisory or Operational management:

This level consist of supervisors, superintendent, foreman, sub department
executives, clerk etc. here the authority is limited. The quantity and quality of
output here depends upon the efficiency of level of managers.

Functions:
a. Representing the problems or grievances of workers before the middle
level management.
b. Maintain good working conditions and developing healthy relations
between superior and subordinates.
c. Looking to safety of workers.
d. Helping the middle level management in recruiting, selecting and
appointing the workers.
9) Functions of Management:
(a) Planning: it is the function determining in advance what is to be done, and who is
to do it. This implies setting goals in advance and developing a way of achieving
them efficiently and effectively.
(b) Organizing: once a specific plan has been established for the accomplishment of
organizational goal, the organizing function examines the activities and resources
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 required to implement the plan. It determines what activities and resources are
required. It decides who will do a particular task where it is to be done and when it
will be done.
(c) Staffing: It is very important aspect of the organization which make sure that the
right person, with right kind of qualification are at right places and time to
accomplish the goals of the org. this is also known as human resource functions
and it involves activities such as recruitment, selection, placement and training of
personnel.
(d) Directing: Motivation and leadership are two keys components of directions.
Motivating workers means simply creating an environment that make them want
to work. Leadership is influencing other to do what the leaders want them to do. A
good manager direct through praise and criticism in such a way that it brings out
the best in employee.
(e) Controlling: the task of controlling involves establishing standards of
performance, comparing this with established standards and taking corrective
actions where any deviation is found. Here management must define what
activities and output are critical to success and where they can be measure and
should have the authority to take corrective action.

10) Coordination: it is the force that binds all the other functions of management. It is
the common thread that runs through all activities such as production, sale, purchase,
finance to ensure continuity in the working of org.
(A) Nature/features/characteristics of Coordination:
a) Coordination integrates group efforts: It gives a common focus to group
effort to ensure that performance is as it was planned and scheduled.
b) Coordination ensures unity of action: the purpose of coordination is to
secure unity of action in the realization of common purpose. It act as the
binding force between development and ensures that all actions are aimed at
achieving the goals of the organization.
c) Coordination is a continuous process: coordination is not a onetime function
but a continuous process. It begins at the planning stage and continues till
controlling.
d) Coordination is an all pervasive function: coordination is required at all
levels of management due to the interdependent nature of activities of various
departments, in the absence of which there is overlapping and chaos instead of
harmony and integration of activities.
e) Coordination is the responsibility of all the managers: top level managers
need to coordinate with their subordinate to ensure that the overall policies for
the organization are duly carried out. Middle level management coordinates
with both the top level and first line managers operational level management
coordinates the activities of its workers to ensure that work proceed according
to plans.
f) Coordination is a deliberate function: Coordination does not occur
simultaneously nor it can be achieved by force. Cooperation in the absence of
coordination may lead to wasted effort, and coordination without cooperation
may lead to dissatisfaction among employees.

(B) Importance /need/Significance of Coordination:

a) Size of the organization: large size organization with more no. of
departments requires coordination to integrate their activities.

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 b) Functional differentiation: generally the functions of an organization are
divided into different department, sections or divisions and each sections tries
to work in isolation and independently so there is more need to relate and
bring together the activities of different sections as they are part of the
organization only.
c) Specialization: In large and modern organization, there are no. of specialist
performing, if all of them work in their capacity it will result in chaos and
confusion. So there is need to coordinate the activities of the entire specialist
in common direction and get maximum benefits of this specialist.

Basis Co-ordination Co-operation

1. Meaning Co-ordination refers to Co-operation refers to
bringing together the activities voluntary efforts of
of an organization. individuals to work together
2. Nature Co-ordination is a conscious and help each other.
and deliberate action of It is a voluntary effort of
3. Inter- manager. employees.
dependence Co-ordination is Co-operation is also
interdependent upon co- dependent upon co-ordination
operation as it is incomplete as it is meaningless without it.
4. Relations without it. Co-operation arises out of
Co-ordination is achieved informal relations
5. Scope through both formal and It has a narrow scope as it is
informal relations. towards establishing
6. Requirement It includes co-operation and coordination.
hence has a wider scope. Co-operation is voluntary in
Co-ordination is essential for nature. It arises only when
achievement of organization people desire to work
goal, where a group of people together.
work together.

Application and Hots Based Questions with Answers

1. Volvo Ltd.'s target is to produce 10000 shirts per month at a cost of ` 100/- per
shirt. The Production Manager achieved this target at a cost of ` 90/- per shirt.
Do you think the 'Production Manager' is effective? Give one reason in support
of your answer.
Ans. Yes, the Production Manager is effective because he has completed the task and
achieved the goal of producing 10000 shirts. He is efficient also as he has achieved
the target at a lower cost.

2. Yash Ltd. is facing a lot of problems these days. It manufactures electronic goods
like washing machines, microwave ovens, refrigerators and air-conditioners. The
company's margins are under pressure and the profits and market share are
declining. The production department blames marketing department for not
meeting sales targets and marketing department blames production department
for producing goods, which are not of good quality to meet customers'
expectations. The finance department blames both production and marketing
departments for declining return on investment and bad marketing.

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 (a) What quality of management do you think the company is lacking? Justify
your answer.
(b) State the importance of the concept identified in (a)
Ans. (a) Coordination; because production, marketing and finance departmental efforts are
not coordinated for achieving organizational objectives harmoniously. As a result, the
company's profits and market share are declining.
(b) Importance of Coordination
(i) Growth in size: As organizations grow in size, the number of people in the
organization also increases. They may work for cross purposes. So, coordination
is needed to integrate their efforts and activities.
(ii) Functional differentiation: Coordination brings unity of action among inter-
dependent departments of an organization and helps to avoid conflicts between
them.
(iii)Specialization: In modern organizations. There is high degree of specialization.
So, many specialists are appointed. Coordination is required to avoid conflict
between the specialists and other members of the organization.

3. Shreya is a branch manager at 'Zara', a popular brand of designer clothes. She

performs several different tasks in a single day. Sometimes, she spends more
time in planning a future exhibition and sometimes in sorting an employee's
problem.
(a) At what level of management does Shreya work in this organization?
(b) What characteristic feature of management is highlighted in the above
para? Explain.
Ans. (a) Top level management
(b) Management is a continuous process.
Management process is a series of continuous, composite but separate functions —
planning, organizing, staffing, directing and controlling. These functions are
simultaneously performed by all managers all the time.
• Organizing cannot be done without planning. Organizing is creation of
organizational structure to implement the plans.
• To fill the positions of organizational structure, staffing is done by putting right
people to the right job. In the staffing function, the Human Resources (HR)
manager has to do planning for manpower requirements, recruitment, selection,
training, etc.
• Directing function initiates action. It means execution of plans. It cannot be
performed without staffing and planning.
• Controlling function helps in future planning on the basis of past experiences.
Without planning, controlling function cannot be executed in the absence of
target standards.
Thus, the functions of management are continuous having no pre-determined
sequence.

4. To meet the objectives of the firm, the management of Bhavya Ltd. offers
employment to physically challenged persons. Identify the organizational
objective it is trying to achieve. Give reason in support of your answer.
Ans. Growth; since number of employees is increasing, it leads to increase in production
and hence growth of the company.

5. B Ltd. wants to modify its existing product, CD players in the market due to

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 decreasing sales. What decisions/steps should each level of management take to
give effect to this decision?
Ans. The company wants to modify its existing product, CD players in the market because
of today's dynamic business environment. For this, each level of management must
divide its tasks.
Functions of top management:
(i) They must plan the technique of modification/modernization of the product.
They may plan to manufacture DVD players or Blue ray players, etc. to
modernize the product.
(ii) They must organize and assemble necessary resources and coordinate the efforts
of all the departments towards modernization.
Functions of middle management:
(i) They must implement the plans laid down by top management in their
respective departments or divisions.
(ii) They must interpret the plans and policies to their subordinates.
Functions of operational/supervisory management:
(i) They must assign the tasks to workforce and supervise that the task is carried on
in the right direction.
(ii) They must maintain the quality of work and reduce the wastage by improving
the motivation and loyalty of workers.

6. Sonali is the manager of a large company manufacturing garments for kids. She
plans her winter collection in the month of August itself. Then, she ensures that
there is adequate workforce. She continuously monitors whether production is
proceeding according to plans. She asks the marketing department to prepare
their promotional and advertising campaigns also.
(a) Identify and explain the concept of management explained in the above
para.
(b) What characteristic feature does the above para highlight? State.
Ans. (a) Coordination
It is the force that binds all the functions of management. It is the common thread that
runs through all activities such as purchase, production, sales, finance, etc. to ensure
continuity in the working of the organization.
Coordination is not a separate function of management.
It is the essence of management. It is implicit and inherent in all functions of
management.
• Top management plans for the entire organization.
• According to these plans, the organizational structure is developed and staffed.
• In order to ensure that these plans are executed according to plans, directing is
required.
• Any deviation between the actual and the standard performance is corrected at the
stage of controlling.
(b) Coordination is a continuous process. It begins at the planning stage and
continues till controlling.

7. H. Tech Ltd. is a company producing IT services. The company's profits are

enough for the survival and growth. The management of the company believes
that a satisfied employee creates a satisfied customer, who in turn creates profits
that lead to satisfied shareholders. So, it pays competitive salaries and perks to
its all employees. All the employees are happy working in the organization

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 because of personal growth and development.
The company has a strong sense of social responsibility. It has set up an
Engineering College in which one-third of the students are girls to whom the
company gives 50% scholarship. Is the management of H. Tech Ltd. fulfilling its
objectives? Justify your answer by giving reasons.
Ans. Yes, the management of H. Tech Ltd. is fulfilling all the objectives — organizational
objectives, social objectives and personal objectives.
(i) Organizational objectives are the economic objectives of a business. These are
survival, profit and growth.
'Profits of H. Tech Ltd. are enough for the survival and growth.'
(ii) Social objectives involve creation of benefits or economic value for the society.
'H. Tech Ltd. has a strong sense of social responsibility. It has set up an
engineering college in which one-third of the students are girls to whom the
company gives 50% scholarship.'
(iii) Personal objectives are related to the employees. 'The management of H. Tech
Ltd. satisfies the financial needs of its employees by giving them competitive
salaries and perks. It also satisfies their higher level needs such as personal
growth and development.'

8. Govinda Ltd. is a highly reputed company. Different functions are performed by

different individuals in this company, who are bound together in a hierarchy of
relationships. Every individual in the hierarchy is responsible for successful
completion of a particular task. Mr. Gauranga is responsible for the welfare and
survival of the organisation. He formulates overall organizational goals and
strategies for their achievement. Mr. Nityanand ensures that quality of output is
maintained, wastage of materials is minimized and safety standards are
maintained. Mr. Sanatan assigns necessary duties and responsibilities to the
personnel and motivates them to achieve desired objectives.
At what levels of management are Mr. Gauranga, Mr. Nityanand and Mr.
Sanatan working in Govinda Ltd.? Justify your answer.
Ans. (i) Mr. Gauranga is working at the top level management.
He is responsible for the welfare and survival of the organization. He formulates
overall organizational goals and strategies for their achievement.
(ii) Mr. Nityanand is working at the lower level management.
He ensures that quality of output is maintained, wastage of materials is minimised and
safety standards are maintained.
(iii) Mr. Sanatan is working at the middle level management.
He assigns necessary duties and responsibilities to the personnel and motivates them
to achieve desired objectives.

9. In today's scenario, organizations look for individuals with specific qualifications

(like MBA) and experience to manage them. It has also been observed that there
has been an increase in the corporate form of business. There has been
increasing emphasis on managed business concerns.
What does this imply?
Ans. Management is a profession.

10. The management of Vrinda Ltd. strongly believes that the members of an
organization should work towards fulfilling the common organizational goals.
This requires team work and integration of efforts of all individuals,
departments and specialists. This is because all the individuals and departments
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 depend on each other for information and resources to perform their respective
activities. Managers need to reconcile differences in approach, timing, effort or
interest. At the same time it should enable all its members to grow and develop.
Thus, there is a need to harmonies individual goals and organizational goals.
(a) Identify the concept of management discussed above.
(b) State any three features of the concept identified in (a).
(c) Identify and explain the characteristic of management which is reflected
from the above Para.
Ans. (a) Coordination
(b) Features of coordination:
(i) Coordination integrates group efforts by unifying diverse interests.
(ii) Coordination ensures unity of action by acting as a binding force between
departments.
(iii) Coordination is a continuous process as it begins at planning stage and
continues till controlling.
(c) Management is a group activity.
An organization is a group of different Individual who work together with team
spirit and coordination to achieve the goals of the organization

11. Sanjana is the branch manager of ABC Handicrafts Pvt. Ltd. The company’s
objective is to promote the sales of India handloom and handicraft products. Its
sells fabrics, furnishings, ready-mades and household items are made out of
traditional Indian fabrics. Sanjana decides quantities, variety, colour and texture
of all the above items and then allocates resources for their purchase from
different suppliers. She appoints a team of designers and crafts people in the
company, who developed some prints for bed covers in bright colours on silk.
Although they looked very impressive, they were more expensive than they had
planned to sell. Average customer could not afford to buy it. Praising their effort,
Sanjana suggested that they should keep the silk bed covers for special occasions
like Diwali and Christmas and offer the cotton bed covers on a regular basis to
keep costs under control.
Identify the functions of management which Sanjana performs by quoting the
lines from the above para.
Ans. (i) Planning
'Sanjana decides quantities, variety, colour and texture of all the above items...'
(ii) Organising
'... allocates resources for their purchase from different suppliers/
(iii) Staffing
'She appoints a team of designers and crafts people in the company...'
(iv) Directing
'Praising their effort, Sanjana suggested that they should keep the silk bed covers
for special occasions like Diwali and Christmas...'
(v) Controlling
'... offer the cotton bed covers on a regular basis to keep costs under control.'
'... they were more expensive than they had planned to sell.'

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 Chapter-2
Principles of Management
Concept of management principles:
These are the statements of fundamental truth, which act as a guideline for taking
management actions and decisions.
Principle: It refers to a statement which reflects the fundamental truth about some
phenomenon, based on cause and effect relationship.

PRINCIPLE OF MANGMENT VS TECHNIQUE OF MANAGEMENT:

Techniques are the procedure or methods which involves a series of steps to be undertaken to
accomplish the desired goals.
Whereas principles are the guidelines to take decision or action while practicing techniques.

PRINCIPLE VS VALUES:
Values are something which are acceptable or desirable. They have moral connation’s where
as principles are basic truth or guidelines for behaviour.

Nature/feature/characteristics of Principles of Management:

1) Universal Application:
The principle of management can; be applied to all types of organization irrespective
of their size and nature. Their result may vary and their applications may be modified
but these are suitable for all kind of organizations. For example, principle of Division
of labour.
2) General Guidelines:
Management principles are not static or absolute statements. The applicability of
management principles depends on conditions and nature of organization.
Management principles give guidelines to provide readymade solutions for all the
problems. For example, principle of fair remuneration.
3) Formed by practice and experimentation:
The principles of management are formed by experience and collective wisdom of
managers as well as experimentation. For example it is a matter of common
experience that discipline is indispensible for accomplishing any purpose. For
example- principle of fatigue study)
4) Flexible: The principles of management are not rigid prescriptions, which have to be
followed absolutely. They are flexible and can be modified by the managers, when the
situation so demand. For example. Principle of Centralization and Decentralization of
authority or its dispersal depends upon the situation and circumstances of each
enterprise.
5) Mainly behavioral:
The principles are formed to give guide and influence the behaviour of employees.
These principles insist on improving relationship between superior, subordinate and
all the members of organization. For example (a) the principle of team effort. (b)
While planning the factory layout, principle of ‘Order’ would require that workflows
are matched by flow of materials and movement of men.

6) Based on cause and effect Relationship:

Related principles are applied in all situations, what might be the effect. Although the
principle do not provide the exact result, as they have to apply on human beings, but it
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 gives some idea about the effect and gets in perfection when applied in similar
situation but in different organization. For example. Principle of ‘Unity of
Command’ states that presence of a single superior avoids confusion. Here, the
presence of unity of command is the cause and avoidance of confusion is the effect.

Significance /importance of Management principles:-

1) Providing mangers with useful insight into reality:-
Management principles act as guidelines for the managers. These principles
improve knowledge, ability and understanding of managers under various
managerial situations.
2) Optimum utilization of resources:-
The management principle insists on planned activities and system of men and
material in the organization. Principles are designed to get maximum benefit from
the human efforts and other resources. For example. Principles of division of
work, unity of direction, order, etc. facilitate better utilization of human and
physical resources.
3) Scientific Decision:
Management decision: Managers have to take number of decisions every day. The
management principles enable the managers to approach various problems
systematically and scientifically. For example. Taylor’s principle of ‘Science not
Rule of Thumb’ stresses on scientific analysis of each part of work.
4) Meeting Changing Environment Requirements:
Management principles train the managers in right direction and at right level in
the organization. Although management principles are relative guidelines yet by
modifying these principles changes can be made in the organization.
5) Effective Administration:
Administration is the function of top level management. In this function major
plans and policies are formed. The management principles act as guidelines and
base to form various administrative working in the organization.
6) Fulfilling Social Responsibilities:
Management principles not only act as a guidelines for achieving organizational
objective but these principles also guide the managers to perform social
responsibilities. For example. Principle of ‘Equity’ emphasize fair treatment to all
workers in an organization and helps in fulfilling responsibility towards them.

Fayol’s Principles of Management:

Henri Fayol (1841-1925) was a French management theorist whose theories concerning
scientific organization of labour were widely influential in the beginning of twentieth
century. The 14 principles of management given by him are as follows:
1) Division of work: According to this principle the whole work must be divided into
small task or units and instead of assigning the whole work to one person it should be
assign to a person according to his capability, qualification and experience of the
person.
For example: In a furniture producing company one person can be asked to cut the
wood pieces one to join them, one to polish, one to give finishing touch to furniture,
with this division each person will specialize in his part of job and his effectiveness
and efficiency improves.(Also give examples of assembling computers and cars
based on division.)

Advantages or Positive Effects Consequences of Violation

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 Leads to specialization as work is divided There will be lack of efficiency and
as per qualifications. specialization.
It simplifies the work and increases the There will be waste of time and efforts
efficiency as same work is performed due to changes from one work to
repeatedly. another.

2) Principles of Authority and Responsibility:

Authority means power to take decision, and responsibility means obligation to
complete the job assigned on time. According to these principles there must be
balance between the authority and responsibility. Excess of authority without
matching responsibilities may bring negative result, and excess of responsibility
without matching authority will not allow the worker to complete the job on time. For
example a sales manager has to negotiate a deal with the buyer. She finds she can
offer a credit period of 60 days she is likely to clinch a deal which is supposed to fetch
the company with net margin of say 50 crores. Now the company gives the power to
manager to offer a credit period of only 40 days, which show that there is an
imbalance between authority and responsibility. In this case the managers should be
granted a credit of 60 days in the interest of company, and similarly he should not be
given power of 100 days because it is not required.

Advantages or Positive Consequences of Violation

Effects
It prevents misuse of authority. If responsibility exceeds authority, then
subordinate cannot perform his duties.
It helps in fixing responsibility. If authority exceeds responsibility, subordinate
may misuse it.

3) Discipline: (Commitment, punishment) Discipline is the obedience to organizational

rules and employment agreement which are necessary for the working of an
organization. For example management and labour union have entered into an
agreement whereby workers have agreed to put in extra hours without any additional
payment to revive the company out of loss. In return the management has promised to
increase wages of the workers when this mission is accomplished. Here discipline
when applied would mean that the managers and employers both honour their
commitments without any prejudice towards one another.

Advantages or Positive Effects Consequences of Violation

Smooth and systematic functioning There may be disobedience of rules and
of the business.. regulations by employees.
Better relations between Relations between management and employee
management and employees. may not be so cordial.

4) Unity of Command: The principle of unity of command states that each participant
in a formal organization should receive orders from and be responsible to one superior
only. Fayol gave a lot of importance to this principle. He felt that if the principle is
violated, authority is undermined, discipline is in jeopardy, order disturbed and
stability threatened. This principle resembles military organization. For example a
sale person is asked to clinch a deal with buyer and is allowed to give 10% discount
by the marketing manager, but finance department tell her/him not to offer more than
5% discount. Thus there is no unity of command.

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 Advantages or Positive Effects Consequences of Violation
There will be no confusion in the mind of It creates confusion for subordinate as to
subordinates. whose order to be complied.
Responsibility can be easily fixed. It will be difficult to fix responsibility.
Better performance as subordinates Lack of Discipline.
receive orders from one superior only.

5) Unity of Direction: Each group of activities having same objectives must have one
head and one plan. This ensures unity of action and coordination. For example if a
company is manufacturing cars as well as motorcycle, then it should have separate
division for both of them. Each division should have its own in charge, plans and
execution resources. On no account should the working of two division overlap.

Advantages or Positive Effects Consequences of Violation

It emphasize importance of common goals Unnecessary duplication of efforts and
and helps in achieving them. wastage of resources.
It ensures unity of action and facilitates There will be lack of coordination.
coordination.

6) Subordinate of Individual interest to General interest:

(Example allowing PGT for board checking but after taking two periods)
According to this principle the interest of organization must supersede the interest of
individuals or employees. In the organization all the employees are working with
some objective, and there is always some objective of the organization. If the
objectives of individuals are in the same direction of organization then there is no
problem, which in else case should be reconciled with that of organization objective,
or otherwise the individual objective should be sacrificed. For example if
individual’s objective is to earn more remuneration and organization is going through
the situation of financial crisis and has the objective of cutting down the expenses. In
this situation the individual interest must sacrifice his interest in the interest of the
organization.

Advantages or Positive Effects Consequences of Violation

It helps in achieving goals of the The firm will not be able to achieve its
organization. goals.
It brings coordination between individual Lack of coordination between individual
and organizational objectives. and organizational objectives.

7) Remuneration of Employees:-
The employees should be paid fair wages, which should give them at least a
reasonable standard of living, at the same time it should be within the capacity of
company.
For example. If a company has earned higher profits, then it must share some of its
part with the employees in the form of bonus, which would be very satisfying to them.

Advantages or Positive Effects Consequences of Violation

High level of motivation as they are paid fully for Lack of motivation among
services rendered. employees.
Cordial relations between employees and Unhealthy relations between

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 management. employees
Improvement in commitment of employees Increase in labour turnover.
towards organisation.

8) Centralization and Decentralization:

The concentration of decision making authority is called Centralization. Where as its
dispersal among more than one person is known as decentralization. There is need to
balance subordinate involvement through decentralization with managers, retention of
final authority through centralization. In general large organization has more
decentralization then the small organization. For example banking system. (HDFC)
For example. Authority to take vital decisions must be of top management and
operational authority may be given to middle and lower level managers.

Advantages or Positive Effects Consequences of Violation

It leads to quick decisions at middle and Slow decision-making in case of
operational level. complete centralization.
It decreases work load of superiors. Risk of misuse of authority in case of
complete decentralization.
Increase in the encouragement and
motivation level of the subordinates.

9) Scalar Chain:
An organization consists of superiors and subordinates. The formal lines of authority
from highest to lowest rank are known as scalar chain.
Let us consider a situation where there is one head “A” who has two line of authority
under him/her.
B-C-D-E-F. Another line of authority under “A” is L-M-N-O-P. If “E” has to
communicate with “O” who is at the same level of authority then she/he has to
transverse the route as E-D-C-B-A-L-M-N-O. This is due to principal of scalar chain,
being followed in these situation. According to Fayol this
chain should not be violated in the normal course of formal
communication. However if there is an emergency then E
can directly communicate “O” (Same level) through gang
plank as shown in diagram.
For example Harish (supervisor) has to pass on some
important details of work to Karan (Director) and to
Mahesh (Supervisor of another department). Now, Harish
cannot directly contact Karan and he will have to follow the
Gang plank
scalar chain. However, he can talk to Mahesh (through gang
plank) to avoid delays.

Advantages or Positive Effects Consequences of Violation

Orderly and smooth flow of information. Information may not flow in
orderly direction.
Clear lines of authority and responsibility Authority and responsibility
relationship. relationship will not be clear.
Better relations between subordinate and Unhealthy relations between
superior due to absolute respect for authority. subordinate and superior.
Unity of command as there will be no Lack of unity of command.

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 confusion of dual order.

10) Order :-
The principle of order states that “A place for everything (everyone) and everything
(everyone) should be at its place.” Essentially it means orderliness. This lead to
increase in efficiency and productivity. For example: if worker is in need of a tool he
must known in which box or tool room it will be found and if need guidance from
supervisor he must know the fixed cabin of supervisor.

Advantages or Positive Effects Consequences of Violation

Efficient use of resources as no time is Inefficient use of resources due to loss of
wasted in tracing the resources. time and energy in search of resources.
Smooth and systematic working of Lack of discipline in the organization.
organization.

11) Principle of Equity:- This principle emphasizes on individuals and justice in the
behaviour of managers towards workers. This will ensure loyalty and devotion. There
should be no discrimination against anyone on account of sex, religion, language,
caste, belief or nationality etc.
For example the rules for granting medical leave to an employee should be same
irrespective of their position, grade or gender.

Advantages or Positive Effects Consequences of Violation

Improve satisfaction and motivation level Decrease in satisfaction and motivation
among employees. level of employee.
Cordial relations between employees and Unhealthy relations between employees
management. and management.

12) Stability of Personnel:- Personnel should be selected after due and rigorous
procedure. But once selected they should be kept at their post/position for a minimum
fixed tenure. i.e. They should have stability of tenure. Any adhochism in this regard
will create instability/insecurity among employees. They would tend to leave the
organization. Recruitment, selection and training cost will be high. So stability in
tenure of personnel is good too for the business.

Advantages or Positive Effects Consequences of Violation

Increase in efficiency of employees due Unnecessary labour turnover creates an
to felling of job security. atmosphere of disbelief.
Better reputation and goodwill of the Decline in the reputation of the company.
company.
Less expenses on recruitment, selection Wastage of considerable time in learning
and training. new job.

13) Initiative:- It means taking the first step with self motivation. It is thinking out an
executing the plan. It is one of the traits of an intelligent person. Initiative should be
encouraged but it does not mean going against the established practices of the
company for the sake of being different. For example before setting up plan, the

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 manager must welcome the suggestion and ideas of employees to allow their
maximum participation. But once the plan is made every employee must follow it and
implement.

Advantages or Positive Effects Consequences of Violation

Increase in mental growth and feeling of Leads to frustration among employees.
belongingness in employees
It increases commitment of employees Lack of initiative may create an
towards the organization. atmosphere of non-cooperation.

14) Esprit De Corps:- Management should promote team work especially in large
organization, otherwise it would be difficult to achieve goals and will also result loss
of coordination. A manager should replace “I” with “we” in all his conversations with
workers to foster team spirits. This will give rise to a spirit of mutual trust and
belongingness, among members. It will also minimize the need for using penalties.
For example. If a department has to achieve a target, then according to the principle,
it is the duty of each member of the department to ensure that target is achieved on
time, even if any member is unable to fulfill his individual target. It means that
employees should not concentrate only on achieving their individual targets but on
achieving group target.

Advantages or Positive Effects Consequences of Violation

Develops an atmosphere of mutual Lack of team spirit and employees may not
trust. cooperate with each other.
Helps in achievement of group goals. Group goals may not be achieved.
Leads to cordial relations between Unhealthy relations between management
management and workers. and workers.

Taylor’s Scientific Management:

It focuses on Application of science for each and every element of management. It
insist on replacement of rule of thumb.

Scientific Principles of Management:

1) Science Not Rule of Thumb:

According to this principle taylor insist that each job performed in the
organization, should be based on scientific enquiry and not on intuition,
experience, hit and miss methods. He says there must be thinking before doing
which is not in case of rule of thumb. For example. Standard time or standard
method for doing a task must be scientifically analyzed and should not be based
on estimates, past experience or hit and trial method.

2) Harmony Not discord: In this principle taylor insisted that there is need for both
the groups to change their attitude for each other. He insist on mental revolution
which means complete change of attitude and outlook for each other. For
example teachers are given compensatory leave for working overtime. Another
example the main objectives of workers is to earn more and the objective of
management is to maximise production. Instead of discarding each others
objective workers can earn more by producing more which will help in
maximizing the production also.

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 3) Cooperation Not Individualism:
There should be complete cooperation between the labour and management,
instead of individualism. The principle is an extension of principle of harmony
not discord. According to this principle management should not close its ears to
any constructive suggestion made by employees. They should be rewarded for
their suggestion which result in substantial reduction in cost. They should be part
of management and if any important decisions are taken workers should be taken
into confidence.

4) Development of each and Every Person to His or Her Greatest Efficiency and
Prosperity.
Industrial efficiency depends to a large extent on personal Competencies. As such
scientific management also stood for workers development. Workers training was
essential also to learn the best method developed as a consequence of scientific
approach.
Taylor was of view that concern for efficiency could be built in right from the
process of employee selection. i.e. each person should be scientifically selected .
Then work assigned should suit his/her physical, mental and intellectual
capabilities. To increase efficiency they should be given the required training.
Employees should produce more and more and should earn more. This will ensure
their greatest efficiency and prosperity for both company and workers.
For example: Now-a days, companies send their employees to attend seminars of
eminent management experts (like Philip kotler), for mental growth of the
employees.

Techniques of scientific Management:

1) Functional Foremanship: Foreman should have intelligent, education, tact, grit,
judgment, special knowledge, energy, honesty and good health. Since all these
qualities could not be found in a single person so Taylor proposed eight specialists.
Each specialist is to be assigned work according to his/her qualities.

Disciplinarian
Route
Clerk
Repair
Gang Boss
Boss

Under Planning department:

i) Route Clerk: Is responsible for fixing up the sequence of steps for performing
mechanical and manual job.
ii) Instruction Card Clerk: The foreman is responsible for giving general
instruction necessary to carry on the job in a specified manner.
iii) Time and Cost clerk: The foreman is responsible to fix up the time for starting
and completion of job. He also prepares the cost sheet for every job.
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 iv) Disciplinarian: This foreman is responsible for performance of job in orderly and
systematic way.

Under operational/ Production Department:

i) Gang Boss: he arranges all the machines, tools and other resources required for
performance of the job, so that there is no delay.
ii) Speed Boss: This foreman ensures timely completion of job
iii) Repair Boss: this boss ensures that machines and tools are kept in working
conditions.
iv) Inspector: this boss keeps a check on quality control of the output.

2) Standardization and Simplification of work:

(a) Standardization refers to the process of setting standards for every business
activity. It can be standardization of process raw material, time, product,
machinery, methods or working conditions. These standards are benchmarks
which must be adhered to during production. It should be noted that the best
practice can be kept and further refined to develop standard which should be
followed throughout the organization. For example. Standard time can be fixed to
produce a given level of output. If workers take more time than the standard time,
then corrective measures should be taken to check it.

(b) Simplification of work: It aims at eliminating superfluous, sizes and dimensions

while standardization implies devising new varieties instead of existing ones.
Simplification aims at eliminating unnecessary diversity of products. It result in
saving of cost of labour, machines, and tools. It implies reduced inventories, fuller
utilization of equipment and increasing turnover. For example, a paper
manufacturing company in U.S.A. reduced varieties from 2000 to 200 which
brought positive result for the company.

3) Method Study: The objective of method study is to find out one best way of doing
the job. To determine the best way there are several parameters, right from
procurement of raw material till the final product is delivered to the customer, every
activity is a part of method study. For example production of shoes there can be
labour intensive method. To find out which one is best, it is the method which
involves minimum cost and exploit maximum resources.

4) Motion study: it refers to the study of movements like lifting, pulling objects setting
and changing positions etc. which are undertaken while doing typical job.
Unnecessary movements are sought to be eliminating so that it take less time to
complete the job efficiently. For example taylor and his associate were able to reduce
motion in brick layering from 18 to just 5. Taylor demonstrated that productivity
increased about four times by their process.

5) Time Study: the objective of time study is to determine the no. of workers to be
employed, frame suitable incentives schemes and determine labour cost. It determine
the standard time taken to perform a well defined job. The standard time was fixed by
taking several readings.
For example on the basis of several observations it is determined that standard time
take by the workers to make one card board box is 20 minutes. so in one hour he/she
will make 3 boxes. Assuming that a worker has to put in 8 hours of work in a shift and
deducting 1 hour for rest and lunch. It is determine that a worker can make 21 boxes
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 in 7 hours.Now this is the standard task a worker has to do and the wages can be
decided accordingly.

6) Fatigue Study: It seeks to determine the amount and frequency of rest intervals in
completing a task. It is conducted to find out:
a) The frequency of rest intervals.
b) The duration of rest intervals.
c) The number of rest intervals.
The person is bound to feel tired physically and mentally if she/he does not rest
while working. The rest interval will help one to regain stamina and work again
with the same capacity .This will result in increased productivity. Fatigue study
helps to avoid accidents, rejections and industrial sickness.

7) Differential Piece Wage System:

Taylor introduced different rate of wage payment for those who performed above
standard and for those who performed below standard. Taylor was a strong advocate
of piece wage system. He wanted to differentiated between efficient and inefficient
workers. For example it is determine that standard output per worker per day is 10
units, and those who made standard and more than standard will get Rs.50 per unit,
and those below will get Rs.40 per unit. Now an efficient worker working 11 units
will get RS.550 per day where as a worker who makes 9 units will get Rs.360 per day.
According to Taylor the difference of Rs.190 will be enough to motivate the
inefficient workers to perform better.

Fayol Vs Taylor (Similarity)

Taylos principle of scientific management and Fayols principle of management are
mutually complementary, these are the reasons in support.
1) Taylor started his carrier as a labourer where as Fayol started his carrier as high
ranking manager.
2) Taylor gave a no. of suggestion in order to increase the efficiency of workers
where as Fayol gives many principles in order to solve the problems of high
ranking managers.
3) Taylor principles are useful in production activities whereas Fayol’s principles are
important for all functional areas (such as marketing, finance, personal etc.)
4) Taylor principles are related with mainly bottom level where as Fayol principles
are related with mainly top level.
Conclusion: Thus both of them are required to maintain efficiency in all corners of
the org.

PRINCIPLE OF UNITY OF PRINCIPLE OF UNITY OF

COMMAND DIRECTION
This principle insist on one boss or one It implies that there should be one
substitute. head and one plan for group of
activities having same objectives.
It prevents dual subordination. It prevents overlapping of activities.
This principle is related to functioning This principle is related to functions of
of employee with clarity in mind. organization as a whole or as one unit.
This principle results in systematic This principal result in co-ordination
working and improves efficiency by of activities of different personal’s
removing confusion and chaotic

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 conditions

Fayol Vs Taylor(Difference)

Point of Difference Taylor Fayol

1. Concern Taylor’s techniques and Fayol’s principles are
principles are concerned with concerned with
workers’ efficiency. management efficiency
2. Level/Perspective Taylor started his studies and Fayol started his studies
approach from lowest level in and approach from the
the organization. highest level in the
organization.
3. Emphasis Taylor laid great emphasis on Fayol laid great emphasis
standardization of work. on functions of managers.
4. Focus Taylor laid focus on Fayol’s focus was on
eliminating wasteful development of principles
movements and saving energy for better management. It
of workers. It forces on focus on improving overall
increase in productivity. achieve station.
5. Major Taylor’s main contribution Fayol’s main contribution
contribution was development of scientific was development of
techniques and scientific fourteen principles of
principles. general management.
6. Personality Taylor developed a Fayol developed the
personality of scientist and personality of a researcher
became famous as father of and practitioner. He
scientific management. became famous as father of
general management.
7. Unity of Did not follow this principle Strictly followed this
Command as Taylor insisted on principle i.e., only one boss
minimum 8 bosses. for one employee.
8. Expression Taylor’s techniques are Fayol’s techniques are
expressed as scientific expressed as general theory
management. of administration.
9. Applicability Applicable to specialized Applicable universally.
situation.

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 Application and Hots Based Questions Answers

1. In your school, you observe that books are kept in office, chalks in the library
and office records in the staff room.
(a) Which principle of management is violated here and why?
(b) How will that affect the achievement of school objectives?
(c) As a manager, what steps will you take to rectify the shortcomings?
Ans. (a) The principle of' Order'
(b) In the absence of orderliness, school objectives will not be achieved efficiently
and effectively.
(c) Things should be placed at appropriate places to achieve maximum efficiency
within given time framework.

2. The production manager of an automobile company asked the foreman to

achieve a target production of 200 scooters per day. But he did not give him the
authority to requisition tools and materials from the stores department. Can the
production manager blame the foreman if he is not able to achieve the desired
target? Explain briefly the principle relating to the situation.
Ans. No, the production manager cannot blame the foreman because he did not give him
the authority to requisition tools and materials from the stores department. Since he
had no authority, he could not fulfill his responsibility.
In this case the principle of 'Authority and Responsibility' is violated. Fayol suggested
that there must be a balance between authority and responsibility. Authority and
responsibility must go hand in hand. Responsibility without adequate authority will
make the subordinate ineffective, i.e., he will not be able to perform his duties
properly. At the same time giving authority without fixing responsibility may lead to
misuse of authority.

3. In each of the following cases which principle of management as given by Henri

Fayol is being violated?
(i) When no division of the company has a separate plan of action.
(ii) When a sales manager is not given the right to discount to the buyer
necessary to conclude a large sales contract, which will be profitable for the
company.
(iii)When a subordinate receives order from two superiors.
(iv) When a manager awards contract for supply of raw material to a particular
party, which happens to be owned by his relative ignoring other parties, who
can supply the same at a cheaper rate.
(v) When a subordinate habitually contacts higher authorities in the company by
passing his/her immediate superior.
(vi) When the tools and/or raw materials are not found at the right place in the
factory.
(vii) When the employee is given responsibility to achieve target production of
500 units with no authority to access over raw materials.
(viii) When the manager grants one month medical leave to a supervisor with
pay and only one week medical leave to accountant.
Ans. (a) Unity of direction
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 (b) Authority and responsibility
(c) Unity of command
(d) Subordination of individual interest to general interest
(e) Scalar chain
(f) Order
(g) Authority and responsibility
(h) Equity

4. Soniya Ltd. was engaged in the business of manufacturing auto components.

Lately, its business was expanding due to increased demand for cars. The
competition was also increasing. In order to keep its market share intact, the
company directed its workforce to work overtime. But this resulted in many
problems.
Due to increased pressure of work the efficiency of workers declined. Sometimes,
the subordinates had to work for more than one superiors. The workers were
becoming indisciplined. The spirit of teamwork, which had characterised the
company previously, had begun to wane.
Identify any three principles of management (as given by Henry Fayol) which
were being violated, quoting the lines from the above case.
Ans. (i) Unity of command
'Sometimes, the subordinates had to work for more than one superiors.'
(ii) Discipline
'The workers were becoming indisciplined.'
(iii) Espiritde corps
'The spirit of teamwork, which had characterised the company previously, had
begun to wane

5. Identify the techniques of scientific management, which are described by the

statements given below.
(a) When many specialists supervise each worker.
(b) When uniformity is introduced in materials, machines, tools, methods of
work and working conditions after due research.
(c) To determine standard time taken to perform a well-defined job.
(d) Giving variable wages to workers based on their performance.
(e) Change in the attitude of workers and management towards one another
from competition to cooperation.
(f) To find out one best way to do the job.
Ans. (a) Functional foremanship
(b) Standardisation of work
(c) Time study
(d) Differential piece wage system
(e) Mental revolution
(f) Method study

6. Principles of Taylor and Fayol are mutually complementary. One believed that
management should not close its ears to constructive suggestions made by the
employees, while the other suggested that a good company should have an
employee suggestion system, whereby suggestions which result in substantial
time or cost reduction should be rewarded.
Identify and explain the principles of Taylor and Fayol referred in the above
para.
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Ans. (i) 'Management should not close its ears to constructive suggestions made by the
employees'— the principle of Cooperation, not Individualism. According to this
principle, there should be complete cooperation between the labour qnd the
management instead of individualism. Competition should be replaced by
cooperation. Both should realize that they need each other. For all important decisions
taken by the management, workers should be taken into confidence. At the same time,
workers should not go for strikes and should not make unreasonable demands on the
management. According to Taylor, there should be an almost equal division of work
and responsibility between workers and management. Management should work
almost side by side with the workers helping, encouraging and smoothing the way for
them.
(ii) 'A good company should have an employee suggestion system, whereby
suggestions which result in substantial time or cost reduction should be rewarded' —
the principle of Initiative. Initiative means eagerness to initiate action without being
asked to do so. In other words, it means taking the first step with self-motivation.
According to Fayol, subordinates should be encouraged to make and execute plans
within the prescribed limits of authority.

7. Principles of Taylor and Fayol are mutually complementary. One believed that
the management should share the gains with the workers, while the other
suggested that employees compensation should depend on the earning capacity
of the company and should give them a reasonable standard of living.
Identify and explain the principles of Fayol and Taylor referred to in the above
para.
Ans. (i) "Management should share the gains with the workers" — the principle of
Harmony, not Discord. Taylor emphasised that there should be complete harmony
between the management and workers. Both should realise that each one is important.
To achieve this, Taylor advocated a complete 'Mental Revolution' on the part of both
management and workers. It means that management and workers should transform
their thinking. In such a situation even trade unions will not think of going on strikes,
etc.
(ii) "Employees' compensation should depend on the earning capacity of the company
and should give them a reasonable standard of living."—the principle of
Remuneration of Employees. Remuneration of employees should be just and
equitable so as to give maximum satisfaction to both the employees and the
organization. The employees should be paid fair wages/ salaries, which would give
them at least a reasonable standard of living. At the same time, it should be within the
paying capacity of the company. This will ensure good relations between workers and
management. Consequently, the working of the company would be smooth.

8. Principles of Taylor and Fayol are mutually complementary. One believed that
the management should scientifically select the person and the work assigned
should suit his/her physical and intellectual capabilities, while the other
suggested that the work can be performed more efficiently if divided into
specialized tasks.
Identify and explain the principles of Fayol and Taylor referred to in the above
para.
Ans. (i) 'Management should scientifically select the person and the work assigned should
suit his/ her physical and intellectual capabilities' — the principle of Development of
each and every person to his/her greatest efficiency and prosperity. According to
Taylor, to increase efficiency, employees should be given the required training to
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 learn the 'best method'. Efficient employees would produce more and earn more. This
will ensure the greatest efficiency and prosperity for both company and employees.
(ii) 'The work can be performed more efficiently if divided into specialized tasks' —
the principle of Division of work and Specialisation. According to this principle, work
should be divided into small tasks/jobs; each performed by a specialist or trained
employee. Division of work leads to specialisation. This results in efficient and
effective output.

9. The production manager of Harsh Ltd. instructs a salesman to go slow in selling

the product, whereas the marketing manager is insisting on fast selling to achieve
the target. Which principle of management is being violated in this case?
Ans. Unity of command

10. Kanika and Priyanka are typists in a company having same educational
qualifications. Kanika is getting ? 16000 per month and Priyanka ? 10000 per
month as salary for the same working hours. Which principle of management is
violated in this case?
Ans. Principle of equity

11. Rishabh, a manager, very often speaks to people at all levels, passing on
instructions regarding his department and also the other departments. Which
principle of management is being overlooked?
Ans. Principle of Scalar Chain

12. The management and workers have entered into an agreement that workers will
do overtime to cover up losses of the company. In return, the manager will
increase the wages. But management later refused to increase the wages. Name
the principle violated in this situation.
Ans. Principle of discipline

13. In Simran Ltd., an employee has the objective of maximising his salary, but the
organisational objective is to maximise output at competitive cost. There was
some dispute on this for a while. Eventually, the organisation's interest was given
priority over employee's interest. Name the principle related to this situation.
Ans. Principle of subordination of individual interest to general interest

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 Chapter -3
Business Environment
Introduction
Meaning of Business Environment
The term 'Business Environment' means the sum total of all individuals or institutions and
other forces that are outside the control of a business enterprise but that may affect its
performance.

Changes in Business Environment Effect on Performance of Business

Enterprises
1. Increasing taxes by government Increased cost of production, hence things
become expensive to buy
2. Increased competition in the market Reduction in profit margins

3. Changes in fashion and tastes of Shift in market demand from existing products
consumers to new ones

4. Technological improvements and Render existing products obsolete, e.g. LCD

innovations TVs become obsolete with introduction of LED
5. Political uncertainty TVs
Creates fear in the minds of investors to invest
in long-term projects

Features of Business Environment

2. Totality of external forces: Business environment is the sum total of all forces external
to business firms. Therefore, it is aggressive in nature.
3. Specific and general forces: Business environment includes both specific forces
(investors, customers, competitors and suppliers) and general forces (economic, social,
political, legal and technological conditions). Specific forces affect an individual firm
directly and immediately in its day-to-day working while general forces have impact on
all business firms and thus may affect an individual firm only indirectly.
4. Inter-relatedness: Elements of business environment are closely inter-related. For
example, people can purchase better quality goods and services which will improve their
quality of life (social environment) because their incomes are rising (economic
environment).
5. Dynamic nature: Business environment is dynamic as it keeps on changing in terms of
technological improvements, change in fashion and tastes, entry of new competitors in the
market, etc.
6. Uncertainty: Business environment is uncertain as it is very difficult to predict future
happenings, especially when environment changes are taking place too frequently e.g., in
case of IT and fashion industries.
7. Complexity: Business environment is very complex as it is very difficult to know the
relative impact of the social, economic, political, technological or legal factors on change
in demand of a product in the market.
8. Relativity: Business environment is a relative concept since it differs from country to
country and even region to region. For example, demand for sarees may be high in India,
whereas it is almost nil in France.

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Importance of Business Environment
In the present day competitive market, it is essential for a business to remain alert and aware
of its environment. Significance of understanding environment in shaping the future of
business can be appreciated if we consider the following facts:
1. It helps the firm to identify opportunities and get the first mover advantage:
'Opportunities’ refer to the positive external trends and changes that will help to improve
a firm's performance. Early identification of opportunities helps the firm to be the first to
exploit them instead of losing them to competitors. For example, Maruti Udyog became
the leader in the small car market because it was the first to recognise the need for small
cars in India, where petroleum prices were rising and there was a large middle-class
population.
2. It helps the firm to identify threats and early warning signals: 'Threats' refer to the
negative external trends and changes that will hinder a firm's performance. Environmental
awareness can help managers to identify various threats on time and serve as an early
warning signal. For instance, if an Indian firm finds that an MNC is entering the Indian
market with new substitutes, this works as a warning signal for the Indian firm. So, it can
improve the quality of its products, reduce cost of production, engage in aggressive
advertisements, etc.
3. It helps in assisting in planning and policy formulation: Since business environment
provides both opportunities and threats for the firm, its understanding and analysis can be
the basis for planning and policy formulation.
4. It helps in tapping useful resources: A business firm assembles various resources called
inputs like finance, machines, raw materials, power and water, labour, etc. from its
environment. Then, it supplies the environment with its output such as goods and services
for customers, payment of taxes to government, return on financial investment to
investors and so on.
5. It helps in coping with rapid changes: Managers must understand and examine the
environment and develop suitable courses of action to cope with rapid changes in
business environment, e.g. increasing competition, more demanding customers, rapidly
changing technological environment, etc.
6. It helps in improving performance: The firms which continuously monitor their
environment and develop suitable course of action not only improve their present
performance, but also continue to succeed in the market for a longer period.

Dimensions/Components/Elements of Business Environment

1. Economic Environment
The economic environment consists of:
• Change in disposable income of people
• Inflation rate
• Interest rates
• Value of Rupee
• Stock market indices
Examples of Economic Environment affecting the functioning of a business
enterprise: (i) A rise in the disposable income of people due to increase in GDP of a
country creates increasing demand
(ii) In case of construction companies and automobile manufacturers, low interest
rates are beneficial because they result in increased spending by consumers for buying
homes and cars.

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 (iii) High inflation rates generally result in constraints on business enterprises because
they increase the costs of raw materials or machinery and payment of wages and
salaries to employees.

2. Social Environment
The social environment of business includes the social forces like:
• Customs and traditions s Social trends
• Society's expectations from business
• Values
Examples of Social Environment affecting the functioning of a business
enterprise:
(i) Social trends present various opportunities and threats to business enterprises.
For example, the health-and-fitness trend has created demand for products like
diet soft drinks, gyms, mineral water and food supplements. However, this trend
has harmed business in other industries like tobacco and liquor.
(ii) Values refer to concepts that a society holds in high esteem. In India,
individual freedom, social justice, equality of opportunity, etc. are examples of
major values cherished by the society. In business terms, these values translate
into freedom of choice in the market, responsibility of business towards the
society and non- discriminatory employment practices.

3. Political Environment
• It includes political conditions like:
• Stability
• Peace
• Attitude of elected government representatives towards business
Examples of Political Environment affecting the functioning of a business
enterprise:
(i) Political stability builds up confidence among business people to invest in the
long-term projects for the growth of the company. But political instability can
shake that confidence.
(ii) If the government provides subsidy in the production of cotton garments, it
will have positive impact on cotton textile businesses.

4. Legal Environment
It includes:
• Legislations passed by the Government, e.g. Trademark Act, 1999; Essential
Commodities Act, 1955; etc.
• Administrative orders issued by government authorities
• Court judgments
• Decisions rendered by various agencies at every level of government — centre,
state or local.
The management of every business enterprise is required to obey the law of the
land. Non-compliance of laws can land the business enterprise into legal
problems.
Examples of Legal Environment affecting the functioning of a business enterprise:
(i) Advertisements for packets of cigarettes must carry the statutory warning
Cigarette smoking is injurious to health'.
(ii) Advertisement of alcoholic beverages is prohibited on Doordarshan.

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 (iii) Advertisements of baby food must necessarily inform the potential buyers
that mother's milk is the best.
All these rules and regulations are required to be followed by the advertisers for
better business performance.

5. 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 a business.
Examples of Technological Environment affecting the functioning of a business
enterprise:
(i) Recent technological advancement in computers and electronics have modified
the ways in which companies advertise their products. For example, it is common
now to see CD-ROM's and Internet/World Wide Web (WWW) multimedia pages
highlighting the virtues of products.
(ii) Airline companies have internet and WWW pages where customers can look
for flight times, destinations, fares and book their tickets online.
(iii) Innovations in scientific and engineering fields such as lasers, robotics,
biotechnology, food preservatives, telecommunication, etc. have provided both
opportunities and threats for business enterprises, e.g. shifts in demand from
vacuum tubes to transistors, from steam locomotives to diesel and electric
engines, from fountain pens to ball pens and typewriters to computer based word
processors, etc.

3.3 Impact of Government Policy Changes on Business

As a part of economic reforms, the Government of India announced a new industrial policy in
July, 1991 which sought to liberate the industry from the shackles of the licensing system
(liberalization), drastically reduce the role of the public sector (privatization) and encourage
foreign-private participation in industrial development (globalization).

Liberalization
Liberalization means — ‘‘freeing the Indian business and industry from all unnecessary
controls and restrictions." Liberalization of the Indian industry has taken place with respect
to:
• abolishing licensing requirement in most of the industries,
• freedom in deciding the scale of business activities,
• freedom in fixing the prices of goods and services,
• reduction in tax rates,
• simplifying procedures for imports and exports, and
• Making it easier to attract foreign capital and technology to India.

Privatization
Privatization means — "giving greater role to the private sector in the nation building
process and reducing the role of the public sector. "To achieve this, the government adopted
the policy of planned ‘disinvestments', which means transferring the public sector enterprises
to the private sector. If there is dilution of government ownership beyond 51 %, it would
result in transfer of ownership and management of the enterprise to the private sector.

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Globalization
'Globalization' means the integration of our economy with the world economy. It aims at:
• import liberalization,
• export promotion, and
• Foreign exchange reforms.
Globalization involves an increased level of interaction and inter-dependence among the
various nations of the global economy.

Impact of Government Policy Changes on Business and Industry

The policy of Liberalization, Privatization and Globalization of the government has made a
significant impact on the working of Indian business and industry, as explained below:
1. Increasing competition: Due to abolition of licensing requirements and entry of
multinational companies (MNCs), competition for Indian firms has increased especially
in service industries like telecommunications, airlines, banking, insurance, etc.
2. More demanding customers: Customers have become more demanding because they
are well- informed. Increased competition in the market gives the customers wider choice
in purchasing better quality of goods and services.
3. Market orientation: Earlier firms had production-oriented marketing operations, where
they used to produce first and go to the market for sale later. But now, firms have to study
and analyze the market first to identify customer needs and produce goods accordingly.
Marketing research, advertising, sales promotion techniques like BOGOF (Buy one get
one free), public relations programmers, etc. have become more significant. Firms need to
create its USP
4. Rapidly changing technological environment: Increased competition forces the
business firms to develop new technologies (e.g. use of internet/WWW multi-media
pages for advertisements, etc.) to survive and grow in the market. The rapidly changing
technological environment creates tough challenges before smaller firms.
5. Necessity for change: Before 1991, the firms could have stable policies and practices.
But now they have to continuously modify their operations. Investments in R&D and
innovations have become a must.
6. Need for developing human resource: The new market conditions require people with
higher competence and greater commitment.
7. Loss of budgetary support to the public sector: The Central Government's budgetary
support for financing the public sector outlays has declined. So, PSUs will have to be
more efficient and generate their own resources to survive and grow.
Conclusion: On the whole, the impact of government policy changes in respect of
liberalisation, privatization and globalization has been positive as the Indian firms have
developed strategies and adopted business processes and procedures to meet the challenge of
competition. They have become more customer-focused and adopted measures to improve
customer relationship and satisfaction.

Questions with Answers

1. Mr. Ajay after completing MBA from USA comes to India to start a new
business under the banner E com Creations Ltd. He launches a new product in e-
learning for Senior Secondary School students in Commerce stream, which
already has an established market in UK and USA but not in India. His business
starts flourishing in India. Now more Indian companies entered into the market
with other subjects also.

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 Identify and quote the lines from above para which highlight the significance of
understanding business environment.
Ans. (a) "Comes to India to start a new business... launches a new product in e-learning for
Senior secondary school students in Commerce stream."
(i) It helps in assisting in planning and policy formulation.
(ii) It helps the firm to identify opportunities and get the first mover advantage.
(b) "His business starts flourishing in India."
(iii) It helps in improving performance.
(c) "Now more Indian companies entered into the market with different subjects also."
(iv) It helps the firm to identify threats and early warning signals.

2. Geeta Publishing House, a book publishing company, identifies 'CBSE New

Design of Question Paper' as an opportunity early and publishes its books as per
the changed CBSE pattern much before its competitors. Which environment
awareness is being identified by Geeta Publishing House?
Ans. Geeta Publishing House is identifying the opportunities and getting the first mover
advantage.

3. Just after declaration of Lok Sabha Elections 2014 results, the Bombay stock
exchange's price index (Sensex) rose by 1000 points in a day. Identify the
environmental factor which led to this rise giving reason. Also, explain any two
other dimensions of business environment.
Ans. Rise in stock market index (Sensex) is economic environment. But Political
environment (declaration of Lok Sabha Elections 2014 results) led to this rise.
Two other dimensions of business environment:
(i) Legal Environment: It includes legislations passed by the government,
administrative orders, Court judgments and decisions rendered by various agencies at
every level of government — centre, state or local. The management of every
business enterprise is required to obey the law of the land. Non-compliance of laws
can land the business enterprise into legal problems.
(ii) 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 a business. For example, Airline companies have
internet and WWW pages where customers can look for flight times, destinations and
fares and book their tickets online.

4. Lately many companies have planned for significant investment in organised

retailing in India. Several factors have prompted their decisions in this regard —
Customer income is rising. People have developed a taste for better quality
products even though they may have to pay more. The government permitted
cent percent foreign direct investment in some sectors of retailing.
Identify the changes in business environment under different dimensions,
quoting the lines from the above para.
Ans. Dimensions of business environment:
(i) Economic environment — 'Customer income is rising.'
(ii) Social environment —'People have developed a taste for better quality products
even though they may have to pay more’
(iii) Political environment —'The government permitted cent per cent foreign direct
investment in some sectors of retailing.'

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5. The court passed an order that all schools must have water purifier for the
school children as
(i) Society in general is more concerned about quality of life.
(ii) Innovative techniques are being developed to manufacture water purifier at
competitive rates.
(iii) Incomes are rising and children at home are also drinking purified water.
The government is also showing positive attitude towards the water purifier
business. Identify the different dimensions of business environment by quoting
from the above details.
Ans. Legal environment-'The court passed an order that all schools must have water
purifier for the school children.'
Social environment- 'Society in general is more concerned about quality of life.'
Technological environment- 'Innovative techniques are being developed to
manufacture water purifier at competitive rates.'
Economic environment- 'Incomes are rising and children at home are also drinking
purified water.’
Political environment- 'The government is also showing positive attitude towards the
water purifier.'

6. Even after opening up of the Indian Economy in 1991, foreign companies found
it extremely difficult to cut through the bureaucratic red tape to get permits for
doing business in India, which discouraged them from investing in our country.
Identify the dimension of business environment mentioned in the above para.
Ans. Political environment

7. 'It is common now to see CD-ROM's, computerized information kiosks, and

Internet/World Wide Web multimedia pages highlighting the virtues of
products.' Name the dimension of the business environment highlighted by this
statement.
Ans. Technological environment

8. 'The celebration of Diwali, Eid, Christmas and Guru Parv in India provides
significant financial opportunities for greeting cards companies, sweets or
confectionery manufacturers, tailoring outlets and many other related business.'
Name the dimension of the business environment highlighted by this statement.
Ans. Social environment

9. Which component of business environment requires that advertisements of baby

food must necessarily inform the potential buyers that mother's milk is the best?
Ans. Legal environment

10. Due to entry of foreign firms, competition for Indian firms has increased,
especially in service industries. Name such service industries.
Ans. Telecommunications, airlines, banking, insurance, etc.

11. It is the process by which government control over the industry is being
loosened. Give the term to which this statement is trying to indicate.
Ans. Liberalization

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12. Government of India is seriously thinking to allow oil marketing public sector
undertakings to fix their own price for petrol and diesel. Which economic reform
is the reason of this change in government's policy?
Ans. The reason for this change in the government's policy is 'Liberalization'.

13. Identify and explain briefly the type or dimension of environment to which the
following are related:
(i) Banks reducing interest rates on housing loans
(ii) An increasing number of working women
(iii) Booking of air tickets through internet
(iv) Alcoholic beverages are prohibited to be advertised on 'Doordarshan'
(v) A stable government has built up confidence among the firms to invest in big
proj ects
Ans. (i) Economic environment
(ii) Social environment
(iii) Technological environment
(iv) Legal environment
(v) Political environment
14. The Court passed an order to ban polythene bags as
(i) The bags are creating many environmental problems which affect the life of
people in general.
(ii) Society in general is more concerned about quality of life.
The Government decided to give subsidy to jute industry to promote this
business. Innovative techniques are being developed to manufacture jute bags at
low rates.
Incomes are rising and people can afford to buy these bags.
Identify the different dimensions of Business Environment by quoting the lines
from the above particulars.
Ans. Legal environment-'The Court passed an order to ban polythene bags.'
Social environment- 'The bags are creating many environmental problems which
affect the life of people in general. Society in general is more concerned about quality
of life.'
Political environment- 'The Government decided to give subsidy to jute industry to
promote this business.'
Technological environment- 'Innovative techniques are being developed to
manufacture jute bags at low rates.'
Economic environment- 'Incomes are rising and people can afford to buy these bags.'
Multi-Disciplinary and Value Based Questions with Answers

1. Nakul, a manager of Zyco Ltd. always takes into account the changes taking
place in business environment while determining plans. He accepts changes
readily and gives useful suggestions to his superior, which results in reduction of
costs. As a result, company's profits increase. Nakul enjoys cordial relations with
his co-workers and makes plans in consultation with his team to achieve
organizational goals.
(a) Which characteristic of management is highlighted in the above lines?
(b) Identify and state any two principles of management followed by Zyco Ltd.
(c) Give any two benefits which Zyco Ltd. get by taking into account the changes
taking place in business environment, quoting the lines from the above para.

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 (d) State any one value which Nakul wants to communicate to the society. 6
marks
Ans. (a) Management is a dynamic function.
(b) (i) Initiative
This principle indicates that the subordinates should be encouraged to give
suggestions and make and execute plans within the prescribed limits of
authority.
(ii) Espirit de corps
This principle suggests that management should promote a team spirit of unity and
harmony among the employees.
(c) Benefits of business environment:
(i) It helps in assisting in planning and policy formulation.
'...takes into account the changes taking place in business environment while
determining plans.'
(ii) It helps in improving performance.
'He accepts changes readily and gives useful suggestions to his superior, which results
in reduction of costs. As a result, company's profits increase.'
(d) Value:
Teamwork
Adaptability

2. Ultra Paint Co. which is manufacturing paints had been enjoying a prominent
market position as it manufactured best quality paints, made timely payment of
taxes to government. It assembled various inputs like finance, machines, raw
materials, etc. from its environment. But since last year it has been dumping its
untreated poisonous waste on the river bank which has created many health
problems for the people. As a result, the court passed an order to seal the
manufacturing unit of the company.
(a) State the importance of business environment highlighted quoting the line
from the above case.
(b) Identify any two dimensions of business environment mentioned in the above
case by quoting lines from it.
(c) State any two values which have been overlooked by the company?
Ans. (a) Business environment helps in tapping useful resources.
'It assembled various inputs like finance, machines, raw materials, etc. from its
environment.'
(b) (i) Social environment
'...it has been dumping its untreated poisonous waste on the river bank which has
created many health problems for the people.'
(ii) Legal environment
'.. .the court passed an order to seal the manufacturing unit of the company.'
(c) Values overlooked:
Environment protection
Concern for human life
Respect for law and order
Social responsibility

3. Phillips, a company manufacturing light bulbs incurred heavy expenditure on

scientific Research and Development and discovered a technology that made it
possible to produce an energy efficient light bulb that lasts at least twenty times

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 as long as a standard bulb. It resulted in growth and profitability of the
company.
(a) Identify and state the dimension of business environment mentioned above.
(b) State the importance of business environment mentioned above by quoting
the lines.
(c) State any one value which the company wants to communicate to the society.

Ans. (a) 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 a business.
(b) Business environment helps a firm to improve its performance.
'It resulted in growth and profitability of the company.'
(c) Value: Conservation of energy

4. Disco Ltd. manufactures fashionable and designer clothes. Recently it finds that
the demand for its products has been declining. After market research it was
discovered that fashion and tastes of the consumers is changing at a fast pace.
Customers' demand is increasing. New competitors have entered the market
with new designs. It is very difficult for the company to predict future
happenings. Also, it is difficult to know the extent of the relative impact of the
social, economic, political, technological or legal factors on decrease in demand
of its products in the market.
A meeting was held in which managers from different functional levels heading
Production, Marketing, Finance, etc., for example, Chief Operating Officer,
Chief Finance Officer, Vice President (Marketing) were present to discuss how to
deal with the situation. After a long discussion, it was decided that they would
study and analyse the market first to identify customer tastes and fashion and
then manufacture garments accordingly. It was also decided to increase
expenditure on advertising, after-sales services, etc.
(a) Identify any two features of business environment by quoting the lines from
the above case.
(b) At which level of management the meeting of managers of Disco Ltd. was
held?
(c) Identify any two impacts of government policy changes on business, quoting
lines from the above case.
(d) State the importance of understanding of environment by business managers
in the light of the above para.
Ans. (a) Features of business environment:
(i) Dynamic nature — 'fashion and taste of the consumers is changing at a fast pace.'
(ii) Uncertainty — 'It is very difficult for the company to predict future happenings.'
(iii) Complexity —'it is difficult to know the extent of the relative impact of the
social, economic, political, technological or legal factors on decrease in demand of its
products in the market.'
(b) Top level management
(c) Impact of government policy changes on business:
(i) Increasing competition —'New competitors have entered the market with new
designs.'
(ii) More demanding customers — 'Customers' demand is increasing.'
(iii) Market orientation —'it was decided that they would study and analyze the
market
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first to identify customer tastes and fashion and then manufacture garments
accordingly. It was also decided to increase expenditure on advertising, after-sales
services, etc.'
(d) Business environment helps the manager in coping with rapid changes.

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 Chapter -4
PLANNING
1) Introduction: Dreams can be turned into reality only if business management think in
advance on what to do and how to do it. This is the essence of planning.

2) Concept: Planning means setting objectives and targets and formulating an action
plan to achieve them. It bridges the gap between where we are and where we want to
go. It also indicates to decide in advance what to do and how to do it.

3) Importance of Planning: (Explain by taking example of picnic or tour.)

a) Planning provides Direction: By stating in advance how work is to be done,

planning provides direction for action. Planning ensures that goals or objectives
are clearly stated so that they act as a guide for deciding what action should be
taken and in what direction. If goals are well defined, employees are aware of
what the organization has to do and what they must do to achieve those goals.

b) Planning reduces the risk of uncertainty: Planning is an activity which enables

a manager to look ahead and anticipate changes. By deciding in advance the task
to be performed, planning shows the way to deal with changes and uncertain
events. Changes or events cannot be eliminated but they can be anticipated and
managerial responses to them can be developed.

c) Planning reduces overlapping and wasteful activity: planning serves as the

basis of coordinating the activities and efforts of different division, department
and individuals. It helps in avoiding confusion and misunderstanding. Since
planning ensures clarity in thought and action, work is carried on smoothly
without interruption.

d) Planning promotes innovative ideas: Since planning is the first step of

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

e) Planning facilitate decision making: Planning helps the manager to look into the
future and make a choice from among various alternatives course of action.
Planning involves setting targets and predicting future condition, thus helping in
taking rational decisions.

f) Planning Establishes standards for controlling: planning provides goals or

standards against which actual performance is measured. By comparing actual
performance with standards, managers can know whether they have actually been
able to attain the goals and there is any deviation it can be corrected. Therefore we
can say that planning is prerequisite for controlling.

4) Features of Planning:
a) Planning focuses on achieving objective: Organisations are setup with a general
purpose in view. Specific goals are set out in the plan along with the activities to
be undertaken to achieve the goals, thus planning is purposeful.
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 b) Planning is a primary function of management: planning lays down the base
for other functions of management. All other functions are performed within the
framework of plans drawn. Thus planning precedes other functions.

c) Planning is pervasive: planning is required in all level of management, as well as

in all department of the organization. It is neither an exclusive function of top
management nor any particular department.

d) Planning is Continuous: Plans are prepared for specific period of time, may be a
month, a quarter, or a year, at the end of that period new plans are drawn on the
future conditions and new requirement. Hence planning is continuous process.

e) Planning is Futuristic: The purpose of planning is to meet future events

effectively to the best advantage of an organization. It means peeping into the
future, analyzing it and producing it. Though forecasting future events and
conditions are anticipated and plans are drawn accordingly. For sales, forecasting
is the basis on which a business firm prepare its annual plan for production and
sales.

f) Planning involves decision making: The need for planning arises only when
alternative are available. In actual practice, planning presupposes the existence of
alternatives. Planning thus involves thorough examination and evaluation of each
alternative and choosing the most appropriate one.

g) Planning is Mental Exercise: planning requires application of the mind involving

fare sight, intelligent imagination and sound judgment. It is basically an intelligent
activity of thinking rather than doing, because planning determines the action to
be taken. It also requires logical and systematic thinking rather than a wishful
doing.

LIMITATIONS OF PLANNING:
I) Planning Leads to Rigidity: In an organization a well defined plan is drawn up
with specific goals to be achieved within a specific time frame. These plans then
decide the future course of action and managers may not be in a position to
change it. This kind of rigidity in plans may create difficulty.
II) Planning may not work in dynamic environment: It becomes difficult to
accurately assess future trends in the environment, if economic policies are
modified or political conditions are not stable or there is a natural calamity. For
example, competition in the market can also upset financial plans, sales target
may have to be revised and accordingly cash budget also need to be modified,
since they are based on sales figures. Planning cannot foresee everything and thus
there may be obstacle to effective planning.
III) Planning reduces Creativity: Planning is an activity which is done by the top
management usually the rest of the members just implement these plans, as a
result middle management and other decision makers are neither allowed to
deviate from plans nor are they permitted to act on their own. Thus much of
initiative inherent in them also gets lost or reduced.
IV) Planning involves huge cost: There are number of incidental cost like expenses
on boardroom meetings, discussions with professional experts and preliminary

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 investigation to find out the validity of plan. Whereas the cost incurred sometimes
may not justify the benefits derived from the plans.
V) Planning is a time consuming process: sometimes plans to be drawn take so
much of time that there is not much time left for their implementation.
VI) Planning does not guarantee success: it is not always true that just because a
plan has worked before, it will work again. Besides there are so many unknown
factors to be considered. This kind of complications and false sense of security
may actually lead to failure instead of success.

5) Planning process:
1) Setting Objectives:
Objectives or goals specify what the organization wants to achieve. For example.
It could mean an increase in sales by 20%. Which could be the objective of an
organization? How all the departments would contribute the organizational goals
is the plans that is to be drawn up.
2) Developing Premises: (Taking Assumptions)
Planning is concerned with future which is uncertain and every planner is using
conjecture about what might happen in future. Therefore the management has to
take certain assumptions about the future. Assumptions are the base material upon
which plans are to be drawn. The base material may be in the form of forecast,
any existing plan or any post information about policies.
3) Identifying alternative course of action:
Once the objectives are set, assumptions are made then the next step would be to
act upon them. Thus all the alternative courses of action should be identified and
the course of action which could be taken can be either routine or innovative.
Innovative course may be adopted by involving more people and sharing their
ideas. If the project is important then more alternatives should be generated and
thoroughly discussed among the members of the organization.
4) Evaluating alternative courses: The next step is to weigh the pros and cons of
each alternative. Each course will have many variables which have to be weighed
against each other. In financial plans for example the risk return trade off is very
common. The more risky the investment the higher return it is likely to give. To
evaluate such proposals detailed calculations of earning per share, interest, taxes
are made and decisions are taken.
5) Selecting an alternative: this is the real point of decision making. The best plan
has to be adopted and implemented. The ideal plan of course would be more
feasible, profitable and with least negative consequences. most plans may not be
subject to mathematical analysis, In such case subjectivity and the managers
experience, judgment and at times, intuitions play an important part in selecting
the viable alternative. Sometimes a combination of plans may be selected instead
of one best course of action.
6) Implement the plan: this is the plan where other managerial functions also come
in to the picture. This step is concern with putting the plan into action. i.e. doing
what is required.
7) Follow up action: monitoring the plans is equally important to ensure that
objectives are achieved.

6) Types of plan
An organization has to prepare a plan before making any decision related to business
operation, or undertaking any project.

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 A plan is a specific action proposed to help the organization achieve its
objectives. It is a document that outlines how goals will be achieved.
Based on the use and the length of the planning period, plans can be classified into
single-use plans and standing plans. Single- use and standing plans are part of the
operational planning process.
Single use plans Standing Plans
A single-use plan is developed for a A standing plan is used for activities that
one-time event or project. occur regularly over a period of time.
Such a course of action is not likely to It is designed to ensure that internal
be repeated in future, i.e. they are for operations of an organization run smoothly.
non-recurring situations
Its duration may be a week or a Such a plan enhances efficiency in routine
month and sometimes only one day, decision-making.
e.g. organizing an event or a seminar
or conference.
It is discarded when the project or It is usually developed once but used over
event is over. and over again with necessary
modifications from time to time to meet
business needs as required.
Single-use plans include budgets, Standing plans include policies, procedures,
programmes and projects. methods and rules.
Example: Budget for Annual General Example: Selection procedure for a
Meeting (AGM) of shareholders particular post in the company.

Based on what the plans seek to achieve, plans can be classified as:
• Objectives
• Strategy
• Policy
• Procedure
• Rule
• Method
• Budget
• Programmed

1. Objectives
Objectives are defined as ends which the management seeks to achieve by its
operations. They define the desired future state of affairs which the management of an
organization strives to realize.
• Objectives are usually set by the top management and serve as a guide for overall
planning. They focus on broad general issues. Each department or unit then
formulates their own objectives keeping in view the overall organizational
objectives.
• Objectives should be measurable in quantitative terms in the form of a written
statement of desired results to be achieved within a given time period. For

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 example, an organization may have an objective of increasing sales by 10 % in
the next quarter.
• Objectives provide direction for all managerial decisions and actions.
2. Strategy
Strategy is a comprehensive plan for accomplishing an organization’s objectives. It
includes three dimensions:
(i) determining long-term objectives of the enterprise,
(ii) adopting a particular course of action, and
(iii) allocating resources necessary to achieve the objectives.
Strategy also refers to future decisions defining the organization’s direction and scope in
the long run. A strategy takes into consideration the business environment and
competition. The changes in the economic, political, social, legal and technological
environment will affect an organization’s strategy.
Major strategic decisions include decisions like whether the organization will continue to
be in the same line of business, or combine new lines of activity with the existing
business or seek to acquire a dominant position in the same market. For example, a
company's marketing strategy may include choice of channels of distribution, pricing
strategy, choice of advertising media, choice of sales promotion techniques, etc.
3. Policy
Policy is a general guideline which brings uniformity in decision-making for
achievement of predetermined objectives, For example. (a) Recruitment policy (hiring
only university trained engineers), (b) Sales policies (selling products on cash basis and
dealing with wholesalers only), etc.
Policies provide a basis for interpreting strategy. They are guides to managerial action
and decisions in the implementation of strategy.
Policies define the parameters within which a manager may function.
The manager may use his/her discretion to interpret and apply a policy. For example, the
decisions taken under a Purchase Policy may include the following:
• Should a company make or buy its requirements of packages, transport services,
printing of stationery, etc.?
• How should vendors be selected for procuring supplies?
• How many suppliers should a company make purchases from?

4. Procedure
Procedure consists of sequential steps to carry out activities within policy framework
to attain predetermined objectives. It details the exact manner in which a work is to be
performed.
Examples: Procedure for selection of employees, procedure for reporting progress in
production, procedure for requisitioning supplies before production, etc.
Procedures are generally meant for insiders to follow.

5. Rule

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 Rule is a specific statement that specifies clearly what is to be done. It does not allow
for any flexibility or discretion. It reflects a managerial decision that a certain action
must or must not be taken.
Example: Rule of 'No smoking' in office premises.
A rule is usually the simplest type of plan because there is no compromise or change
unless a policy decision is taken.

6. Method
Method is the prescribed way in which a task has to be performed considering the
objective. Example: Training methods for employees — apprenticeship training,
induction training, etc.
It deals with a task comprising one step of a procedure and specifies how this step is to be
performed.
Selection of right method saves time, money and effort and increases efficiency in
completion of a task.

7. Budget
A budget is a statement of expected results in numerical terms for a specified time
period. It may be expressed in time, money or physical units. Examples: Sales budget,
Cash budget, etc.
It is an instrument of both planning and controlling. Since budget represents all items
(e.g. expenses, revenue and income) in numbers, it becomes easier to compare actual
figures with expected figures and take corrective action subsequently. Thus, a budget is
also a control device. But making a budget involves forecasting, therefore, it comes
under planning.

8. Programmed
Programmed is a detailed statement about a project which outlines the objectives,
policies, procedures, rules, tasks, human and physical resources required and the budget
to implement any course of action. The minutest details are worked out within a broad
policy framework. Examples: Construction of a shopping mall, opening a new
department, etc.

Difference between Policies and Objectives

Basis Policies Objectives

Purpose Policies aim to determine how the work is
Objectives aim to determine what
to be done. is to be done.
Period Policies do not have a time dimension. Organisation may have short and
long-term objective.
Need Although they are needed to achieve Objectives are basic and critical
objectives, but an organisation can exist for the existence of an
without them. organisation.
Formulation They are formulated by the managers of They are generally determined by

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 all levels. the top level.
Source They are derived from objectives. They are derived from goals.

Difference between Policies and Strategy

Basis Policies Objectives

Purpose Policy aims to deal with repetitive Strategy aims to counter
issues. unforeseen problems or
environmental threats.
Validity Policies remain valid for the Strategies are single use plans and
situations or problems which are designed to suit specific situations.
recurring in nature.
Role of Policy may not be formulated on the It is formulated after considering
Competitors move of competitors. activities of the competitors.
Hierarchy of Policies, which are supportive in Strategies are considered to be
plans nature, occupy lower place in superior and occupy higher place.
hierarchy of plans.

Difference between Policies and Procedures

Basis Policies Objectives

Need Policy is needed for achieving Procedure is needed for the
objectives. implementation of policy.
Scope for Policies are flexible and Procedures are more rigid and there is
Discretion managers have discretion within little scope for discretion to be used by
prescribed limits. managers.
Expression Policy is expressed as general Procedure is expressed in specific terms.
statement.
Area of Policies have broad areas of Procedures have limited area of
application application. application

Difference Between Procedures and Methods

Basis Policies Objectives

Scope Procedure has a wide scope as it lays Methods have limited scope as they
down sequence of all activities to be are confined to one step of
completed. procedure.
Flexibility Procedures are more rigid as compared to Methods are flexible statements.
methods.
Purpose Procedure aims to develop steps for Method aims to standardize the way
completing an activity. of completing a task.

Difference between Procedures and Rules

Basis Policies Objectives
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Nature They indicate broad guidelines within Rules strictly define the guidelines
which management can exercise little and there is no scope for
discretion. discretion.
Flexibility Procedures are more flexible as Rules are rigid statement.
compared to rules.
Effect of There is no specific penalty for violation The guilty has to face penalty in
violation of procedure. case of violation.
Example Procedure established for selection of Rule of ‘No Smoking’ in the
employees by a company. organisation.

Deference Between Policies and Rules

Basis Policies Objectives
Nature Policy is a general statement. Rule is the most specific
statement.
Purpose Policy aims to guide in decision making. Rules aim to guide to human
behavior.
Flexibility Policies are generally flexible. Rules are rigid and there is no
scope for deviations.
Effect of There is no penalty specified for violation The guilty has to face penalty
violation of policies. in case of violation.
Example Company may have Policy “To make Rule of “No Smoking” in the
payments more than one lakh by cheque”. company.

Difference Between Rules and Methods

Basis Policies Objectives
Purpose Rules are designed to achieve order and Methods are designed to achieve
discipline. efficiency and economy.
Effect of The guilty has to face penalty in case of There is no penalty specified for
violation violation. violation of methods.
Flexibility Rules are rigid and there is not scope for Methods are flexible statements.
deviations.
Application Rules are applied to human beings to Methods relate to manual and
make them behave in a particular mechanical ways of doing a task.
manner.

Application and Hots Based Questions with Answers

1. A company is manufacturing garments. The manager wants to increase profits

by purchasing new high speed machines or increasing the sale price or using
waste material in manufacturing stuffed toys.
He decided that 'using waste material' to increase the profit is the best solution
for him.
(a) Identify the concept of management involved.
(b) Mention the steps involved in the above process by quoting the lines from
the question.
(c) To complete the process of the concept identified in (a), what two next
steps does the manager have to take? Explain.
Ans. (a) The concept of management involved is PLANNING.
(b) Steps involved are:

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 • Setting objectives: increasing profits
• Developing planning premises: making certain assumptions about future.
• Identifying alternative courses of action
o purchasing new high speed machines, or
o increasing the sale price, or
o using waste material in manufacturing stuffed toys
• Evaluating alternatives and selecting an alternative: using waste material in
manufacturing stuffed toys.
(c) Further steps to complete the process of planning:
• Formulating derivative plans: Derivative plans are formulated to support the
main plan. For example, advertisement plan for toys.
• Implementing the plan and follow-up action: This step is concerned with
putting the plan into action. It involves organizing for labour and purchase of
machinery. The managers also take follow up action to ensure that objectives
are achieved.

2. Rahul, a worker, is given a target of assembling two computers per day. Due to
his habit of doing things differently, an idea struck him which would not only
reduce the assembling time of computers but would also reduce the cost of
production of the computers. Rahul’s supervisor instead of appreciating him,
ordered him to complete the work as per the methods and techniques decided
earlier as nothing could be changed at that stage.
The above para describes one of the limitations of planning function of
management. Name that limitation.
Ans. Planning reduces creativity.

3. 'Natural disaster like floods in Gujarat has been responsible for failure of
production and sales plans of Jindal Textile Industry.' Which limitations of
planning are highlighted in the given statement? State any three such limitations.
Ans. External limitations of planning
(i) Changes in government policies (e.g. tax rates, bank rate, etc.) may lead to
failure of planning.
(ii) Changes in the strategies of competitors also lead to failure of planning many
times.
(iii) Rapid technological changes may affect planning.

4. ABC Ltd. has a plan of increasing profits by 20%. It has devoted a lot of time
and money to this plan. But the competition starts increasing, so it could not
change its plan to beat its competitors because huge amount of money had
already been devoted to the pre-decided plan. It caused losses to the company.
Explain any two limitations of planning highlighted in the above case. Also,
quote the lines from it.
Ans. (i) 'ABC Ltd. has devoted a lot of time and money to its plan.'
Planning is a time consuming process. It also involves huge costs.
(ii) 'The competition starts increasing, so it could not change its plan to beat its
competitors because huge amount of money had already been devoted to the pre-
decided plan.' Planning leads to rigidity. Following a pre-decided plan, when
circumstances change, may not turn out to be in the organization’s interest.

5. In 'Chak De India' movie, Shahrukh Khan becomes the coach of the girls'

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 hockey team. He knows that he has to prepare the girls for the international
hockey matches and bring the world cup after winning. For this he prepares a
long-term plan and thinks the ways how to beat the competitors. He coaches the
girls to play in different ways like defensive, offensive, etc. At the outset of a
match he explains who will open the match, and how the ball will be passed by
one player to another step by step.
Identify four types of plans that are highlighted in the above case, quoting the
lines from it.
Ans. (i) Objective
'.. .bring the world cup after winning.'
(ii) Strategy
'For this he prepares a long-term plan and thinks the ways how to beat the
competitors.'
(iii) Method
'He coaches the girls to play in different ways like defensive, offensive, etc.'
(iv) Procedure
'At the outset of a match he explains who will open the match, and how the ball will
be passed by one player to another step by step.'

6. An electronic company is facing a problem of declining market share due to

increased competition from other new and existing players in the market. Its
competitors are introducing lower price models for mass consumers who are
price sensitive. For quality conscious consumers, company is introducing new
model LED TV and DVD players with added features and new technological
advancements. For this, the company raises extra funds ? 5 crore from banks.
Name the type of plan the company is preparing. State the steps which the
company follows to implement this plan quoting the line from the above para.
Ans. The type of plan needed to be prepared under this situation is 'Strategy'.
Steps involved in preparing this plan are:
(i) Determining long-term objectives: The company sets long-term objective of
capturing more and more quality conscious consumers.'
(ii) Adopting a particular course of action: The company is introducing new
model LED TV and DVD players with added features and new technological
advancements.'
(iii) Allocating resources necessary to achieve the objectives: 'The company raises
extra funds ` 5 crore from banks.'

7. Shagun Ltd. decides to advertise its products on radio and newspapers. What
type of plan it is?
Ans. Strategy

8. Tanya Ltd. decides that at the supervisory level, on-the-job training methods and
work- oriented methods be used while for higher level management, lectures and
orientation programmes be organized. What type of plan it is known as?
Ans. Method

9. 'Planning eliminates changes/uncertainties'. Do you agree? Give reason in

support of your answer.
Ans. No; planning only anticipates, not eliminates changes/ uncertainties.

10. Anshika Ltd. intends to achieve a return of 20% on investment. What type of
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 plan it is known as?
Ans. Objectives

11. A company needs a detailed plan for its new project, "Construction of a
Shopping Mall". What type of plan is it?
Ans. The company will prepare 'Programme1.

12. Chaitanya Limited follows a standard procedure for selection Production

Manager for its company. Is it a single-use plan or a standing plan? Give reason.
Ans. Standing Plan; because the selection procedure will be used over and over again with
necessary modifications only.

13. Sahil Limited prepares budget for its Annual General Meeting for Financial
Year 2015-16. Is it a single-use plan or a standing plan? Give reason.
Ans. Single use plan; because it will be discarded when the annual general meeting is over.

14. Identify the type of plan when a company has to take the following decisions:
Should the company make or buy its requirements of packages, transport
services, printing of stationary, water and power supply and other items? How
should vendors be selected for procuring supplies? How many suppliers should
the company make purchases from?
Ans. Policy (the company's purchase policy)

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 Chapter -5
Organizing
1) Concept: organizing can be defined as a process that initiates implementation of plan by
clarifying jobs and working relationships and effectively deploying resources for
attainment of identical an desired results.

2) Steps in the process of organizing:

a) Identification and Division of Work: The first step in the process of organizing
involves identifying and dividing the work that has to be done in accordance with
previously determined plans. The work is divided into manageable activities so that
duplication can be avoided and the burden of work can be shared among the
employees. For example. In banks, the total work is divided among different
employees. The division of work also promotes specialization and systematic working
as each individual is assigned work as per his qualifications and capabilities.
b) Departmentalization: Once the work has been divided into small and manageable
activities then those activities which are similar in nature are grouped together. Such
sets facilitate specialization. This grouping process is called as departmentalization.
For example. Sales and advertisement activities may be grouped under marketing
department.
c) Assignment of Duties: once the department is formed each of them is placed under
the charge of an individual. Jobs are then allocated to each department according to
their skills and competencies. For example. Purchase manager must be assigned
duties relating to purchase of raw material.
d) Establishing reporting relationships: Merely allocating work is not enough. Each
individual should also know from whom he has to take order and to whom he is
accountable. The establishment of such clear relationships helps to create a hierarchal
structure and helps in coordinating among various departments. For example. It may
be laid down that employees involved in production, purchases and stores will take
orders from, and be accountable to production manager.

3) Importance of organizing:
The following points highlights the crucial role that organsing plays in any business
enterprises.
(i) Benefits of Specialization: organizing leads to a systematic allocation of job
amongst the work force. This reduces the workload as well as enhances the
productivity because of the specific job on regular basis. Repetitive performance
of a particular task allows a worker to gain experience in that area and leads to
specialization.
(ii) Clarity in working relationships: the establishment of working relationships
clarifies lines of communication and who is to report to whom. This reduces
ambiguity in transfer of information and instructions. It helps in creating a
hierarchal order thereby enabling fixation of responsibilities and specialization of
the extent of authority to be exercised by an individual.
(iii) Optimum Utilization of Resources: organizing leads to proper usage of material,
financial and human resources. The proper assignment of jobs avoids overlapping
of work and also makes possible the best use of resources.
(iv) Adaption to Change: The process of organizing allows business enterprises to
accommodate changes in the business environment. It allows provides much

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 needed stability to the enterprises, as it can then continue to survive and grow in
spite of changes.
(v) Effective Administration: Organizing provides a clear description of jobs and
related duties. This helps to avoid confusion and duplication. Management of an
enterprise becomes easy and they bring effectiveness in administration.
(vi) Development of Personnel: Organizing stimulates creativity amongst the
managers. Effective delegation allows the managers to reduce their workload by
assigning routine jobs to their subordinates. The reduction in workload is not just
necessary because of limited capacity of an individual but allows the manager to
develop new methods and ways of performing task.
(vii) Expansion and Growth: It allows the business enterprises to add more job
positions, departments and even diversifying their product lines. New
geographical territories can be added to current areas of operation and this will
help to increase customer base, sales and profit.

4) Organizing Structure:
It can be defined as the framework within which managerial and operating task
are performed. It specifies the relationship between people, work and resources, It
allows correlation and coordination among human, physical and financial resources
and this enables a business enterprise to achieve desired goals. The Span of
management to a large extent gives shape to the organization structure. Span of
management refers to the no. of subordinates that can be effectively managed by
superior. This determines the level of management in the structure.
For example - sunita opened her own travel Agency, sometimes back. She assigns
her work to her three employees in the following manner. Neha you are in charge of
Airplane, train and bus reservation. Karan you will take care of accommodation,
booking, Sahil you will keep track of online queries and credit card payment. I want
regular report from three of you. Thus n a few sentences an organization structure has
been created specifying line of authority and areas of responsibility.

5) Types of Organization Structure:

The organizational structure can be classified into two categories which are as
follows:
(i) Functional structure:
(ii) Divisional structures:

(i) Functional Structures: Grouping of jobs of similar nature under functional and
organizing these major functions as separate department creates a functional
structure.

Organizational Chart of Functional structure:

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Advantages:
a) It leads to occupational specialization since emphasis is placed on specific
function.
b) It promotes control and coordination within a department because of similarity in
the task being performed.
c) It helps in increasing managerial and operation efficiency and this results in
increased profits.
d) It makes training of employees easier as the focus is only on a limited range of
skills.

Disadvantages:
a) It places less emphasis on overall enterprises objective, then objective pursued by
a functional head.
b) It may lead to problems in coordination as information has to be exchanged,
across functionally differentiated departments.
c) A conflict of interest may arise when the interest of two or more departments are
not compatible. For example sales department is insisting on customer friendly
design which may cause production difficulty.
Suitability: It is most suitable when the size of the organization is large, has diversified
activities, and operating on a high degree of specialization.
(ii) Divisional Structure: In a divisional structure the organization structure comprise
of separate business units or divisions. Each unit has a divisional manager
responsible for performance and who has the authority over the unit.

Organizational Chart of Divisional Structure:

Advantages:
a) Product Specialization helps in the development of varied skills in a divisional
head and this prepares him for higher positions.
b) Divisional heads are accountable for profit, as revenue and cost related to different
department can be easily identified being assigned to them. This provides a proper
basis for performance and measurement.
c) It promotes flexibility and initiative because each division functions as a
automatic unit, which leads to faster decision making.
d) It ensures expansion and growth as new divisions can be added without
interrupting the existing operation, by merely adding another divisional head and
staff for product line.

Disadvantages:
a) Conflicts may arise among various divisions with reference to allocation of funds
and further a particular division may seek to maximize its profits at the cost of
other divisions.
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 b) It may lead to increase in cost since there may be duplication of activities across
products.
c) An authorize manager may with the power he has been give can assert his
independence and ignore organizational interest.
Suitability: divisional Structure is suitable for those business enterprises where a large
variety of products are manufacture using different productive resources.

6) Difference between Functional and Divisional Structure:

Points of Functional structure Divisional Structure
Difference
1.Basis of This structure is formed on This structure is formed on the
Formation the basis of function. basis of product.
2.Accountability Difficult to make accountable Easy to fix the accountability
as departments are as departments work
interdependent. independently.
3.Economy It is economical It is not very economical
because all the resources are
required in different
department’s
4.Development of Less chances as manager More chances as managers
Managers becomes specialized in one perform multifunction’s.
function only.
5.Specialisaton This type of structure brings It brings product
functional specialization. specialization.
6.Co-ordiantion Compared to Divisional less Better co-ordination because
when company is producing all the activities related to one
company is producing more product are in one department
products only.
7.Autonmomy of Less autonomy of action More autonomy.
operations
8.Suitable It is suitable for all types of It is suitable for multiproduct
organizations. or diversified firms.

7) Formal and Informal organization:

(i) Formal Organization:
a) Concept: It refers to the organization structure which is deliberately designed by
management to accomplish a particular task. It specifies clearly the boundary of
authority and responsibility and a systematic coordination among various
activities to achieve organizational goal. The structure in formal organization can
be Functional or Divisional.
b) Features/characteristics of formal Organization:
(i) It specifies the relationships among various job positions and the nature of
their interrelationship. This clarifies who has to report to whom.
(ii) It is means to achieve the objective specified in the plans, as it lays down
rules and procedure essential for their achievement.
(iii) Efforts of various departments are coordinated, interlinked and integrated
through the formal organization.
(iv) It is deliberately designed by the top management to facilitate smooth
functional or organization.

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 (v) It places more emphasis on work to be performed than interpersonal
relationship among the employees.

c) Advantages:
(i) It is easier to fix responsibility, since mutual relationships are clearly
defined.
(ii) There is no ambiguity in the role that each member has to play as duties
are specified. This helps in avoiding duplication of work.
(iii) Unity of command is maintained through an established chain of
command.
(iv) It leads to effective accomplishment of goals by providing a framework of
operation.
(v) It provides stability to the organization.

d) Limitations:
(i) The formal communications may lead to procedural delays as the
established chain of command has to be followed which increases the time
taken for decision making.
(ii) Poor organization practice may not provide adequate recognition to
creative talent.
(iii) It is difficult to understand all human relationships in an enterprise a it
place more emphasis on structure and work.

(ii) INFORMAL ORGANISATION:

a) Concept: Interactions among people at work give rise to a network of social
relationships among employees as informal organization.

b) Features:
(i) An informal organization originates from within the formal organization as
a result of personal interaction among employees.
(ii) The standards of behavior evolve from group means norms rather than
officially laid down rules and regulations.
(iii) Independent channels of communications without specified direction of
flow of information are developed by group members.
(iv) It emerges spontaneously and is not deliberately created by the
management.
c) Advantages:
(i) Prescribed lines of communication are not allowed. Thus the informal
organization lead to faster spread of information as well as quick feedback.
(ii) It helps to fulfill the social needs of the people and allow them to find
likeminded people.
(iii) It contributes towards fulfillment of organizations objectives by
compensating for inadequacies in the formal organization. For example
employee’s reaction towards plans and policies can be tested through
informal network.

d) Disadvantages:
(i) Informal organization may become a disruptive force when it spread
rumors.
(ii) The management may not be able to implement the changes if the informal
organization opposes them.
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 (iii) It pressurizes members to conform to group expectations.

e) Difference between formal and Informal organization:

Pints of Formal Informal
difference
1.Formation Formal organizational structure is Informal organization structure
formed deliberately in a planned gets created spontaneously
manner without any planning
2.Purpose The purpose of formal organization The purpose of informal structure
structure is to work systematically is to get psychological
and achieve the organizational goal satisfaction.
3.Behaviour of Under formal organization structure In informal organization structure
members the behavior of the employees is there is no control of the
decided by the managers management over the behavior of
members. But if the behavior of
informal group is bringing
negative results then the
management may interfere.
4.Structure Under formal organization there is In case of informal, there is no
well defined organizational well defined structure, no fixed
structure which decides the scalar superior or sub-ordinate and no
chain and defines superior- scalar chain.
subordinate relationship.
5.Communicati Under formal structure all the Under informal structure there is
on information passes through scalar no fixed path of passing of
chain and the managers prefer information. Information can
written channels for travel from any side, Mostly oral
communication. communication takes place.
6.Leadership In formal organization structure Under informal structure there is
there is direct relation between the no relationship between the
authority and leadership. The person authority and leadership. The
with highest authority is considered person with the lowest authority
as the leader, Generally the also can be a leader.
manager’s act as leaders.
7.Stability of The formal organization structure is Informal organization structure is
duration more stable and durable (lasts for a not very stable because employees
long period of time) because once can change their friendly and
the organization structure is made, it social group whenever they desire.
exists till survival of a organization.
8.Rule sand Under formal organization structure There are no rules or regulations
regulations the employees strictly have to for the members of informal
follow the rules and regulations and organization and if they are to
in case they are not following the following also otherwise no
rules and regulations there will be penalty.
penalty on them.
9.Inter The formal structure is an Informal structure depends upon
dependence independent structure which can formal organization structure.
exist systematically after the
organizing process is over
10.Flow of Authority flows from top to bottom Authority can flow in all the

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 authority directions.

8) DELEGATION:
a) Concept: It refers to downward transfer of authority from a superior to a
subordinate. It is a prerequisite to the efficient functioning of an organization
because it enables a manager to use his time on high priority activities.

b) Elements of Delegation:
(i) Authority: it refers to the right of an individual to command his subordinates
and to take action within the scope of his positions. The concept of authority
arises from established scalar chain which links various job positions and
levels of an organization. It also refers to the right to take decision inherent in
managerial position to tell people what to do and expect them to do it. The
extent of authority is highest at the top management levels and reduces
successively as we go down the corporate ladder. It must be noted that
authority is restricted by laws and the rules and regulations of the
organization, which limits its scope.
(ii) Responsibility: it is the obligation of a subordinate to properly perform the
assigned duty. Responsibility flows upwards. i.e. subordinate will always be
responsible for his superior for effective delegation the authority granted must
be commensurate with the assigned responsibility. If authority granted is more
than responsibility, it may lead to misuse of authority, and if responsibility
assigned is more than the authority it may make a person ineffective.
(iii) Accountability: Delegation of authority undoubtedly empowers an employee
to act for his superior, but the superior will still be accountable for outcome. It
implies being accountable for the final outcome.

c) Importance of Delegation:
(i) Effective management: by empowering the employee. The mangers are able
to function more efficiently as they get more time to concentrate on important
matters.
(ii) Employee development: as a result of delegation, employees get more
opportunities to utilize their talent and this may give rise to talent abilities
inherent in them. Thus delegation helps in making better future managers.
(iii) Motivation of employees: Responsibility of work builds the self esteem of an
employee and improves his confidence. He feels encourage and tries to
improve his performance further.
(iv) Facilitation of growth: delegation helps in expansion of organization by
providing a ready workforce to take up leading positions in new ventures.
(v) Basis of management hierarchy: Delegation of authority establishes superior
subordinate relationships which are the basis of hierarchy of management.
(vi) Better coordination: It helps in avoiding overlapping of duties and
duplication of efforts as it gives a clear picture of the work being done at
various levels. Such clarity in relationships helps in maintain effective
coordination.

9) Decentralization:
a) Concept: In many organizations top level plays an active role in taking all decision,
while there are others in which this power is given to even the lower levels of
management. Those organization in which decision making authority lies with the top

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 managers are termed as centralized organization, where as those in which such
authority is shared with lower levels are called as decentralized organization.
b) Importance of Decentralization:
(i) Develops initiative Among subordinates: Decentralization helps to promote
self reliance and confidence amongst the subordinates. This is because when
lower levels of management are given freedom to take their own decision they
learn to depend on their own judgment. It also keeps them in a state where in
they are constantly challenged, and have to develop situations for the various
problems they encounter.
(ii) Develops managerial Talent for the Future: Formal training plays an
important part in equipping subordinates with skills that help them, rise in the
organization but equally important is the experience gained by handling
assignments independently. Decentralization gives them a chance to prove
their abilities and creates a reservoir of qualified manpower that can be
considered to fill more challenging positions through promotions.
(iii) Quick Decision Making: Since decision is taken at levels which are nearest to
the point of actions and there is no requirement for approval from many levels,
the process is much faster. There are also less chances of information getting
distorted because it does not have to go through long channels.
(iv) Relief to Top Management: Decentralization leaves the top management
with more time which they can devote to important policy decision rather than
occupying their time with both policy as well as operation decisions.
(v) Facilitates Growth: Decentralization allows functioning in a manner best
suited to their department and fosters a sense of competition amongst the
department. Consequently with each department doing its best in a bid to
outdo other, the productivity level increases and the organization is able to
generate more returns which can be used for expansion purpose.
(vi) Better Control: In decentralization one of the challenges is the accountability
of performance. In repose to this challenge better control system are being
evolved such as the balance score card and the management information
system. Decentralization compels the management to innovative performance
measurement system.

Difference between Delegation and Decentralization:

Point of Delegation Decentralization

difference
1.Scope/parties Delegation is limited in scope Decentralization is large or wide in
involved because in delegation only two scope because n decentralization
parties are involved. It is confined employees working at different
to manager and his immediate levels are involved which means
subordinates. almost all the employees in the
organization are involved in the
process of decentralization, It means
pushing down the authority at every
managerial level.
2.Significane Delegation is important function Decentralization is more significant
but it is the routine function of the because it is a onetime decision and
managers. Almost every day it is a policy matter. The top level
managers share their authority and executives decide whether to follow
responsibilities with the sub- the decentralized or centralized
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 ordinates. policy. And once the decision is
taken it is very difficult to change
the decision.
3.Freedom of In the process of delegation the In decentralization there is more
action managers pass the authority and the freedom of action because once the
responsibilities to the subordinates authority is distributed
and after that also there is constant systematically there will be periodic
and continuous supervision by the appraisal and not the continuous
managers to keep a check how supervision.
subordinates are performing their
activities.
4.Essential Delegation is essential part of every Decentralization is significant but it
organization. No organization is not essential for every
whether small or large can work organization. The organizations
without delegation as managers which are small in size and having
always share their authority and systematic delegation can work even
responsibilities with their with centralized policy also. The
subordinates. They do not perform organization can run smoothly
all the activities themselves. So without decentralization also. It
organization cannot work even for a becomes essential in large
single day without delegation. organization.
5.Responibility It is the responsibility of every It is the responsibility of top level
manager. manager.
6.Nature Delegation is comp8ulsory act Decentralization is an optional
because no individual can perform policy.
all the tasks on his own.
7.Purpose To reduce the burden of manager. To increase the role of subordinates
and giving them more autonomy.
8.Grant of Authority is granted by immediate Authority is granted by top level.
Authority superior

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 Application and Hots Based Questions with Answers
1. The cartoon shows that one of the prerequisites to the efficient functioning of an
organization is missing. Name it.
Ans. Delegation of Authority: No delegation leads to delay in decision-making.

2. Rishu, Ashu and Ravi have decided to start a business of manufacturing toys.
They identified the following main activities which they have to perform:
(i) Purchase of raw materials, (ii) Purchase of machinery, (iii) Production of toys,
(iv) Arrangement of finance, (v) Sale of toys, (vi) Identifying the areas where
they can sell their toys (vii) Selection of employees
In order to facilitate the work they thought that four managers should be
appointed to look after (a) Production, (b) Finance, (c) Marketing, (d) Personnel.
A. Identify the function of management involved in the above-mentioned para.
B. Quote the lines from the above Para which help you in identifying this
function.
C. State the steps followed in the process of this function of management
Ans. A. Organizing
B. They identified the following main activities which they have to perform.
'In order to facilitate the work they thought that four managers should be
appointed to look after (a) Production, (b) Finance, (c) Marketing, (d) Personnel.
C. Steps in Organizing Process:
(i) Identifying and dividing the work into manageable activities.
(ii) Departmentalization/Departmentation where activities of a similar nature
are grouped together.
(iii) Assignment of duties to job positions.
(iv) Establishing reporting relationships so that each individual knows from
whom he has to take orders and to whom he is accountable.

3. A truck manufacturing company has its registered office in Delhi,

manufacturing unit at Gurgaon and marketing department is located at
Faridabad. The company manufactures different types of trucks. Which type of
organizational structure should it adopt to achieve its target? Give reasons. State
any f our advantages of this organization structure.
Ans. The company should adopt 'Functional Structure' since it manufactures trucks only (a
single product). The company has separate departments like manufacturing unit
(Gurgaon), marketing and sales department (Faridabad), etc. That means, the size of
the organization is large, it has diversified activities and operations require a high
degree of specialization. So, it should adopt functional structure.
By adopting functional structure, the company gets the following advantages:
(i) Each functional area of business (production, marketing, finance and
personnel) will be controlled by an expert/ specialist. It will lead to
specialisation.
(ii) It will lead to minimum duplication of efforts. This results in lower costs.
(iii) It helps in increasing managerial and operational efficiency and these results
in increased profit.
(iv) It ensures that different functions (production, marketing, finance, etc.) get due
attention.

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4. Tanushree runs a factory wherein she manufactures shoes. The business has
been doing well and she intends to expand by diversifying into leather bags as
well as western formal wear, thereby making her company a complete provider
of corporate wear. This will enable her to market her business unit as the one
shop for working women. Which type of structure would you recommend for the
expanded organization and why? State any four advantages of this organization
structure.
Ans. 'Divisional structure1 is suitable for the expanded business since it will produce
multiple products —shoes, leather bags and western formal wear. That means, the
organization will grow; and will need to add more employees; create more divisions;
and introduce new levels of management.
By adopting divisional structure, the company will get the following advantages:
(i) It will facilitate growth and expansion. Now the business of Tanushree will
have multiple division’s shoes, bags and formal wear. Within each division,
functions like production, marketing, finance, purchase, etc. will be performed
to achieve the objectives of the business.
(ii) Greater accountability will be possible because the divisional managers can be
held separately accountable for their respective division's profits, costs, etc.
(iii) Product specialization: A divisional head gains experience in all functions
related to a particular product.
(iv) Flexibility and initiative: It promotes flexibility and initiative because each
division functions as an autonomous unit which leads to faster decision-
making.

5. The directors of Gunjan Ltd., an organization manufacturing colour televisions,

have asked their production manager to achieve a target production of 150
televisions per day. The production manager has asked his foreman to achieve
this target, but he did not give him the authority for the requisition of tools and
materials from the stores department. The foreman could not achieve the desired
target. Can the directors blame the production manager, and can the production
manager blame his foreman for not achieving the target? Explain in brief the
relevant principles relating to this situation in support of your answer.
Ans. Yes, the directors can blame the production manager, although he had delegated the
task to his foreman because accountability cannot be delegated by a manager. The
production manager shall still be accountable for the performance of the assigned
tasks. (Principle of absoluteness of accountability)
However, the production manager cannot blame his foreman for not achieving the
target because he did not give him the authority for the requisition of tools and
materials from the stores department. Responsibility without authority will make the
subordinate ineffective, i.e., he will not be able to perform his duties well. (Principle
of authority and responsibility)

6. A company manufacturing sewing machines set up in 1946 follows formal

organization structure. It is facing a lot of problems such as delay in decision-
making. As a result, it is not able to adapt to the changing business environment.
The workforce is also not motivated, there is problem of red tapism and
employees' turnover is very high.
(i) Advise the company with regard to change it should bring about in its
organization structure to overcome the problems faced by it.
(ii) Give reasons in terms of benefits it will derive from the changes suggested
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 by you.
(iii) In which sector can the company diversify keeping in mind the declining
market for the product the company is manufacturing?
Ans. (i) The company should give due importance to informal organizational structure
along with the formal structure. It enhances their job satisfaction. This will overcome
the problem of lack of motivation. Informal groups can also provide useful
communication channels, which may help to transmit useful information quickly.
(ii) Benefits of informal organizational structure:
(a) Faster spread of information: Fixed lines of communication are not followed.
Thus, the informal organization leads to faster spread of information as well as
quick feedback.
(b) Fulfillment of social needs: It helps to fulfill the social needs of the members.
This enhances their job satisfaction since it gives them a sense of
belongingness in the organization.
(c) Fills inadequacies of formal structure: It contributes towards fulfilment of
organizational objectives by compensating for inadequacies in the formal
organization. For example, employees' reactions towards plans and policies
can be tested through the informal network.
(iii) The company can diversify its activities by introducing embroidery machines. It
can also design special machines keeping in mind the requirement of ready-made
garment manufacturers, etc. By diversifying in the same field, it can get maximum
utilization of existing resources.

7. A company manufacturing consumer goods has grown in size. It was a market

leader but with changes in economic environment and with the entry of MNCs
its market share is declining. The company was following a centralised business
model as even the minor decisions were in the hands of top level. Before 1991 this
model was suitable for company but now the company is under pressure to
reform.
What changes should the company bring about in order to retain its market
share? Give its three points of importance.
Ans. The top management of the company must share decision-making authority with
middle level and supervisory level also. It should introduce the concept of
'Decentralization' instead of following complete centralization. In the current scenario
of business environment, there is need for fast action and quick decision-making
which is possible only with decentralization. Importance of decentralization:
(i) Relief to top management: In a decentralized organization, top level managers
are not burdened by common day-to-day problems. Therefore, they have
enough time to plan ahead, develop new strategies and concentrate on
coordination and control.
(ii) Develops initiative amongst subordinates: Decentralization helps to promote
self- reliance and confidence amongst the subordinates. This is because when
lower managerial levels are given freedom to take their own decisions, they
learn to depend on their own judgment.
(iii) Quick decision-making: In a decentralized organization, decision-making is
not restricted in few hands only but decision-making power is entrusted to all
the managers who perform the activities. This facilitates quick decision-
making.

8. National Vritech Ltd. has grown in size. It was a market leader but with changes
in business environment and with the entry of MNCs its market share is
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 declining. To cope up with the situation CEO starts delegating some of his
authority to the General Manager, who also felt himself overburdened and with
the approval of CEO disperses some of his authority to various levels throughout
the organization. Identify the concept of management discussed above.
Ans. Decentralization

9. A company is manufacturing washing machines. There is a well defined system

of jobs with a clear and definite authority, responsibility and accountability in
the company. But people are not allowed to interact beyond their officially
defined roles. As a result the company is not able to adapt to the changing
business environment. The workforce is also not motivated due to lack of social
interaction. The company is facing problems of procedural delays and
inadequate recognition to creative talents.
(i) Suggest how the organization can overcome the problems faced by it.
(ii) Give any two benefits it will derive from your suggestion.
Ans. (i) Introduction of informal organization
(ii) Two benefits the firm will derive are:
(a) Faster spread of communication and quick feedback.
(b) It helps to fulfill the social needs of the members and enhances their job
satisfaction.

10. The Employees of Manik Ltd., a software company, have formed a dramatic
group for their recreation. Name the type of organization so formed and state its
four features.
Ans. The type of organization formed by employees of Manik Ltd. is informal organization
Features of Informal Organisation:
(a) An informal organization originates from within the formal organization as a
result of personal interaction among employees.
(b) The standards of behaviour evolve from group norms rather than officially laid
down rules.
(c) Independent channels of communication without specified direction of flow of
information are developed by group members.
(d) It emerges spontaneously and is not deliberately created by the management

11. Which function of management includes the designing of roles to be filled by

suitably skilled people?
Ans. Organising

12. A Steel Manufacturing Company has the following main jobs:

(i) Manufacturing, (ii) Finance, (iii) Marketing, (iv) Personnel and (v) Research
and development.
a. Which type of organizational structure will you choose for this type of a
company and why?
b. State any six advantages that this structure offers to an organization.
Ans. (a) Functional structure; because the company has diversified activities and operations
require a high degree of specialisation.
(b) Advantages of functional structure:
(i) Functional structure leads to occupational specialisation.
(ii) It promotes control and coordination within the department.
(iii)It helps in increasing managerial and operational efficiency and this result in
an increase in profits.
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 (iv) It leads to minimum duplication of effort.
(v) It makes training of employees easier.
(vi) It ensures that different functions get due attention.

13. Ravi runs a locks manufacturing factory. He manufactures locks used in houses.
He wants to expand his business. For this, he wants to enter into the
manufacturing of locks for cars and motorcycles.
Which type of organizational structure will he choose for his factory and why
Ans. Functional structure; because the company produces a single product (locks used in
houses) or a small number of related products (locks for cars and motorcycles).

14. Neeta Ltd. is engaged in the production of marble articles. The members of the
organization have friendly relationships among them. What type of organization
is Neeta Ltd.?
Ans. Informal organization

15. Identify and state the type of organization structure that should be followed by
the company in each case:
(i) Vrinda Ltd. grows, so it needs to add more employees, create new
departments and introduce new levels of management.
(ii) Shreya Ltd. is a large organization having diversified activities and
operations requires a high degree of specialization.
Ans. (i) Divisional structure
It is an organization structure comprising of separate business units or divisions,
created on a certain basis, e.g. product lines.
(ii) Functional structure
It is an organization structure formed by grouping of jobs of similar nature under
functions and organizing these functions as separate departments like production,
finance, marketing, etc.

16. It is defined as the framework within which managerial and operating tasks are
performed. Identify it. State when the need for it is felt by an enterprise. Also
state its any one benefit to the organization.
Ans. Organization structure
The need for an organization structure is felt by an enterprise when it grows in size or
complexity.
An effective organization structure allows correlation and coordination among human,
physical and financial resources and this enables a business enterprise to accomplish
desired goals.

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 Chapter –6
Staffing
1) Concept: it is that part of the process of management which is concerned with obtaining,
utilizing and maintaining a satisfactory and satisfied work force. Or in simple terms
staffing is putting people to jobs.
2) Importance of Staffing:
(i) It helps in discovering and obtaining competent personnel for various jobs.
(ii) Makes for higher performance, by putting right person on the right job.
(iii) Ensures the continuous survival and growth of the enterprise through the
succession planning for managers.
(iv) Helps to ensure optimum utilization of resources.
(v) Improves job satisfaction and morale of employees through objective assessment
and fair rewarding of their contribution.
3) Staffing process:

(i) Estimating Man Power Requirements: Understanding manpower requirement is

not merely a matter of knowing how many persons we need, but also of what type.
Operationally understanding the manpower requirements would necessitate
workload analysis on the one hand and workforce analysis on the other. Workload
analysis would enable an assessment of the number and types of human resources,
necessary for the performance of various jobs and accomplishment of organization
objectives. Workforce analysis would reveal the number and types available.
(ii) Recruitment: It is defined as the process of searching for prospective employees and
stimulating them to apply for jobs in the organization. The essential objective is to
create a pool of prospective job candidates.
(iii) Selection: It is the process of choosing from among the pool of the prospective job
candidate developed at the stage of Recruitment. Even in the case of highly
specialized jobs where the choice of space is narrow, the rigour of selection process
serves two important purposes.
(a) It ensures that the organization gets the best among available and
(b) It enhances the self esteem and prestige of those selected and conveys them the
seriousness with which the things are done in the organization.
(iv) Placement and Orientation: Orientation implies introducing the selected employees
to other employees and familiarizing him with the rules and policies of the
organization. Whereas placement refers to the employee occupying the position or
part for which the person has been selected.
(v) Training and Development: what people seek is not simply a job but a carrier. The
best way to provide such an opportunity is to facilitate employee learning.
Organizations have either in-house training or have forged alliances with training
centers or with training institutes to ensure continuing learning of their employees.
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 Three More Steps for Firms without Separate HRD.

(vi) Performance Appraisal: While performing the job the employees are supervised
and observed by their superiors. These superiors prepare the performance appraisal
reports for all the employees, on the basis of which compensation is fixed and are
sent for training in future.
(vii) Compensation: The HRD department helps in fixing the compensation by keeping
in mind the government regulations, financial capacity of the company and the
compensation offered by the competitors. It also takes into account the increments
and other incentives which are offered to the employees for extra contribution.
(viii) Promotion and Carrier Planning: The carrier planning includes promotion,
transfer and demotion of employees based on their performance appraisal report.

4) ASPECTS OF STAFFING:
(i) Recruitment:
a) Concept: It has been defined as the process of searching for prospective
employees and stimulating them to apply for jobs in the organization.
b) Sources of Recruitment: the requisite position may be filled up from within
the organization or from outside. Thus there are two sources of recruitment
internal and external.
A) INTERNAL SOURCES:
1) Transfers: It is a good source of filling the vacancies with employees from over
staffed department. It is practically a horizontal movement of employees.
2) Promotions: the practice of filling higher jobs by promoting employees from
lower jobs is called as promotion. It leads to shifting of employees to a higher
position carrying higher responsibilities, facilitate status and pay. Promotion is
vertically shifting of employees. This practice helps to improve the motivation,
loyalty and satisfaction level of employees.
Advantages of Internal sources:
1) A promotion of higher level may lead to chain of promotion at lower level in the
organization. This motivates the employees to improve their performance
2) Internal recruitment also simplifies the process of selection and placement.
3) People recruited from within the organization do not need training.
4) Transfer means shifting from surplus to shortage.
5) Filling of jobs internally is cheaper as compare to getting candidates from external
sources.
Disadvantages of Internal sources:
1) When vacancies are filled from internal promotions, the scope of induction of
fresh talent is reduced.
2) The employees may become lethargic if they are sure of time bound, promotion.
3) A new enterprises cannot use internal source of recruitment.
4) The spirit of competition among employees may be hampered.
5) Frequent transfers of employees may often reduce the productivity of the
organization.

B) External sources:
1) Direct Recruitment: Normally the casual vacancies or unskilled or semi skilled
vacancies are done under this kind of recruitment by placing a notice specifying
the jobs available.

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 2) Casual Callers: many reputed business organizations keeps a database of
unsolicited applicants in their office. A list of such job seekers can be prepared
and can be screened to fill the vacancies as they arise.
3) Advertisement: Advertisement in newspaper or trade and professional journals is
generally used when a wider choice is required.
4) Employment Exchange: employment exchange run by the government are
regarded as good source of recruitment for unskilled and skilled operation jobs.
5) Placement agencies and management consultant: these agencies compile bio
data of a large no. of candidates and recommend suitable names to their clients
and also charge a fee for their services.
6) Campus Recruitment: Many big organizations maintain to close look with the
universities, vocational schools and management institute to recruit qualified
personnel for various jobs.
7) Others: recommendations of employees, labour contractors, ad on television, web
publishing etc.

Advantages of External sources:

(i) Qualified Personnel: management can attract qualified and trained people to
apply for vacancies /jobs in the organization.
(ii) Wider Choice: management gets wider choice and new blood in the
organization.
(iii) Competitive spirit: if a company taps external sources the existing staff will
have to compete with outsiders.
(iv) Fresh Talent: it wider choice and new blood in the organization.

Disadvantages of External sources:

(i) Lengthy process: it takes long time to select a candidate.
(ii) Dissatisfaction among the existing staff.
(iii) Costly process: it is very costly to recruit staff from external sources.

Difference between Internal and external Recruitment:

Point of Internal Recruitment External Recruitment
difference
1.meaning Internal recruitment means External recruitment means making
making use of existing staff to use of new personnel or outsiders to
fill up the vacant job position in full up the vacant job positions in
the organization. the organization.
2.Time It is less time-consuming. It is more time-confusing.
3.Economy This process is more economical This process is costly as vacancies
as it does not involve any cost of have to be notified in newspapers,
searching external sources. magazines etc.
4.Quality There is limited choice so better It provides a wider choice and the
quality may not be assured. best quality is assumed.
5.Morale of This method boosts up the This method brings down the
the employees morale of the employees morale of the employees as they do
because existing staff gets not get chance of growth and
chance of promotion. development.

(ii) Selection: It is the process of identifying and choosing the best prospective
candidate for a job.

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 Process of selection:
a) Preliminary screening: under this manager eliminate unqualified or unfit
job seekers based on the information supplied in the application form.
b) Selection test: An employment test is a mechanism that attempts to
measure the level of intelligence quotient of an individual. There are many
important test which are conducted such as :
(i) Intelligence test: It measures the level of intelligence or the
intelligence quotient (IQ) of the candidate.
(ii) Aptitude test: to test the potential to learn new skill.
(iii) Personality test: to test person emotions, reactions etc.
(iv) Trade test: to measure the existing skill of an individual.
(v) Interest test: to test the involvement in job.
c) Employment Interview: It is conducted to evaluate the applicant
suitability for the job.
d) Reference and Background checks: many employers request Name,
Address and Telephone numbers of references for the purpose of verifying
information and gaining additional information about the applicant.
e) Selection Decision: The final decision has to be made from among the
candidates who pass the test, interviews and references checks and here the
views of the concerned manager will be considered as binding for final
selection.
f) Medical Examination: After the selection decision and before the job is
offer is made the candidate is required to undergo a medical test.
g) Job offer: The next stop in selection process is job offer to those
applicants who have passed all the previous hurdles. Job offer is made
through letter of appointment confirming his acceptance. Such a letter
must contain a date by which the appointee must report on duty.
h) Contract of Employment: Basic information that should be included in
written contract of employment will vary according to the level of jobs but
the following check list sets out the typical headings. Jobs Title, duties
Responsibilities, date, when continuous employment starts and the basis
for calculating services, rates of pay, allowances, hour of work,
termination of employment, etc.

5) Training and Development:

a) Concept:
(i) Training: It is the process by which the aptitude, skills and abilities of
employees to perform specific jobs increased.
(ii) Development: It refers to learning opportunities and designed to help
employees grow.
b) Advantages of Training and Development to the organization.
(i) It is systematic learning and is always better than hit and trial methods.
(ii)It enhances employee productivity both in terms of quantity and quality leading to
higher profits.
(iii)Training equips the future manager who can take over in case of emergency.
(iv) Training increases employees moral and reduces absenteeism and employee
turnover.

c) Advantages to the employee:

(i) Improved skill and knowledge due to training lead to better carrier of the
individual.
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 (ii) Increased performance by the individual help him to earn more.
(iii) Training makes it more efficient to handle machines.
(iv) Training increases the satisfaction and morale of employees.

d) Difference between Training and Development:

Point of Difference Training Development
1.Concept/Depth of Training is concerned with Development is concerned in
knowledge teaching technical skill only. teaching technical, human
and conceptual skill.
2.Suitability Training is more suitable for Development is more suitable
technical staff for managerial staff.
3.Nature Training concentrates on Development concentrates on
developing the skill already development of hidden
possessed by the employees qualities of the employees
4.Mathods used In training on the job In development off the job
methods of training are methods of training are
preferred. preferred.
5.Focus/Purpose Training focuses on present Development focuses on
requirements of the present as well as future
organization. requirements of the
organization.
6.Time It is short term process. It is a long term process
7.Initiative The boss/superior takes The individual takes initiative
imitative for imparting himself for his growth and
training to his subordinates. development.

e) Training methods:
The important methods of training are broadly categorized into two groups.
(i) On-the-Job Training Methods (ii) Off-the-Job Training Methods.

On-The-Job Training Methods

On-the-Job training methods refer to the methods that are applied to the workplace,
while the employee is actually working. This method involves ‘learning while doing’.
For example. Apprenticeship Training, Internship Training, etc.
Off-The-Job Training Methods
Off-the-Job methods refer to the methods in which training is provided to the
employee away from his job. This method involves ‘learning before doing’. The
trainee is separated from the job and his attention is focused on learning the material
related to his future job performance. For example, Vestibule Training.
1) Apprenticeship Programmes: It put trainee under the guidance of master
worker. These are designed to acquire a higher level of skill. People seeking to
enter skilled traits to become, for example, plumbers, electricians, are often
require to undergo apprenticeship training.
2) Internship Training: It is joint Programme of training in which educational
institutions and business firm cooperate selected candidates carry on regular
studies for the prescribed period. They also work in some factory or office to
acquire practical knowledge and skill. For example. Engineering students are
sent to business enterprises and medical students are sent to big hospitals to get
practical knowledge.

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 3) Vestibule Training: Employees learn their jobs on the equipment they will be
using, but the training is conducted away from the actual work floor.
4) Induction Training (or Orientation Training): Induction training is a type of
training given to help a new employee in settling down quickly into the job by
becoming familiar with the people, the surroundings, the job and the business.

Application and Hots Based Questions with Answers

1. Zenith Ltd. is a highly reputed company and many people wanted to join this
company. The employees of this organization are very happy and they discussed
how they came in contact with this organization.
Aman said that he was introduced by the present Sales manager, Mr. John.
Benu said that he had applied through the newspaper and was appointed as H.R
Manager.
Vaibhav said that he was neither related to any of the employee of the
organization nor there was any advertisement in the newspaper even then he was
directly called from IIM Ahmedabad from where he was about to complete his
MBA.
(a) The above discussion is indicating an important function of management.
Name the function of management
(b) The management function identified in part (a) follows a particular process.
Explain the step of this process which is being discussed in the above para.
Ans. (a) Staffing
(b) Recruitment —It is defined as the process of researching for prospective
employees and stimulating them to apply for jobs in the organization.

2. Blue Heavens Ltd. purchased a new hi-tech machine from Germany for
manufacturing high quality auto components in a cost effective manner. But
during the production process, the manager observed that the quality of
production was not as per standard. On investigation it was found that there was
lack of knowledge amongst the employees of using these hi-tech machines. So,
frequent visit of engineers was required from Germany. This resulted in high
overhead charges.
Suggest what can be done to develop the skills and abilities of employees for
producing high quality products by using these hi-tech machines. Also state how
the employees or the organization will benefit from your suggestion.
Ans. Training of employees
Benefits to the organization or employees:
(i) Avoid wastage of effort & money
(ii) Enhances employee productivity
(iii) Equips future managers
(iv) Increases employee morale & reduces absenteeism
(v) Obtaining effective response to fast changing environment
(vi) Improved skills and knowledge of the individual
(vii) Increased performance by the individual

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3. Ms. Neeta recently completed her Post-Graduate Diploma in Human Resource
Management. A few months from now a large steel manufacturing company
appointed her as its Human Resource Manager. As of now, the company employs
800 persons and has an expansion plan in hand which may require another 200
persons for various types of additional requirements. Ms. Neeta has been given
complete charge of the company's Human Resource Department.
(a) State any two functions she must be performing.
(b) What problems do you foresee in her job? What steps is she going to take to
perform her job efficiently?
Ans. (a) Ms. Neeta is must be performing these functions as a HR manager:
(i) Analysing jobs and collecting information about jobs to prepare job
descriptions.
(ii) Developing compensation and incentive plans.
(b) Since the company has an expansion plan requiring 200 more persons for various
types of additional requirements, Ms. Neeta will have to recruit and select those
persons from outside the organization. For this she will have to invite candidates to
apply for the jobs through external sources of recruitment such as advertisements,
placement agencies, recommendations of employees, etc.
Then, Ms. Neeta will have to arrange for various types of training (e.g. apprenticeship
training, vestibule training, etc.) of the employees to make them efficient.
She will have to handle workers' grievances and complaints and maintain labour
relations.
She will have to provide for social security and welfare of employees.

4 Name the methods of recruitment in the following cases:

(i) A company gets applications on and off even without declaring any
vacancy. However, as and when the vacancy arises, the company makes
use of such applications.
(ii) Casual vacancies of unskilled or semi-skilled jobs when there is a rush of
order or when some permanent workers are absent.
(iii) Recruitment by which most of the senior positions of the industry as well
as commerce are filled. 3 marks
Ans. (i) Casual callers (ii) Direct recruitment (fit) Advertisement

5 Which source of external recruitment is ideal for a manufacturing organization?

Why?
Ans. Advertisement, because it has wider choice to recruit and select most of the senior
position of industry and commerce. More information about the organization and job
can be given in the advertisement.

6 Name the methods of training:

(i) The trainee learns under the guidance of a master worker.
(ii) Trainees learn on the equipments they will be using, but training is
conducted away from the actual work floor.
(iii) Trainees work in some factory or office to acquire practical knowledge
and skills along with regular studies.
Ans. (i) Apprenticeship training (ii) Vestibule training (iii) Internship training

7 A company is manufacturing paper plates and bowls. It produces 100000 plates

and bowls each day. Due to local festival it got an urgent order of extra 50000
plates and bowls per day.
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 (i) Name the source of recruitment of labour the company needs to fulfil its
order.
(ii) Explain any two merits of this method. 3 marks
Ans. (i) Direct recruitment of casual or 'Badli1 workers (External source of recruitment).
(ii) Merits:
(a) Wider choice: A notice can be placed on the noticeboard of the enterprise
specifying the details of the jobs available. A large number of job-seekers
assemble outside the premises of the organization. Selection is done on the spot.
(b) Competitive spirit: The existing workers will have to compete with the outsiders.

8 Your school has some vacancies of teachers. The eligible staff has been promoted
to half of the posts. Suggest any three ways through which right type of people
may be invited to fill up rest of the vacancies.
Ans. The following external sources of recruitment will suit the purpose:
(a) Advertisements
(b) Employment Exchange
(c) Recommendations of existing staff

9 What kind of tests will primarily be used while selecting these people in an
organization? Give reasons.
(i) An interior decorator
(ii) A computer operator
(iii) A public dealing officer
(iv) A school teacher
Ans. The type of tests primarily to be used for selection are the following:
(i) Interest tests as these tests are used to know the pattern of interest or
involvement of a person.
(ii) Trade tests as these tests measure the existing skills of the individuals.
(iii) Personality tests as these provide clues to a person's emotions, reactions,
maturity and value system, etc.
(iv) Intelligence tests as these tests are indicators of a person's learning ability or
ability to make decisions and judgments.

10 Ramesh is working under the guidance of Harish, a carpenter for the last three
years to learn the different skills of this j ob. Name the method of training
Ramesh is undergoing. 1 mark
Ans. Apprenticeship training

11 The workers of a factory remain idle because of lack of knowledge of hi-tech

machines. Frequent visit of engineer is made which causes high overhead
charges. Suggest the method of training that should be given to the employees.
Explain.
Ans. Workers are needed to be given appropriate training to learn the use of hi-tech and
sophisticated machines. The suitable method of training in this case is vestibule
training. It is an off-the-job method of training in which employees learn their jobs on
the equipment they will be using, but the training is conducted away from the actual
work floor. Actual work environments are created in a classroom and employees use
the same materials, files and equipment.

12 The quality of production is not as per standard. On investigation it was

observed that most of the workers were not fully aware of proper operation of
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 the machinery. What could be the way to improve the accuracy?
Ans. Workers are needed to be given appropriate training to make them learn use of
machinery and most suitable method in this case is apprenticeship training. It is an on-
the-job method of training. The workers seeking to enter skilled traits, e.g., to become
plumbers, electricians or iron workers are required to undergo apprenticeship training
for a prescribed time period (which may vary from 2 to 5 years). Apprenticeship
training puts the apprentices (trainees) under the guidance of a master worker or an
experienced guide or trainer.

13 A company X Ltd. is setting up a new plant in India for manufacturing auto

components. India has highly competitive and cost-effective production base in
this sector. X Ltd. is planning to capture about 40% of the market share in India
and also export to the tune of at least $5 million in about 2 years of its planned
operations. To achieve these targets, it requires a highly trained and motivated
workforce. You have been retained by the company to advise it in this matter.
(i) Which sources of recruitment the company should rely upon?
(ii) Which methods of training should company initiate?
Ans. (i) The company should rely upon the following external sources of recruitment
because it is setting up a new plant and requiring large number of employees with
latest technology.
So, it needs to recruit technical, professional and managerial personnel.
• Advertisement
• Management consultants
• Campus recruitment.
(ii) The company should initiate following methods of training:
• Apprenticeship training
• Vestibule training
• Internship.

14 Identify and explain the following:

(i) It is a managerial decision-making process as to predict which job
applicants will be successful if hired.
(ii) It is the process of differentiating between applicants in order to identify
and hire those with a greater likelihood of success in job.
(iii) It is the process of choosing from among the candidates from within the
organization or from the outside, the most suitable person for the current
position or for the future position.
Ans. Selection is the process being referred to in all the three statements.
It is the process of identifying and choosing the best person out of a number of
prospective candidates for the job.
Selection process serves two important purposes:
(a) It ensures that the organization gets the best among the available.
(b) It enhances the self-esteem and prestige of those selected.

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 Chapter – 7
Directing
1) Concept of Directing: It refers to the process of instructing, guiding, counseling,
motivating and leading people in the organization to achieve its objectives. For
example like a hotel owner directing his employees to complete certain activities for
organizing a function, a teacher directing his student to complete an assignment etc.
2) Features:
a) Directing Initiates action: while other function prepare a setting for action,
directing initiates action in the org.
b) Directing takes place at every level of management: the directing takes place
wherever superior subordinate relation exist.
c) Directing is a continuous process: It takes place throughout the life of an
organization, irrespective of people occupying managerial positions.
d) Directing flows from top to bottom: Directing is first initiated at the top level
and flows to the bottom through organizational hierarchy.
3) Importance of Directing:
a) It helps to initiate action by people in the organization towards attainment of
desired objectives.
b) Directing integrates employees efforts in the organization in such a way that every
individual effort contribute to the organization performance.
c) Directing guide employees to fully realize their potential and capabilities by
motivating and providing effective leadership.
d) Directing facilitates introduction of needed changes in the org.
e) Effective directing helps to bring stability and balance in the organization, since it
fosters cooperation and commitments among the people.

4) Principle of Directing:(How to make direction effective)

a) Maximum individual contribution: directing techniques should bring out

untapped energies of employees for the efficiency of organization.

b) Harmony of objective: very often we find that individual good directing should
provide harmony by convincing that employee rewards and work efficiency are
complimentary to each other.

c) Unity of command: this principle insists that a person in the organization should
receive instruction from one superior only.

d) Appropriateness of direction techniques: Appropriate motivational and

leadership technique should be used while directing the people based on
subordinate need, capabilities, attitude and other situational variables.

e) Managerial communication: effective managerial communication across all the

levels in the organization makes direction effective.
f) Use of Informal organization: A manager should realize that informal groups or
organization exist within the every formal organization and should make use of it.

5) Elements of Directing:

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6) Supervision:
(i) Concept: It means overseeing what is being done by subordinates and giving
instructions to ensure optimum utilization of resources and achievements of
work target. Secondly supervision can be understood as the function to be
performed by supervisor, a managerial position in the organization hierarchy
at the operative level i.e. immediately above the worker.
(ii) Importance /Role of Supervisor:
a) Supervisor maintains day to day contact and maintains friendly relations
with workers.
b) Supervisor acts as a link between worker and management.
c) Supervisor plays a key role in maintaining group unity among workers
placed under his control.
d) It ensures performance of work according to the target set.
e) It provides good on the job training to the worker and employees.
f) It helps in boosting the morale of employees.
7) Motivation:
a) Concept: It means a process of stimulating people to action to accomplish desired
goals.
b) Features of Motivation:
(i) Motivation is an internal feeling, like the urge, drives, desires, aspiration
need of human being etc.
(ii) Motivation produces goal directed behavior.
(iii) Motivation can be positive or negative.
(iv) Motivation is a complex process as the individual are heterogeneous in
their expectations, perceptions and reaction.
c) Motivation process :( Explain the example of student who has not done his home
work.)

d) Importance of Motivation:
(i) It helps to improve the performance levels of employees as well as the
organization.
(ii) Motivation helps to change negative or indifferent attitude of employees to
positive attitude so as to achieve organizational goals.
(iii) Motivation helps to reduce employee turnover and thereby saves the cost
of new recruitment and training.
(iv) Motivational helps to reduce absenteeism in the organization.
(v) Motivation helps managers to introduce changes smoothly without much
resistance from people.

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e) Maslow’s Need Hierarchy theory of Motivation:

Maslow’s theory was based on human needs. He felt that within every human
being, there exists a hierarchy of five needs. These are:
1. Basic Physiological Needs: Physiological needs are basic for human
survival and include need for food, shelter, clothing and other basic
necessities of life.
• These needs form the foundation of hierarchy and tend to have the
highest strength in terms of motivation.
• Basic salary and other monetary incentive help to satisfy the
physiological needs.
2. Safety or Security Needs: These needs provide security and protection
from physical and emotional harm. Motivators like benefits of pension
plans, job safety of Security needs are concerned with two kinds of
securities: (i) Physical Security, i.e. security against death, injury, illness
and other bodily threats; and (ii) Financial Security, i.e. security of job and
congenial working conditions.
3. Social or Affiliation or Belonging Needs: these needs include the need for
affection, sense of belongingness, acceptance and friendship. For example,
employees often form informal groups to satisfy their social needs.
4. Esteem Needs: These needs include the need for self-respect, autonomy
status, recognition and attention. Generally, higher level employees are
motivated by such needs.
5. Self-Actualisation Needs: These are the needs of becoming what one
really wants to become. It is the highest level of need in the hierarchy.
These needs include growth, self-fulfillment and achievement of goals. For
example, Motivators like challenging jobs, opportunities for innovation,
etc. help to satisfy self-activators needs of an individual. People with strong
self-actualization needs do not wait for things to happen; they in fact, make
things happen.
It is based on the following assumption:
(i) People behavior is based on their needs; satisfaction of such needs
influence their behavior.
(ii) People needs are in hierarchal order starting from basic needs to other
higher level needs.
(iii) A satisfied need can no longer motivate a person; only next higher level
need can motivate him.

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 (iv) A person moves to the next higher level of hierarchy only when the lower
need is satisfied.
f) Tools for motivation:
A) Financial Incentives:
(i) Pay and allowances: It includes basic, and other types of allowances
such as dearness allowances, house rent allowances etc. which are
linked to performance.
(ii) Productivity linked wages incentives: Several wage incentive plans
aims at linking payment of wages to increase in productivity at
individual or group level.
(iii) Bonus: It is an incentive offered over and above the wages and salary
to the employees.
(iv) Profit sharing: sometimes a share in the profit of organization is given
to employee to improve their performance and contribute to increase in
profits. (Give the example of working behavior of employees in some
restaurant.
(v) Co-partnership/Stock Option: In this case the employees are offered
company share at a set price which is lower than market price, in order
to retain good employees.(ESOS)
(vi) Retirement Benefits: Several retirement benefits such as pensions,
provident fund , gratuity etc. provides financial security to employees.
(vii) Perquisites: Many company gives perqs and fringe benefits such as
car allowances, medical aid etc. over and above the salary these
measure help to provide motivation to them.
B) Non Financial Incentive:
(i) Status: Psychological, social and esteem needs of an individual are
satisfied by giving status to employees like authority, responsibility,
rewards recognition, perquisites and prestige of job.
(ii) Organizational Climate: It indicates the characteristics which
describe an organization and distinguish one organization from the
other. Some of these characteristics are individual autonomy, reward
orientation, consideration to employees, risk taking etc. which helps in
developing better climate.
(iii) Career advancement Opportunity: Manager should provide
opportunity to employees to improve their skills and be promoted to
the higher level jobs. Application skill development programmed and
sound promotion policy will help employees to achieve promotions.
(iv) Job Enrichment: It is concerned with designing jobs that include
greater variety of work content, require higher level of knowledge and
skill. It give worker more autonomy and responsibility and provide the
opposition for personal growth and a meaningful work experience.
(v) Employee Recognition Programmes: Most people feel that they
should be recognized by others concerned. Like the following:
a) Congratulating the employee for good performance.
b) Displaying on the notice board or in the companies news letter
about the achievement of employee.
c) Installing award or certificate for best performance.
vi) Job Security: It provides a great motivation to the employees, as they
do not feel worried about different aspect and work with great
zeal.(pleasure)
vii) Others: Employee participation and employee empowerment, etc.
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 8) Leadership:
a) Concept: It is an activity of influencing people to strive willing fully for group
objectives.
b) Importance/Features:
(i) It influences the behavior of people and makes them to positively
contribute their energies for the benefit of the organization.
(ii) A leader provides needed confidence, support and encouragement and
thereby creates congenial environment.
(iii) Leader plays a key role in the introducing required changes in the
organization.
(iv) A leader handles the conflict effectively and does not allow adverse effect
resulting from the conflicts.
(v) Leader provides training to their subordinates.
c) Qualities of a Good leader:
(i) Physical Features: It is believed that good physical features attract
people. Health and endurance help a leader to work hard which inspires
others to work with same tempo.
(ii) Knowledge: A good leader should have required knowledge and
competence. Only such person can instruct subordinates correctly and
influence them.
(iii) Integrity: A leader should have courage and initiative. He should not wait
for opportunities come to his way, rather he should grab the opportunity.
(iv) Communication skill: a leader should have the capacity to clearly explain
his idea and make the people to understand his ideas.
(v) Motivational Skill: A leader should be an effective motivator. He should
understand the needs of the people and motivate them by satisfying their
needs.
(vi) Others: Self Confidence, Decisiveness, social skill etc.

Leadership Styles
Autocratic Leadership or Authoritative Leadership
Under this style, the leader centralizes all decision-making powers and exercises complete
control over his subordinates. An autocratic leader gives orders and insists that they are
obeyed. For example, If Mr. X distributes and delegates work to his staff as per his
discretion, then Mr. X is behaving as an autocratic leader.
Participative Leadership or Democratic Leadership
Under this style, the leader consults subordinates in the decision-making process and
encourages them to give suggestions in setting goals and implementing decisions.
• A democratic leader gives order only after consulting the group and works out the
policies with the acceptance of the group.
• For example, If Mr. X discusses the work with his staff members in order to
complete it within the scheduled time, then Mr. X is behaving as a democratic leader.

Free Rain Leadership or Laissez Faire Leadership

Under this style, the leader gives complete freedom to the subordinates in setting goals.
• Such a leader avoids use of power. He depends largely upon the group to establish its
own goals and work out its own problems.
• For example, if Mr. X keeps gives responsibility of setting goals and devising means
to achieve them to the group members, then Mr. X is behaving as a free rein leader.

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 Comparison Between Different Styles of Leadership
Basis Authoritative Style Democratic Style Laissez Faire Style
Decision Leader centralizes Leader consults Leader delegates
making decision making subordinates in the entire authority of
power decision making decision making to
subordinates.
Delegation of Little or no More delegation. Full delegation.
Authority delegation.
Degree of Close supervision. Moderate No supervision.
Supervision supervision.
Employees Low High Leader does not
Morale promote employees
morale.
Effectiveness This style may be This style is usually This style may or may
effective in short-run. effective in both not be effective.
short and long-run.
Positive or The leader makes use The leader makes use The leader neither
negative of negative approach of positive approach uses positive nor
approach (like penalties) to get (like rewards) to get negative methods.
work done. work done.
Suitability When there is little or When subordinates When subordinates
no time for group are competent and are so competent,
decision making or experienced to skilled and expert that
when subordinates participate in the they can take all
are incompetent and decision making decisions by
inexperienced. process under the themselves without
guidance of their any direction by the
leader. leader.

9) Communication:
(i) Concept: it is transfer of information from the sender to the receiver with the
information being understood by the receiver.
(ii) Elements of communication Process:
a) Sender: it means person who conveys his thoughts or ideas to the receiver.
It represents the source of communication.
b) Message: it is the content of ideas, feeling, suggestion, order etc. intended
to be communicated.
c) Encoding: it is the process of converting the message into communication
symbols, such as words, pictures, gestures etc.
d) Medial: it is the path through which encoded message is transmitted to
receiver. The channel may be in written form, face to face phone call,
internet etc.
e) Decoding: it is a process of converting the encoded symbols of the sender.
f) Receiver: the person who receives communication of the sender.
g) Feed back: It includes all those action of receiver indicating that he has
received and understand message of sender.
h) Noise: it means some obstruction or hindrance to communication. For
example
(i) Ambiguous symbols that leads to faulty encoding.
(ii) A poor telephone connection.

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 (iii) An inattentive receiver.
(iii) Importance of Communication:
a) Act as a basis of coordination: It provides coordination among departments,
activities and person in the organizations.
b) Helps in smooth working of an enterprise: Communication is basic to an
organization existence right from its birth through its continuing life. When
communication stops, organized activity ceases to exist. It is only communication
which makes smooth working of an enterprise possible.
c) Act as a basis of Decision making: only on the basis of communication of
relevant information one can take right decision.
d) Increase managerial efficiency: communication is essential for quick and
effective performance of managerial functions. The management conveys the goal
and targets, issues instructions, allocate job responsibilities and looks after the
performance of subordinates.
e) Promotes cooperation and industrial peace: the two way communication
promotes cooperation and mutual understanding between the management and
workers.
f) Establishes effective leadership: communication is the basis of leadership, and
effective communication helps to influence subordinates.
(iv) Formal and Informal Communication:
A) It flows through official channels designed in the organization chart. This
communication may takes place between a superior and subordinate, a
subordinate and superior or among same cadre, employees or managers. The
communication may be oral or written but generally recorded and filed in the
office.

It may be further classified as vertical and horizontal.

(i) Vertical communication: It flows vertically, i.e. upwards or

downwards through normal channels. Upward communication refer to
flow of communication from subordinate to superior, where as
downward communication indicates communication from a superior to
subordinate.
The examples of upward communication are
a) Application for grant of leave.
b) Submission of progress report.
c) Request for grants etc.
The examples of downward communication are:
a) Sending notice to employees to attend a meeting.
b) Ordering subordinates to complete an assigned work.
c) Passing on guidelines by top management to the subordinates etc.
(ii) Horizontal or lateral Communication: It takes place between one
division and another. For example a production manager may contact
marketing manager to discuss about schedule of product delivery,
product design, quality etc.

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Different types of communication network may operate in formal organization, some
of them are:

(i) Single Chain: This network exists between a supervisor and his subordinate.
Since many levels exist in the organization structure, communication flows
from every superior to his subordinate through single chain.
(ii) Wheel: in wheel network all subordinates under one superior communicate
through him only as he acts as a hub of wheel. The subordinates are not
allowed to talk among themselves.
(iii) Circular: In circular network the communication moves in a circle. Each
person can communicate moves in a circle. Each person can communicate
with his adjoining two person. In this network communication flow is slow.
(iv) Free Flow: In this network each person can communicate with others freely.
The flow of communication is fast in this network.
(v) Inverted V: In this network a subordinate is allowed to communicate with his
immediate superior as well as his superior’s superior. However in later case
only prescribed communication takes place.
B) Informal Communication: Communication takes place without the formal
lines of communication is said to be informal communication. This type of
communication is generally referred to as a grapevine network because it
spreads throughout the organization with its branches going out in all
direction, in utter disregard to the levels of authority. Some of these grape vine
networks are as follows.

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 (i) Single Strand Network: Each person communicates to each other in
sequence.
(ii) Gossip Network: each person communicates with all on selective basis.
(iii) Probability Network: The individual communicates randomly with other
on selective basis.
(iv) Cluster Network: The individual communicates with those whom he
trusts.

C) Barriers to Communication:(These are four types)

a) Semantic Barriers: is the branch of linguistic dealing with the meaning of

words and sentences. These are concerned with problems and obstructions
in the process of encoding and decoding of message into words or
impressions.
Some of these are as follows:
(i) Badly express message: sometimes intended meaning may not be
conveyed by a manager to his subordinates. These badly express
message may be on account of inadequate vocabulary, usage of
wrong words etc.
(ii) Symbols with different meaning: a word may have several
meanings. Receiver has to perceive one such meaning for the word
use by the communicator. For example:
a) What is the value of this ring?
b) I value our friendship.
c) What is the value of learning computer skills.
(iii) Faulty Translation: sometimes the communication originally
drafted in one language.(say English) need to be translated to the
language understandable to workers(say Hindi) if the translator is
not proficient with both the languages, mistakes may creep in
causing different meanings to the communications.
(iv) Unqualified assumptions: some communication may have certain
assumption which is subject to different interpretations. For
example a boss may instruct his subordinates “to take care of our
guest”. Boss may mean that subordinate should take care of
transport food communication, of the guest until he leaves the
place. The subordinate may interpret that guest should be taken to
hotel with care.
(v) Technical Jargon(language): It is usually found that specialist use
technical jargon while explaining to persons who are not specialist
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 in the concerned filed. Therefore they may not understand the
actual meaning of that words.
(vi) Body language and gestures decoding:
Every moment of body communicates some meaning. The body
movement and gestures of communicator so matters so much in
conveying the message, if there is no match between what is said
and what is expressed in body movements, communication may be
wrongly perceived.
b) Psychological Barriers:
(i) Premature evaluation: sometimes people evaluate the meaning of
message before the sender completes his message. Such premature
evaluation may be due to preconceived notions and prejudices
against the communication.
(ii) Lack of attention: the preoccupied mind of receiver and the
resultant, non listening of message act as a major psychological
barrier.
(iii) Loss of transmission and poor retention: when communication
passes through various levels successive transmission of the
message results in loss, or transmission of inaccurate information.
This is more so in case of oral communication. Usually people
cannot retain the information for long time if they are inattentive or
not interested.
(iv) Distrust : distrust between communicator and communicate acts as
a barrier, if the parties do not believe each other, they cannot
understand each other messages in its original sense.
c) Organizational Barriers: the factors related to organization structure,
authority, relationships, rules and regulations may sometimes acts as a
barrier to effective communication, some of these barriers are
(i) Organizational Policy: if the organization, policy, explicit of
implicit, is not supportive to free flow of communication, it may
hamper effectiveness of communication.
(ii) Rules and Regulations: Rigid rules and cumbersome procedure
may be a hurdle to communication through prescribed channel may
result in delays.
(iii) Status: Superior may create a psychological distance between him
and his subordinates to express their feelings freely.
(iv) Complexity in organization structure: In an organization where
there are no of managerial levels, communications get delayed and
destroyed as number of filtering points are more.
d) Personal Barriers:
(i) Fear of challenge to authority: if a superior perceives that a
particular communication may adversely affect his authority,
he/she may withhold or suppress such communication.
(ii) Lack of confidence of superior on his subordinates: if superior
does not have the confidence on the competency of their
subordinates, they may not seek their advice or opinions.
(iii) Unwillingness to communicate: sometimes, subordinates may not
be prepared to communicate with their superiors, if they perceive
that it may adversely affect their interest.

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 (iv) Lack of proper incentives: if there is no motivation or incentives
for communication, subordinates may not take initiative to
communicate.

D) Improving Communication effectiveness:

(i) Clarifies the idea before communication: the entire problem should
be studied in depth, analyzed and stated in such a manner that it is
clearly conveyed to subordinate.
(ii) Communicate according to the need of receiver: Manager should
adjust the communication according to the education and
understanding level of subordinates.
(iii) Consult other before communication: if the communication is done
by involving others before it is delivered, then it improves quality.
(iv) Be aware of language tone and content of message: the contents of
the message, tone and language are important aspect in improving
effective communication.
(v) Ensure proper feedback: the communicator may ensure success by
asking question regarding message, conveyed.
(vi) Be a good listener: Patient and attentive listening solves half of the
problems. So listen carefully, to improve communication.

Application and Hots Based Questions with Answers

1. Is directing required at planning stage? Name the element of directing function
under which:
(i) the superiors oversee the activities of their subordinates.
(ii) the superiors assure the subordinates that their needs will be taken care
of.
(iii) the superior attempts to influence the behaviour of people at work
towards the realisation of specified goals.
(iv) the superiors share information with the subordinates in order to reach
common understanding.
Ans. No, directing is not required at planning stage since it is an executive function. It
initiates action in the organization while other functions of management (planning,
organising, staffing and controlling) just prepare a setting for action.
(i) Supervision (ii) Motivation (iii) Leadership (iv) Communication.

2. The workers of X Ltd. always try to show their inability when any new work is
given to them. They are always unwilling to take up any kind of work. Due to
sudden rise in demand the company wants to meet excess orders. The supervisor
is finding it difficult to cope up with the situation. Suggest any four ways for the
supervisor to handle the problem.
Ans. The supervisor should perform the following functions to motivate the workers and
guide their efforts and other resources to accomplish the desired objectives:
(i) Ensuring performance of work according to the targets set by motivating the
workers effectively.
(ii) Giving on-the-job training to the workers to build an efficient team.
(iii) Building up high morale among workers by influencing their behaviour to

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 meet the excess orders.
(iv) Maintaining group unity and harmony among workers by sorting out internal
differences, thus maintaining discipline in the organization.
3. Arnit and Mikki are working in the same organization but in different
departments. One day at lunch time Mikki informed Amit that due to
computerisation some people are going to be retrenched from the organization.
Name which type of communication is this. State any two limitations of this type
of communication.
Ans. Informal Communication
Limitations:
(i) The grapevine/informal communication spreads rapidly and sometimes gets
distorted. It is very difficult to detect the source of such communication.
(ii) It also leads to generate rumours. People's behaviour is affected by rumours
and informal discussions and sometimes may hamper work environment.
4. You are working at the middle level of management. Your superior, a top
management personnel, sent a message for you which you received and well
understood. Is the communication process complete? Give reason.
Ans. No, the communication process is not complete unless and until feedback is given to
the superior. Feedback includes all those actions of the receiver indicating that he has
received and understood the message of sender. So, I must respond to communication
to improve its effectiveness, e.g., by giving a reply to letter, giving reactions to the
message, etc.

5. Rakesh is working under his superior Neeraj. He always communicates useful

ideas and suggestions to his superior regarding reduction of cost, improvement
in the product, etc. Neeraj implements his suggestions and has always found
favourable results, but he never appreciates Rakesh for his suggestions. Now
Rakesh decided not to communicate any suggestion or idea to Neeraj. Identify
the factor which acts as a communication barrier.
Ans. Lack of proper incentives (Personal Barriers to Communication)

6. Ankur is working as a production manager in an organization. His subordinate

Saurabh discussed with him a method of production which will reduce the cost of
production. But due to some domestic problems and Ankur's mind being pre-
occupied he is not in a position to understand the message. Saurabh got
disappointed by this. Identify the factor which acts as a communication barrier.
Ans. Lack of attention (Psychological/Emotional Barriers to Communication)

7. In an organization all the employees take things easy and are free to approach
anyone for minor queries and problems. It has resulted in loss of secrecy and
confidential information being leaked out. What system do you think the
manager should adopt to improve communication?
Ans. The manager should adopt the system of "Formal communication' to deal with the
situation, where communication will take place following the chain of command
through prescribed channels only. Therefore, employees cannot approach anyone for
minor queries and problems. Formal communication system will ensure
confidentiality of information because communications are recorded and filed in the
office by responsible manager. Formal communication does not generate rumours.

8. Rajat a Sales Manager, achieved his sales target one month in advance. This

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 achievement was displayed on the notice board and the CEO of the Company
awarded a certificate for the best performance to him. Name the incentive
provided to Rajat.
Ans. The Incentive provided to Rajat is — 'Recognition'

9. Ms. Umang, production manager of Creative Concepts discusses with her staff
about the new export order. All the staff members unanimously agree that they
all will work together to do overtime to complete the order and meet the
deadline. State the 'leadership style' being followed by Ms. Umang. lmark
Ans. Ms. Umang is following Democratic leadership style, in which a leader consults with
her subordinates on proposed actions and decisions and encourages them to
participate in decision making.

10. A behaviour study was done on total of 100 employees of an organization. Group
A (of 50 employees) were appreciated by the manager for their work and
initiative for new ideas. All these employees were given option of flexible working
hours and were paid wages at a higher piece rate. On the other hand, Group B
(of remaining 50 employees) was criticised for their poor performance. Their
increments were stopped and they were paid wages at a lower piece rate.
(a) Identify and explain the feature of motivation highlighted in the above case.
(b) What type of leadership is followed by the manager? Justify your answer
Ans. (a) Motivation can be either positive or negative. Positive motivation provides
positive rewards like increase in pay, promotion, recognition, etc. Negative
motivation uses negative means like punishment, stopping increments, threatening,
etc.
(b) Autocratic leadership style
The leader's following is based on the assumption that reward or punishment both can
be given depending upon the result.

11. In a company, Mr. Kshitij always explains management policies to workers and
brings workers' problems to the notice of management. At what post does Mr.
Kshitij work in this company?
Ans. Mr. Kshitij is a supervisor in the company as he acts as a link between workers and
management.

12. Prachi is working in an MNC. She has been given an option to buy the shares of
the company at an amount less than the market price because of her
performance as an incentive. Identify which incentive is being given to her.
Ans. Co-partner ship/Stock option

13. Ms. Snigdha, Production Manager and Mr. Sarthak, Marketing manager of an
electronics company are not on talking terms with each other. Because of that
they do not transfer complete information to each other.
(a) Identify the element of directing which becomes ineffective due to the
behaviour of the managers.
(b) Also, explain the factor which led to their such behavior
Ans. (a) Communication
(b) Distrust (Psychological barrier)
Distrust between sender and receiver causes failure of communication. If they do not
believe each other, they cannot understand each other's message in its original sense

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14. This notice was placed on the notice board in the reception area of XYZ Ltd. But
it did not mention clear specification regarding the time of meeting. Which
barrier of communication is referred to here? Explain any two other forms of
barriers to effective communication under the same category
Ans. Badly expressed message (Semantic barriers) —Use of wrong words, omission of
needed words, inadequate vocabulary, etc.
Two other Semantic barriers are:
(b) Symbols with different meanings: A word may have several meanings. For
example, consider these three sentences where the word 'value' is used:
• What is the value of this ring?
• I value our friendship.
• What is the value of learning computer skills?
Wrong perception by the receiver leads to communication problems.
(c) Faulty translations: Sometimes, the communications originally drafted in one
language (say, English) need to be translated to the language understandable to
workers (say, Hindi). If the translator is not proficient with both the languages,
communication becomes ineffective.

15. Identify and state the elements of directing mentioned below:

(a) Mr. Pramod Aggarwal, a manager explains a worker about operations to be
carried out by him on a hi-tech machine.
(b) Mr. Rajinder Tyagi, a mining engineer explains about safety precautions to
be followed while working in a coal mine.
(c) Mr. Anil Sarraf, a managing director declares share in the profits to the
managers for their contribution to enhance profits of the company.
(d) Mr. Rajiv Asopa, a manager inspires his employees by playing a lead role in
performing a work.
Ans. (a) Supervision
It means overseeing what is being done by subordinates and giving instructions to
ensure optimum utilization of resources and achievement of work targets.
(b) Communication
It is the process of exchange of ideas and information among people to create
common understanding.
(c) Motivation
It means the process of stimulating people to action to accomplish desired goals.
(d) Leadership
It is the process of influencing people so that they strive willingly and enthusiastically
towards the achievement of group goals.

16. Mr. Sandeep is the marketing manager of a company manufacturing designer

clothes. One day, in the morning while leaving home he had a quarrel with a
person in his neighbourhood on some issue. That person is a criminal who could
abuse his family members. Mr. Sandeep, on that day, is very worried and angry
too on the behaviour of the neighourhood person. On that day, a meeting was
held by a team of marketing and design experts to ensure that whatever is
produced is according to market demand and tastes and fashion of the
customers. But Mr. Sandeep could not pay attention to the discussion between
them.
(a) Identify the type of barriers to communication mentioned in the above para.
Justify your answer.

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 (b) Explain any two such barriers to communication.
Ans. (a) Psychological barriers
These are related to the state of mind of both sender and receiver of communication.
For example, a worried person cannot communicate properly and an angry receiver
cannot understand the real meaning of message.
'Mr Sandeep is very worried and angry on that day. So he could not pay attention to
the discussion in the meeting.'
(b) Psychological barriers to communication:
(iv) Lack of attention: The pre-occupied mind of receiver and the resultant non-
listening of message acts as a major psychological barrier.
(v) Premature evaluation: Sometimes people form a judgement before the sender
completes his message, which causes failure of communication.

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 Chapter 8
Controlling
Controlling: Introduction
Concept of Controlling
Controlling is the process of comparing the actual performance with the standards, finding
out deviations, if any and taking the necessary corrective action to prevent the recurrence of
these deviations in future.

Definitions of Controlling
Managerial control implies the measurement of accomplishment against the standards and the
correction of deviations to assure attainment of objectives according to plans. “Koontz and
O’Donnell”
The managerial function of controlling is the measurement and correction of performance in
order to make sure that enterprise objectives and plans devised to attain them are being
accomplished. “Harold Koontz and Heinz Weihrich”

1. Setting performance standards

• Standards are criteria against which actual performance is measured.
• Standards can be set in both quantitative and qualitative terms.
• Standards should be flexible enough to be modified whenever required.
2. Measurement of actual performance
• Measurement of actual performance should be done in an objective and reliable
manner.
• Performance should be measured in the same units in which the standards are set to
make comparison easier.
• Wherever possible, measurement should be done continuously during performance.
3. Comparing actual performance with standards
Actual performance is compared with standards to find to the deviations, if any. ‘Deviation’
means the difference between actual performance and the standards.
4. Analyzing deviations
The deviations from the standards are analyzed to identify their causes. While analyzing
deviations, it is important to determine the acceptable range of deviations and key result
areas.
• Critical Point Control (CPC): It helps in controlling process by focusing on key
result area s(KRAs) which are critical to the success of an organization. The key
result areas are set as critical points since it is neither economical nor easy to keep a
check on each and every activity in an organization. If anything goes wrong at the
critical points, the entire organization suffers. For example, in a manufacturing
organization, an increase of 10 per cent in the labour cost ,may be more troublesome
than a 20 per cent increase in postal charges.
• Management by Exception (MBE): It means that “an attempt to control everything
results in controlling nothing” It helps in the controlling process by identifying only
significant deviations which cross the permissible limit / acceptable range and
bringing them to the notice of the management. Deviations within the acceptable
range (i.e. minor deviations) are ignored.
5. Taking corrective action.
• No corrective action is required when the deviations are within the acceptable range/
permissible limit.

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 • When the deviations go beyond the acceptable range/ permissible limit, especially in
the key result areas, immediate managerial attention is required so that the deviations
do not occur again.
• If the deviation cannot be corrected through managerial action, the standards may
have to be revised.
Some Examples of Corrective Action
Causes of Deviation Corrective Action
1.Defective materials Change the quality specification for the materials used
2.Defective machinery Repair the wasting machine or replace the machine if it
cannot be repaired
3.Obsolete machinery Undertake technological up gradation of machinery
4.Defective process Modify the existing process
5.Defective physical conditions Improve the physical conditions of work
of work

IMPORTANCE OF CONTROLLING
Controlling is an indispensable function of management. Without it, the management process
is incomplete. A good control system helps an organization in the following ways:
2. Accomplishing organizational goals: Controlling helps in accomplishing organizational
goals by measuring the progress towards the goals, finding out the deviations, if any and
taking the necessary corrective action. Like a traffic signal, controlling guides the
organization and keeps it on the right track so that organizational goals are achieved.
3. Judging accuracy of standards. : Controlling helps in judging accuracy of standards by
keeping a carefully check on the change taking place in the organization and reviewing
and revising the standards in the light of these changes.
4. Efficient use of resources: Controlling helps in making efficient use of resources by
ensuring that each activity is performed according to pre-determined standards.
5. Ensures order and discipline: Controlling ensures order and discipline among
employees by keeping a close check on their activities.
6. Improving employees’ motivation and morale: Controlling ensures that employees
know well in advance what they are expected to do and what are the standards of
performance on the basis of which they will be judged, thereby, improving employees’
motivation and morale.
7. Facilitates coordination in action: The controlling function lays down performance
standards for each department and employee which are well-coordinated with one
another, thereby helping in achieving better coordination in the organization.

Relationship between Planning and Controlling

Planning and controlling are mutually interrelated and interdependent activities. They are
inseparable twins of management.
1. Controlling takes place on the basis of standards developed by planning. So,
when there is no plan, manages have no basis for controlling. Thus, controlling is
blind without planning.
2. Planning is meaningless without controlling as controlling ensures that the
events conform to the plans. Once a plan is implemented, controlling is necessary to
monitor the progress, measure it, identify and analyze deviations and take corrective
action to ensure that events conform to plans.
3. Planning prescribes an appropriate course of action for achieving objectives whereas
controlling evaluates whether decisions have been translated into desired actions.
4. Planning and controlling both are forward-looking.
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 • Planning is looking ahead because plans are prepared for future and are based
on forecasts about future conditions.
• Controlling is forward looking because the corrective action in controlling is
taken to prevent the recurrence of the deviations in future. It seeks to improve
the future performance.
5. Planning and controlling are both looking back.
• Planning is looking back because new planning is guides by the problems
identified in the past.
• Controlling is looking back as it compares the actual performance with the
standards. This involves scrutinizing the events after they have taken place. It
is like a postmortem of past activities to find out deviations from the
standards.

Nature of Controlling
1. Controlling is a goal-oriented function because it involves measuring the progress
towards the organizational goals, finding deviations, if any and taking corrective
action to ensure achievement of the goals,
2. Controlling is a pervasive function because it is performed: - in all organizations,
whether business or non-business (e.g., educational institution, military, hospital, etc.)
and – at all levels of management (top, middle and operations)
3. Controlling is both a backward looking and forward looking function.
4. Controlling is a continuous process because it involves a constant review of actual
performance for taking corrective action, if any.

Questions with Answers

1. Babita Ltd. is engaged in manufacturing machine components. The target
production is 250 units per day per worker. The company had been successfully
attaining this target until two months ago. Over the last two months it has been
observed that daily production varies between 200-210 units per worker.
(a) Name the function of management and identify the step in the process of this
function which helped in finding out that the actual production of a worker is
less than the set target.
(b) To complete the process of the function identified in (a) and to ensure the
performance as per set targets, explain what further steps a manager has to take.
Ans. (a) The management function is Controlling.
"Comparing actual performance with standards" is the step involved in the process of
controlling which helped in finding out that the actual production of a worker is less
than the set target.
(b) A manager has to take the following two further steps to complete the process of
controlling:
(i) Analysing deviations: The deviations from the standards are analysed to identify
their causes. While analysing deviations, it is important to determine the acceptable
range of deviations and key result areas.
(ii) Taking corrective action: Immediate managerial attention is required so that the
deviations do not occur again. If the deviation cannot be corrected through managerial
action, the standards may have to be revised.
2. Which two steps in the process of controlling are concerned with compelling
events to conform to the plan?

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Ans. (i) Comparison of actual performance with standards
(ii) Taking corrective action
3. Rajeev and Sanjeev are managers in the same organization having different
units. While discussing about the function of management, Rajeev says
"Planning is looking ahead whereas controlling is looking back." But Sanjeev
says, "Planning is looking back whereas controlling is looking ahead." Both are
giving reasons in favor of their statements.
Explain the possible reasons given by both and justify who is correct.
Ans. Rajeev who says, "Planning is looking ahead whereas controlling is looking back"
must be giving the following reasons:
• Plans are prepared for future and are based on forecasts about future
conditions. Therefore, planning is looking ahead.
• On the contrary, controlling is like a post-mortem of past activities to find out
deviations. In this sense, controlling is looking back.
Sanjeev who says, "Planning is looking back whereas controlling is looking ahead"
must be giving the following reasons:
• Planning is also looking back because future planning is guided by past
experiences.
• Controlling is looking ahead because the corrective action initiated by control
function seeks to improve future performance or to revise future plans.
Conclusion: Planning and controlling are both backward looking and forward looking
functions. Hence, both of them are partially correct.

4. You are the manager of Bharti Chemicals Ltd. It is reported to you that postal
expenses have increased by 10% over standard rates and cost of raw materials
has increased by 2%. Which of the two deviations will be more critical to you?

Ans. Increase in cost of raw materials by 2% is more critical. (Critical Point Control)
5. Surbhi Ltd. produces safety pins on a mass scale. The company's policy is that at
most 2% of the daily production could be defective. Over a three months period,
it has been observed that 8% - 10% of the production is defective. The cause of
deviation found is defective machinery. What corrective action should be taken
by the management?
Ans. Repair the existing machine or replace the machine if it cannot be repaired.
6. D&D Ltd. is a large manufacturing unit. Recently, the company has conducted
the 'time' and 'motion' studies and concluded that on an average a worker could
produce 120 units per day. However, it has been noticed that average daily
production of a worker is in the range of 80-90 units.
Which function of management is needed to ensure that the actual performance
is in accordance with the performance as per 'time' and 'motion' studies? State
four features of this function of management.
Ans. Controlling
Features of controlling:
(i) Controlling is a goal-oriented function because it involves measuring the progress
towards the organizational goals, finding deviations, if any and taking corrective
action to ensure achievement of the goals.
(ii) Controlling is a pervasive function because it is performed in all organisations,
whether business or non-business and at all levels of management.

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 (iii) Controlling is a continuous process because it involves a constant review of
actual performance for taking corrective action, if any.
(iv) Controlling is both a backward looking as well as forward looking function.
7. K&K Co. Ltd. is engaged in manufacturing machine components. The target
production is 200 units daily. The company had been successfully attaining this
target until two months ago. Over the last few months it has been observed that
daily production varies between 150-170 units.
Identify the possible causes for the decline in production and the steps to be
taken to achieve the desired targets.
Causes of
Corrective Action
Deviation
1. Defective materials Change the quality specification for the materials used
Defective machinery Repair the existing machine or replace the machine if
2. it cannot be repaired
3. Obsolete machinery Undertake technological upgradation of machinery
4. Defective process Modify the existing process
Defective physical Improve the physical conditions of work
5.
conditions of work

Questions with Answers

1. Mr. Nath, a recently appointed production manager of Suntech Ltd. has decided
to produce jute bags instead of plastic bags as these are banned by the
government. He set a target of producing 1000 jute bags a day. It was reported
that the employees were not able to achieve the target. After analysis he found
that employees were demotivated and not putting in their best for achieving the
target. Mr. Nath's behavior is good towards the employees. His attitude is always
positive. So he announced various incentive schemes for the employees like:
Installing award or certificate for best performance.
Rewarding an employee for giving valuable suggestions.
Congratulating the employees for good performance.
(a) Identify the functions of management highlighted in the above paragraph.
(b) State the' incentive' under which the employees are motivated.
(c) State any two values which the production manager wants to communicate to
the society by his work and behaviour.
Ans. (a) Controlling and Directing
(b) Employee recognition programme (non-monetary incentive)
(c) Values:
• Sensitivity to environment
• Good behavior towards employees
• Team work with employees
2. Airtech Ltd. is manufacturing mobile phones both for domestic Indian market as
well as for export. It had enjoyed a substantial market share and also had a loyal
customer following. But lately it has been experiencing problems because its
targets have not been met with regard to sales and customer satisfaction. Also,
mobile market in India has grown tremendously and new players have come
with better technology and pricing. This is causing problems for the company. It
is planning to revamp its controlling system and take other steps necessary to

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 rectify the problems it is facing. It also decides to offer its basic models of mobile
phones at 50% discount to the poor people.
(a) State any two benefits the company will derive from a good control system.
(b) How can the company relate its planning with control in this line of business
to ensure that its plans are actually implemented and targets attained.
(c) Give the steps that the company should follow to remove the problems it is
facing.
(d) Identify any one value which the company wants to communicate to the
society.
Ans. (a) Two benefits which the company will derive from a good control system are:
(i) Accomplishing organizational goals of increasing market share and customer
satisfaction.
(ii) Making efficient use of resources by controlling wastage and spoilage of
resources; and ensuring that each activity is performed according to the predetermined
standards.
(b) Controlling will improve future planning by providing information to the company
derived from past experience that its targets were not met with regard to sales and
customer satisfaction.
(c) The company should undertake technological upgradation of machinery, and
modify the existing process so that cost is reduced and the company can set lower
price for its mobile phones to beat its competitors.
(d) Value:
• Concern about poor people
• Social responsibility

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 Chapter 9
Financial Management
Financial Management
It is concerned with management of flow of funds and involves decisions relating to
procurement of funds, investment of funds in long term and short term assets and distribution
of earnings to the owner.

Objectives
The primary objective of finical management is to maximize shareholders’ wealth,
which means maximization of the market value or price of equity of the company.
Shareholders’ wealth maximsation is possibly by:
1. Ensuring availability of sufficient funds at reasonable cost: Whenever required,
sufficient funds must be raised at reasonable cost, keeping the risk under control so
that some value addition takes place.
2. Ensuring effective utilization of funds: When investment decision is taken, e.g.
investment in land, building, plant and machinery, etc. The aim of financial
management is to ensure that benefits or returns from the investment exceed the cost
so that the value addition is even higher.
3. Ensuring safety of funds: Financial management must aim at ensuring safety of
funds procured by creating reserves, reinvesting profits, etc.

Financial planning
The process of estimating the funds requirements of a business and specifying the
sources of funds is called financial planning. It is the preparation of a financial blueprint of
an organization’s future operations.
Objective of financial planning is to ensure availability of sufficient funds at reasonable cost.
It has twin objectives:
(i) To ensure availability of funds, whenever these are required: If adequate funds are not
available, the firm will not be able to honour its commitments and carry out its plans.
(ii) To see that firm does not raise resources unnecessary: If excess funds are available, it
will unnecessarily add to the cost and may encourage wasteful expenditure.
Importance
1. It helps the company to prepare for the future. It forecasts what may happen in
future under different business situations. For example, a growth of 10% in sales
is predicted. However, it may happen that the growth rate eventually turns out to
5% or 15%. The amount of expenses and revenues will be different in these three
situations. By preparing a blueprint of these three situations, the management may
decide what must be done in each of these situations.
2. It helps in avoiding business shocks and surprises.
3. It helps in coordinating various business functions, e. g., sales and production
functions by providing clear policies and procedures.
4. It helps in reducing waste, duplication of efforts, gaps in planning and confusion.
5. It links the present with the future.
6. It provides a link between investment and financing decision on a continuous
basis.

An understanding of how financial planning works

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Financial planning usually begins with the preparation of a sales forecast. Based on sales
forecast for a given time period , say, 5 years, the finical statements are prepared keeping in
mind the requirement of funds for investment in the current and fixed assets. Then the
expected profits during the period are estimated so that an idea can be made of how much of
the funds requirements can be met from retained earnings ( after payment of dividend) and
how much will to be raised from external sources (e.g., issue of shares, debentures, etc.)
Financial planning includes both long – term as well as short- term planning.
- Long-term finical planning relates to long- term growth and investment. It is done for 3 to
5 years. it focuses on capital expenditure programmes.
- Short-term financial plans are detailed plans of action made for a period of one year or
less. These are termed as budgets.

Financial Decisions
The finance function is concerned with broad decisions: (i) Investment decision, (ii)
financing decision and (iii) Dividend decision.
Investment Decision
Investment decision relates to how the firm’s funds are invested in different assets so that the
firm is able to earn the highest possible returns on investment.
Investment decision can long –term or short – term.
Long- term investment decision (also called capital Budgeting Decision): The long- term
investment decision involves committing the finance a long –term basis on fixed assets or
various projects of an organization. These decisions involve huge of investment, affect
earning and are irreversible except at a huge cost. Examples: (i) purchase of fixed assets like
land , building, plant and machinery , etc. (ii) opening a new branch, (iii) Launching a new
product line, (iv) investing in advanced techniques of production, (v) major expenditure on
advertising campaign or research and development programme, etc.
Since long- term assists are called fixed assets, therefore, this decision is also called
‘fixed capital decision’ (or management of fixed capital).

Factors affecting investment or capital budgeting decision:

(i) Rate of return of the project: The most important criterion is the rate of return of the
project. If there are two projects A and B (with the same risk involved) with a rate of
return of 10% and 15% respectively, then project B should be selected.
(ii) Cash flows of the project: When company invests huge amount of fund in some
project, it expects regular cash inflows from that project. Suppose if project A yields
estimated annual cash inflows of 5 lacs for 4 year while project B yields estimated
cash inflow of 18 lacs at the end of 4 years. Therefore, Project A should be selected.
(iii) Investment criteria involved: The decision to invest in a particular project involves a
number of calculations regarding the amount of investment, interest rate, cash inflows
and rate of return. There are different capital budgeting techniques to evaluate
investment proposals, e.g., Net present Value, Internal rate of Return ,pay Back
period, etc. These techniques are applied to each proposal before selecting a particular
project.
Note: Short – term investment decision (also called Working capital decision): This is
concerned with the decisions about the levels of cash, inventories, debtors, etc. These
decisions affect the day –to-day working of a business.

Financing Decision
Financing decision relates to the quantum of finance to be raised from various long term
sources:

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_ Shareholders ‘funds (or Equity), which includes share capital, reserves and surplus (or
retained earnings).
_ Borrowed funds (or Debt) which includes debentures, long-term loans, public deposits,
etc.
Financing decision determines the overall cost of capital and the financial risk of the
enterprise.

Factors affecting financing decision

1. Cash flow position of the company: A stronger cash flow position of the company
makes debt financing better than funding through equity because if can generate
enough cash inflows to pay interest on debt. On the contrary, it would be quite risky
to use more debt if cash inflows are unstable.
2. Cost : Debt is cheaper source of finance because interest on debt is a tax deductible
expenses . More debt can be used in capital structure if cost of debt is low. (Rate of
interest).
3. Risk : Debt is cheaper but is more risky for a business because it is compulsory to pay
interest on debt and redeem the principal amount on maturity . Therefore, use of more
debt increase the financial risk of a business.
4. Level of fixed operating costs: If a business has high fixed operating costs (e.g.,
building rent, insurance premium, salaries ,etc) i.e. high operating/ business risk, it
can assume lower financial risk. Therefore, lower debt financing is better in this
situation, On the contrary, more of debt financing is preferred if the level of fixed
operating costs is less.
5. Floatation costs: Cost of raising, funds is called floatation cost. Issuing equity shares
involve costs of advertising, printing prospectus, etc. Getting a loan from a financial
institution may not cost so much. These considerations may also affect the choice
between debt and equity.
6. Control considerations: Debt normally does not cause a dilution of control while
issue of equity shares may reduce management control over the business.
7. State of the capital market/Stock market conditions: During the period when stock
market is rising (i.e., period of boom/bullish phase), more people are ready to invest
in equity .Therefore, equity shares case be easily issued even at higher price.
However, during depressed capital market (bearish phase),a company may find it
difficult to make equity issue and hence it may opt for debt.

Dividend Decision
Dividend decision relates to how much of the profit earned by the company (after paying tax)
is to be distributed to the shareholders as dividends and how much of its should be retained in
the business.

Factors Affecting Dividend Decision

1. Amount of earnings: Dividends are paid out of current and past earnings. Therefore,
‘earnings’ is a major determinant of the dividend decision.
2. Stability of earnings: A company having stable earnings can declare higher
dividends while a company having unstable earnings is likely to pay smaller dividend.
3. Stability of dividends: Many companies follow a policy of ‘fixed dividend per
share’. The increase in dividends is made only when earning potential increases and
not just the earnings of the current year increases.
4. Growth opportunities: Company having good growth opportunities are likely to pay
less dividend and retain more profits to invest in profitable projects. On the other

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 hand, non-growth companies can pay higher dividend, provided they have enough
earnings and cash.
5. Cash flow position: Payment of dividend involves outflow of cash. So, availability of
enough cash is necessary for distribution of dividend. Sometimes, it is possible that
statement of Profit and Loss shows high profit but the company falls short of cash. So,
the company can pay less dividend in such a situation.
6. Shareholders’ preference: If the shareholders in general desire that at least a certain
amount is paid as dividend, the companies are likely to declare the same. There are
always some shareholders who depend upon a regular income from their investments.
7. Taxation Policy: Dividends are free of tax in the hands of shareholders. So, they
prefer higher dividends. But, a dividend distribution tax is levied on companies. So, if
tax rate on dividend is higher ,a company generally declares less dividend. As against
this, higher dividends may be declared if tax rate is lower.
8. Stock market reaction: Generally, investors view an increase in dividend as a good
news and hence market price of shares increase in the stock market. On the contrary ,
a decrease in dividend reduces the market price of shares. This is an important factor
affecting dividend decision.
9. Access to capital market: Large and reputed companies can raise funds easily from
the capital market to finance their growth. They depend less on retained earnings. So,
they can pay higher dividend than smaller companies which have low access to the
capital market.
10. Legal constraints: Certain provisions of the Companies Act,1956 place restrictions
on payouts as dividend, Such provisions must be adhered to while declaring the
dividend. For example, depreciation for the entire year has to be provided before a
dividend is declared or paid. Similarly, before declaring the dividend, some part of the
profit has to be transferred compulsorily to the Reserves of the company, . ., if the
proposed dividend exceeds dividend exceeds 20% of the paid up capital, the amount
to be transferred to reserves shall be at least 10% of the current profits.
11. Contractual constraints: While granting loans to a company, sometimes banks/
financial institutions may impose certain restrictions on the payment of dividends in
future. The companies are required to ensure that the dividend does not violate the
terms of the long agreement.

Concept of Capital Structure:

‘Capital structure’ means the proportion of debt and equity used for financing the operations
of a business.
It can be calculated as debt-equity ratio, i.e., or as the proportion of debt in the total
capital.i.e., The proportion of debt in the total capital is also called financial
.
leverage.
Note:
 Cost of debt is lower than cost of equity for a business because lender’s risk is lower
than equity shareholder’s risk. Since lenders earn an assured return (fixed interest)
and repayment of capital, therefore, they should require a lower rate of return.
Moreover, interest paid on debt is deductible expense for computation of tax liability
whereas dividends are paid out of after-tax profits. Therefore, increased use of debt
is likely to lower the overall cost of capital of the firm. Financial risk is the chance
that a firm would fail to meet its payment obligations, i.e., interest and principal
amount. Thus, overall financial risk depends upon ‘Debt’ component of the capital
structure.

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  On the other hand, shareholder’s funds (or equity) involve no commitment regarding
payment of dividend and repayment of capital. Therefore, equity us considered
‘riskless ‘for the business.

 Conclusion: use of more debt reduces the overall cost of capital land increases
profitability but the financial risk also increases. Thus, capital structure of a business
affects both the profitability and the financial risk.

 Ideally, a company must choose the risk-return combination which maximizes

shareholders’ wealth.

Factors affecting the Choice of Capital Structure

1. Risk consideration: The total risk depends upon the business risk and the financial
risk. If a firm’s business risk is lower, its capacity to use debt is higher and if business
risk is higher firm’s capacity to use debt is lower.
2. Cost of debt: It is the rate of interest payable on debentures or loans. More debt can
be used in capital structure if rate of interest on debt is low. Debt is the cheapest
source of finance because interest on debt is a tax deductible expenses.
3. Cost of equity: It is the rate of dividend on shares. When a company increases debt,
the financial risk faced by the equity holders also increases. Consequently, their
desired rate of return may increase. Therefore, a company cannot use debt beyond a
point. If debt is used beyond that point, cost of equity may go up sharply and share
price may decrease. Hence, for maximization of shareholder’s wealth, debt can be
used only up to a level.
4. Floatation costs: Cost of raising funds is called floatation cost, e.g. costs of
advertising, printing prospectus, etc. Getting a loan from a financial institution may
not cost so much. These considerations may also affect the choice between debt and
equity.
5. Cash flow position: A company uses more debt if it can generate enough cash
inflows to pay interest on debt. On the contrary, it would be quite risky to use more
debt if cash inflows are unstable.
6. Control: Debt normally does not cause a dilution of management’s control over the
business. While issue of more equity may reduce the management’s holding in the
company. There is a threat of takeover also. So, if the management of a company is
interested in retaining control over the affairs of the business, it will use more debt
(but upto a limit).
7. Tax rate : Interest on debt is a tax deductible expenses. Therefore, a higher tax rate
makes debt relatively cheaper. So, more debt can be used.
Example: Borrowing @10% and the tax rate 30% means the after-tax cost of debt is
only 7%.
Suppose 10% Debentures = 100000 and tax is payable @ 30%.
Profit before interest and tax (PBIT) 100000
(-) Interest (10% of 100000) 10000
Profit before tax (PBT) 90000
Therefore, Tax = 30% of 100000 = 27000.
If there is no debt, Tax = 30% of 100000 = 30000.
Thus, tax savings due to debt = 30000- 27000 = 3000.
So, Net interest payable = 7000 which is 7% of 100000.

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8. Return on Investment (ROI) : If the ROI of the company is greater than rate of
interest on debt, it can use more debt to increase the rate of return on share capital.
This is called ‘Trading on Equity’. In other words, the shareholders of a company
are likely to gain with a debt component in the capital employed.
How? The use of more debt along with equity increases the rate of return on share
capital.
Why? This is because debt / loans carry fixed amount of interest, which is a tax
deductible expense.
When? Benefit to shareholders will be realized only if the ROI is greater than rate of
interest on debt. It is called favorable financial leverage. But if ROI is less than the
rate of interest on debt, rate of return on share capital will decrease i.e., unfavorable
financial leverage.

Favorable Financial Leverage

Company ‘X’ Company ‘Y’
Share Capital 10000000 4000000
Loan @ 15% p.a. - 6000000
Total capital 1000000 1000000
Profit before Interest and Tax (30% ROI ) 300000 3000000
Less: Interest (15% of 600000) _ 90000
Profit before Tax 300000 210000
Less: Tax @50% 150000 105000
Profit after Tax 150000 105000

Rate of return on share capital = X 100

Company X: X 100 = 15%

Company Y: X 100 = 26.25%

It is clear from this example that share holders of the Company ‘Y’ earn higher rate of
return than Company ‘X’ due to the debt /loan component in the total capital and
because ROI (30%) is greater than rate of interest (15%).

Unfavorable Financial Leverage

Company ‘A’ Company ‘B’
Share Capital 10000000 4000000
Loan @ 20% p.a. - 6000000
Total capital 1000000 1000000
Profit before Interest and Tax (15% ROI ) 150000 1500000
Less: Interest (20% of 600000) _ 120000
Profit before Tax 150000 30000
Less: Tax @50% 75000 15000
Profit after Tax 75000 15000

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 Rate of return on share capital = X 100
Company A : X 100 = 7.5% Company B : X 100 = 3.75%

It is quite clear that equity shareholders of the Company B earn lower rate of return
than Company A because of debt component in the capital employed and because
ROI (15%) is less than the rate of interest (20%).

Fixed and Working Capital

Fixed Capital
Fixed capital means the portion of capital investment in long-term assets/ fixed assets of a
firm e.g./ land and building , plant and machinery, furniture and fixtures, vehicles, etc.

Factors affecting fixed capital requirements

1. Nature of business: A trading firm needs lower fixed capital because it requires less
investment in fixed assets like plant and machinery. On the other hand, a
manufacturing firm requires more fixed capital since it requires more investment in
fixed assets.
2. Scale of operations: A larger organization operating at a higher scale needs bigger
plant, more space, etc. and, therefore, requires more fixed capital as compared to a
small organization.
3. Choice of technique: A capital- intensive organization requires higher investment in
plant and machinery. So, requirement of fixed capital would be higher. On the
contrary, labour- intensive organizations require less investment in fixed assets .so;
their fixed capital requirement is lower.
4. Technology up gradation: In certain industries, assets become obsolete very soon, e
.g., computers. So, their replacement also becomes due faster. Hence, higher fixed
capital will be required to purchase such assets.
5. Financing alternatives: When an asset is taken on lease, the firm pays lease rent
and uses it. so, fixed capital requirements is low snide the firm can avoid huge sums
required to purchase it .on the contrary, if the asset is purchased, then fixed capital
requirement will be more.
6. Diversification: A firm may choose to diversify its operation, e.g., a textile company
is diversifying and starting a cement manufacturing plant. With diversification,
investment in fixed assets will increase. So, the fixed capital requirement also
increases.
7. Growth prospects: higher growth prospects require higher investment in fixed assets.
so the fixed capital requirement also increases.
8. Level of collaboration: Certain business organizations share’ s facilities, e.g., a bank
may use another’ s ATM. Such collaboration reduces the level of investment in fixed
assets for each firm. So, fixed capital requirement is lower.

Working capital
Working capital means the portion of caption of capital investment in short- term assets (or
current assets) of a firm. Net working capital is the excess of current asset over current
liabilities.
1. Nature of business: A trading business needs less amount of working capital
because there is no processing of raw materials into finished goods. Sales can be
effected immediately upon the receipt of materials. On the contrary, a working
capital requirement of a manufacturing business is more since raw material needs to
be converted into finished goods before any sales can become possible.
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 Similarly, service industries like transport, warehousing, etc. require less
working capital since they do not have to maintain on inventory.
2. Scale of operations: A large – scale organization requires larger amount of working
capital as compared to a small – scale organization because the quantum of inventory,
debtors and required is generally high.
3. Business cycle: In case of boom (e.g., during Diwali, Id, etc.), the production and
sales are likely to be higher. As a result, the working capital requirement will be high.
In contrast, during depression, working capital requirement will be lower since sine
production and sales will be low.
4. Seasonal factors: In peak season, higher amount of working capital is receipt due to
higher level of activity during this period. As against this, the level of activity and ,
therefore, working capital requirement will be lower during the lean season.
5. Production cycle: Production cycle is the time span between the receipt of raw
materials and their conversion into finished goods. A longer production cycle
increases the amount of funds required for raw materials and expenses, resulting in
higher hand, shorter the production cycle, lower is the working capital requirement
(e.g., in case of production of bread).
6. Credit allowed: More credit period allowed on goods sold results in higher amount
of debtors. So requirement is reduced.
7. Credit availed: If a firm gets more credit period on its purchases from the suppliers,
the working capital requirement is reduced.
8. Availability of raw materials: If the raw materials can be procured easily and
continuously, the firm will require maintaining Lowe stick levels. So working capital
requirements will be low. However, if the raw materials are not easily and
continuously available, working capital requirements will be high.

Application and Hots Based Questions with Answers

1. Identify what is being demonstrated in the figure.

Ans. Shareholders' Wealth Maximization, i.e., maximizing the market value of investment
in shares of the company.

2. Krishna Ltd. is manufacturing steel at its plant at Noida. Due to economic

growth, the demand for steel is also growing. The company is planning to set up
a new steel plant at Gurgaon. It needs ` 800 crore to start the new plant. It
decides to raise ` 300 crore through debentures, ` 200 crore through long-term
loan from banks and ` 200 crore by issue of equity shares to the public. It
decided to finance the remaining amount by utilizing its reserves and surplus.
(a) State the importance of financial planning for this company.
(b) What is the capital structure of this company? Explain.
(c) Identify the financial decision involved when the company decides to raise `
800 crore from different sources of funds.
(d) How will the dividend decision of Krishna Ltd. be affected? Explain.
Ans. (a) Financial planning will help the company in avoiding business shocks and
surprises. It will reduce waste and duplication of efforts.
(b) Capital structure refers to the mix between owners funds and borrowed funds. It is
calculated as debt equity ratio i.e., .

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 For Krishna Ltd.:
Debt = Debentures + Long term loans from banks = 300+200=` 500 crore
Equity = Share capital + Reserves and surplus (or retained earnings)
= 200+ 100 = ` 300 crore.
Therefore, Debt equity ratio = = 1.67: 1
!
(c) Financing decision
(d) Since the company have growth opportunities of setting up a new steel plant at
Gurgaon, it retains ` 100 crore out of profits to finance the required investment. So, it
is likely to pay less dividend. However, since the company makes more debt
financing than funding through equity, it implies that cash flow position of the
company is strong. Therefore, it can pay higher dividend.

3. Cost of debt is less than cost of equity. Still a company cannot go with entire
debt. Why?
Ans. Because debt is more risky for a business, since payment of interest and return of
principal amount is compulsory for the business. Any default in meeting these
commitments may force the business to go into liquidation. That is, increased use of
debt increases financial risk of a business (the chance that a firm would fail to pay
interest on debt and the principal amount).

4. What does a higher business risk indicate

Ans. Higher business risk means higher fixed operating costs (e.g. building rent, salaries,
etc.), which indicates that company's capacity to use debt is lower.

5. Amar is doing his transport business in Delhi. His buses are generally used for
the tourists going to Jaipur and Agra. Identify the working capital requirement
of Amar giving reason in support of your answer. Further Amar wants to
expand and diversify his Transport business. Enumerate any four factors that
will affect his fixed capital requirements.
Ans. Working capital requirements of Amar would be less as it is a SERVICE industry.
Factors which will affect his fixed capital requirements are:
(i) Scale of operations (ii) Financing alternatives
(iii) Growth prospects (in) Diversification

6. Yogesh, a businessman is engaged in purchasing and selling of Ice-creams.

Identify the working capital requirement of Yogesh giving reason in support of
your answer.
Ans. Working capital requirements of Yogesh would be less as it is a TRADING business.

7. Manish is engaged in business of garments manufacturing. Identify the working

capital requirement of Manish giving reason in support of your answer.
Ans. Working capital requirements of Manish would be less as it is a MANUFACTURING
business. So raw material needs to be converted into finished goods before any sales
can become possible.

8. The directors of a manufacturing company are thinking of issuing ` 20 crores

worth additional debentures for expansion of their production capacity. This will
lead to an increase in debt equity ratio from 2:1 to 3 : 1 . What are the risks
involved in it? What factors other than risk do you think the directors should
keep in view before taking the decision? Name any four factors.

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Ans. Higher use of debt increases the fixed financial charges of a business because
payment of interest and return of principal amount is compulsory. Any default in
meeting these commitments may force the business to go into liquidation. As a result,
increased use of debt increases the financial risk of a business. Financial risk is the
chance that a firm would fail to meet its payment obligations.
Other factors affecting this decision are:
(i) Cost (ii) Cash flow position
(iii) Control (iv) Return on investment (ROI)

9. Explain whether the following manufacturing concerns require large or small

working capital: (a) Bread, (b) Sugar, (c) Coolers, (d) Furniture manufacturing
against orders, (e) Motor car/Scooters, (f) Clothes, (g) Industrial chemicals.
Ans. (a) Bread: Small —the product is sold for cash, there is no need to maintain inventory
and production cycle is short i.e., quick cash turnover.
(b) Sugar: Large — the ratio of cost of raw material to the total cost of production is
quite high and the availability of raw material (sugarcane) is seasonal.
(c) Coolers: Large —It is a seasonal product. Therefore, it requires large amount of
working capital to store the output during the non-season period.
(d) Furniture manufacturing against orders: Small —It is quickly converted into cash
sales, advance from customers is also available and it does not require to maintain
inventory.
(e) Motor car/Scooters: Large — the production cycle is long and these are costly
items and are manufactured in large scale. So, funds are blocked up for a long period.
(f) Clothes: Large — the ratio of cost of raw materials to total cost is high. Moreover,
different kinds of clothes are manufactured in different seasons. So, the inventory
required is more.
(g) Industrial chemicals: Large — these chemicals are produced on a large scale and
sold mostly on credit basis. Liberal credit terms are to be allowed.

10. Amit is running an 'Advertising agency' and earning a lot by providing this
service to big industries. State whether the working capital requirement of the
firm will be 'less' or 'more'. Give reason in support of your answer.
Ans. Less working capital is required as service industries which usually do not have to
maintain inventory require less working capital.

11. Tata International Ltd. earned a net profit of ` 50 crores. Ankit the finance
manager of Tata International Ltd. wants to decide how to appropriate these
profits. Identify the decision that Ankit will have to take and also discuss any five
factors which help him in taking this decision.
Ans. Dividend decision
Factors affecting dividend decision:
(i) Earnings: It is a major determinant since dividends are paid out of earnings.
(ii) Stability of earnings: A company having stable earning can declare higher
dividends.
(iii) Stability of dividends, i.e., paying fixed dividend per share increases the
market price of shares.
(iv) Growth opportunities: Less dividend is paid if good growth opportunities are
there.
(v) Cash flow position: More dividend can be paid if cash flow position is strong.

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 CHAPTER 10
Financial Markets
Financial Markets: introduction
Concept of financial Market
A financial market is a market for the creation and exchange of financial assets.
Functions of financial Markets
1. Mobilization of savings and channeling them into the most productive uses: A
financial market facilitates the transfer of savings from savers to investors. It gives
savers the choice of different investments and thus helps to channelize surplus funds
into the most productive use.
2. Facilitating price discovery: In the financial market, the households are suppliers of
funds and business firms represent the demand. The interaction between them helps to
establish a price for the financial asset which is being traded in the market.
3. Providing liquidity to financial assets: Financial markets facilitate easy purchase and
sale of financial assets. In doing so, they provide liquidity to financial assets so that they
can be easily converted into cash whenever required.
4. Reducing the cost of transactions: Financial markets provide valuable information
about securities being traded in the market and thus help to save time, effort and money
of both the buyers and sellers of a financial asset.

Types of Financial Markets

Money Market Instruments

1. Call money: call money is a method by which commercial banks borrow from
each other to be able to maintain the minimum cash balance, called case reserve ratio
(CRR), as required by the Reserve Bank of India.
Call money is a short-term finance repayable on demand, with a maturity period
of one day to 15days.
• The interest rate paid on call money loans is known as the call rate. It is a highly
fluctuating rate that changes from day – to –day and sometimes even from hour to
hour.
2. Treasury bill: A Treasury bill is an instrument issued by the RBI (in the form of a
promissory note) on behalf of the Central Government to meet its short- term
requirements of funds.
• It is highly liquid, has assured returns and negligible risk o default.
• Treasury bills are available for a minimum amount of ` 25,000 and in multiples
thereof.
• Treasury bills are also known as ‘Zero Coupon Bonds’ since they do not pay any
interest but the issue price is less than the redemption value. This difference is the
interest receivable on them. For example, suppose an investor purchases a 91
days’ treasury bill with a face value of ` 1,00,000 for ` 95,000. By holding the bill
until the maturity date, the investor receives `1,00,000. The difference of `5,000
represents the interest received by the investor.
3. Commercial bill: A commercial bill is a bill of exchange used to finance the
working capital requirements of business firms. It is a short- term, negotiable and self-
liquidating instrument.

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 When goods are sold on credit, the seller (drawer) draws a bill of exchange and the
buyer (drawer) accepts it. On being accepted, the bill becomes a marketable
instrument and is called a trade bill. A trade bill can be discounted with a bank if the
seller needs funds before the date of maturity of the bill. When a trade bill is accepted
by commercial bank, it is known as a commercial bill,
4. Commercial paper: Commercial paper is an instrument issued by lager and
creditworthy companies to raise short-term funds at lower rates of interest than the
market rates.
• It is an unsecured, negotiable promissory note, having maturity period of 15 days
to one year.
• It is sold at a discount and redeemed at par.
• The purpose of issue of a commercial paper is to provide shot-term funds for
seasonal and working capital needs, e.g., bridge financing. For example, suppose
a company needs long- term finance to buy some machinery. In order to raise the
long- term funds in the capital market, the company will have to incur floatation
costs(e.g. ,brokerage, cost of advertising and printing prospectus, etc.). Funds
raised through commercial paper are used to meet the floatation costs. This is
known as Bridge financing.
5. Certificate of deposit: Certificates of deposit (CD) are short-term, unsecured,
negotiable, instruments, issued by commercial banks or development financial
institutions to individuals, corporations and companies.
• They are issued during periods of tight liquidity when the deposit growth of banks
is slow but the demand for credit is high.
• These help to mobilize a large amount of money for short periods.

Types of Capital Market

Capital Market

Primary Market Secondary Market

(New issue Market) (Stock exchange/stock Market)

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Meaning/ Securities traded: Primary Meaning/ Securities traded: Secondary
market means the market for issue of market means the market for the purchase
securities (shares, debentures and bonds) by and sale of existing securities thus, there is
new companies or new issues of securities by trading of existing securities only.
existing companies to investors. Thus, it
deals with new securities being issued for the
first time.
Buying /Selling: Only buying of securities Buying/Selling: Both the buying and the
takes place in the primary market. Securities selling of securities can take place on the
cannot be sold by the investors. stock exchange.
Purpose/ Company involvement: Securities Purpose/Company involvement: Ownership
are sold by the company to the investors of existing securities is exchanged between
directly (or through an intermediary). investors. The company is not involved at all.
Capital formation: The flow of funds is Capital formation: Enhances encashability
from savers to investors, i.e., the primary (liquidity) of securities, i.e., the secondary
market directly promotes capital formation. market indirectly promotes capital formation.
Price determination: Prices of securities are Price determination: Prices are determined
determined by the management of the by demand and supply of the securities.
company.
Location: There is no fixed geographical Location: Located at specified places.
location.

Methods of Floating New Issues in the Primary Market

1. Offer through prospectus/Initial public offer (IPO): under this method, a company
invites subscription from the public through issue of prospectus. A prospectus makes
a direct appeal to investors to raise capital through an advertisement in newspapers
and magazines.
2. Offer for sale: Under this method, securities are not issued directly to the public but
are offered for sale through intermediaries like issuing houses or stock brokers. In this
case, a company sells the entire lot of securities at an agreed price to the
intermediaries who, in turn, resell them to the investing public.
3. Private placement: Private placement is the allotment of securities by a company to
intuitional investors and some selected individuals. It helps to raise capital more
quickly than a public issue. Sometimes companies cannot afford a public issue and
choose to use private placement.
4. Rights issue: This is a privilege given to the existing shareholders to subscribe to a
new issue of shares according to the terms and condition of the company. The
shareholders are offered the ‘right’ to buy new shares in proportion of the number of
shares they already hold.
5. e –IPOs: It refers to issuing securities through the on- line system of stock exchange.
A company proposing to issue capital to the public through this method has to enter
into an agreement with the stock exchange.
SEBI registered brokers are appointed for the purpose of accepting applications and
placing orders with the company. The company also appoints a registrar to the issue
having a electronic connectivity with the stock exchange.
The stock exchange is an institution which provides a platform for buying and selling
of existing securities.

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 Difference between Money Market and Capital Market
Money Market Capital Market
Meaning, Instruments and Duration: Meaning, Instruments and Duration:
Money market is a market for short-term Capital market refers to facilities and
funds. It deals in monetary assets whose institutional arrangements through which
maturity period is up to one year, e.g., medium- term and long – term funds (e.g.,
Treasury bills, call money, commercial shares, debentures and bonds) are raised and
paper, Commercial bill and Certificate of invested. The maturity period of these
deposits. Features of money market securities is more than one year.
instruments :(i) close substitutes for money
,(ii) short- term debt instruments (iii) low risk
(iv) highly liquid (v) unsecured.
Participants: Reserve bank of India (RBI), Participants: Corporate entities, stock
commercial Banks, Non-Banking finance exchanges, development banks, commercial
companies (NBFCs), State Governments, banks, financial institutions, foreign investors
large corporate Houses and Mutual Funds. and ordinary retail investors from members
of the public.
Investment outlay: Investment in money Investment outlay: Investment in the capital
market instrument requires huge sums of market does not require a huge financial
money as the instruments are quite outlay as the value of units of securities is
expensive, e.g., Treasury bills are available generally low, i.e.,10 or 100.
for a minimum amount of 25,000 and in
multiples thereof.
Liquidity: Money market instruments enjoy Liquidity: Capital market securities are less
higher degree of liquidity. liquid.
Safety: Money market instruments are much Safety: Capital market instruments are
safer with a minimum risk of default. riskier both with respect to returns and
principal payment.

Expected return: The expected rate of Expected return: The investment in capital
return of the money market instruments is markets yields higher returns for investors.
less.

Functions of stock Exchange

1. Provides liquidity and marketability of existing securities: The main function of a
stock exchange is to provide a ready and continuous market for the sale and purchase of
existing securities. This provides both liquidity and easy marketability to the existing
securities in the market.

2. Determines price of securities: It helps in determining the price of securities through

the forces of demand and supply. Under the existing online screen based electronic
trading system, computer screens display constant information on prices of securities.

3. Ensures safety of transactions: Trading is done through SEBI registered stock brokers
only. In the Demat account securities are held electronically and there is electronic
transfer of securities. This new system of trading ensures safe and fair dealings in
securities by eliminating the problems associated with physical certificates, e.g., theft,
forgery, bad delivery, paper work, etc.

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4. Contributes to economic growth: A stock exchange is a market in which existing
securities are bought and sold. Through this process of reinvestment and disinvestment,
savings get channelized into their most productive investment avenues. This leads to
capital formation and economic growth.

5. Spreads Equity cult: The stock exchanges 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. Provides scope for speculation: The stock exchange provides scope for speculation in a
restricted and controlled manner.

Advantages of Electronic trading systems or Screen-based trading:

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. The computer screens display information on prices and also capital market
developments that influence share prices.

3. It increases the efficiency of operations: since there is reduction in time, cost and risk
of error.

4. It improves the liquidity of the stock market: because a large numbers of participants
can trade with each other. People from all over the country and even abroad can buy or
sell securities through brokers without knowing each other.

5. It provides a single trading platform.: All the trading centers spread all over the
country have been brought onto one trading platform, i.e., the stock exchange. Now, we
can buy or sell shares through on-line trading only.

Dematerialization
The process of holding securities in an electronic form is called dematerialization.
These demat securities can even be pledged or hypothecated to get loans. There is no
danger of loss, theft or forgery of share certificates.

Depository
Depository is an institution/organization which holds securities (e.g. shares, debentures,
bonds, mutual funds etc.) in electronic form, in which trading is done. Just like a bank keeps
money in safe custody for customers, a depository also is like a bank and keeps securities in
electronic form on behalf of the investor. In the depository a securities account can be
opened, 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.

In India, there are two depositories:

(i) National Securities Depositories Limited (NSDL): It is the first and largest
depository presently operational in India. It was promoted as a joint venture of the
IDBI, UTI, and the National Stock Exchange.

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(ii) Central Depository Services Limited (CDSL): It is the second depository to
commence operations and was promoted by the Bombay Stock Exchange and the
Bank of India.

Procedure for purchase and sale of securities in a stock exchange:

1. Selection of a broker: trading of securities can only be done through SEBI registered
brokers who are the members of a stock exchange. Brokers may be individuals,
partnership firms or corporate bodies. The investor has to sign a broker-client
agreement and a client registration form before placing an order to buy or sell
securities. He has also to provide certain other details and information. These include:
PAN number (This is mandatory)
Date of birth and address
Educational qualification and occupation
2. Opening Demat account: The investor has to open a ‘demat’ account or ‘beneficial
owner’ (BO) account with a depository participant (DP) for holding and transferring
securities in the demat form. He will also have to open a bank account for cash
transactions in the securities market.
3. Placing the order:
4. Executing the order: The broker then will go on-line and connect to the main stock
exchange and match the share and best price available. When the shares can be
bought or sold at the price mentioned, it will be communicated to the broker’s
terminal and the order will be executed electronically. The broker will issue a trade
confirmation slip to the investor. After the trade has been executed, the broker issues a
Contract Note within 24 hours.
5. Settlement: Equity spot markets follow a T+2 rolling settlement. This means that any
trade taking place gets settled within 2 days of the trade date. Delivery of shares must
be made in dematerialized form.

10.3 Securities and Exchange Board of India (SEBI)

An interim administrative body to promote orderly and healthy growth of securities
market and for investor protection from trading malpractices, e.g., price rigging,
insider trading, etc.
• Price rigging – Making manipulations with the sole objective of inflating or
depressing the market price of securities.
• Insider trading – The insiders to a company (Directors, Promoters, etc.) using
inside information (e.g., bonus issue) to make personal profits.

Objectives of SEBI
1. To protect the rights and interest of investors, particularly individual investors and to
guide and educate them.
2. To prevent trading malpractices like price rigging, insider trading, making misleading
statements in prospectus, etc.
3. To regulate stock exchanges and the securities market to promote their orderly
functioning.
4. To regulate and develop a code of conduct and fair practices by intermediaries like
brokers, merchant bankers, etc., with a view to make them competitive and
professional.
5. To provide a market place in which the issuers can raise finances in an easy, fair and
efficient manner.

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Functions of SEBI
Protective functions
(i) It prohibits fraudulent and unfair trade practices in the securities market, etc.,
price rigging, making misleading statements in prospectus, manipulations, etc.
(ii) It controls insider trading and imposes penalties for such practices.
(iii) It undertakes steps for investors’ protection.
(iv) It promotes fair practices and code of conduct in securities market.

Regulatory Functions
(i) It registers brokers and sub-brokers and other players in the market.
(ii) It registers collective investment schemes and Mutual Funds.
(iii) It regulates stock brokers, portfolio exchanges, underwriters and merchant
bankers.
(iv) It regulates take-over bids by companies.
(v) It levies fee or other charges for carrying out the purposes of the SEBI Act, 1992.
(vi) It calls for information by undertaking inspection, conducting enquiries and audits
of stock exchanges and intermediaries.
(vii) It performs and exercises such powers under Securities Contract (Regulation) Act,
1956 as may be delegated by the government of India.

Development functions
(i) It trains intermediaries of the securities market.
(ii) It conducts research and publishes information useful to all market participant’s.
(iii) It undertakes measures to develop the capital markets by adapting a flexible
approach.

Application and Hots Based Questions with Answers

1. Supriya's grandmother, who was unwell, called her and gave her a gift packet.
Supriya opened the packet and saw many crumpled share certificates inside. Her
grandmother told her that they had been left behind by her late grandfather.
As no trading is now done in physical form, Supriya wants to know the process
by adopting which she is in a position to deal with these certificates.
(a) Identify and state the process.
(b) Also give two reasons to Supriya why dealing with shares in physical form had
been stopped.
Ans. (a) Dematerialization - It is a process where securities held by the investor in physical
form are cancelled and the investor gives an electronic entry or number so that she/he
can hold it as an electronic balance in an account
(b) Problems with dealing in physical form - (any two)
(i) Theft
(ii) Fake/forged transfers
(iii) Transfer delays
(iv) Paper work associated with share certificates or debentures held in physical form.

12. The directors of a company want to modernize its plant and machinery by
making a public issue of shares. They wish to approach the stock exchange, while
the finance manager prefers to approach a consultant for the new public issue of
shares. Advise the directors whether to approach the stock exchange or a
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 consultant for new public issue of shares and why. Also advise them about
different methods which the company may adopt for the new public issue of
shares.
Ans. The directors should approach a consultant for new public issue of shares. The stock
exchanges deal with sale and purchase of existing securities only, not in new issue of
securities.
Different methods which the company may adopt for the new public issue of shares:
(i) Offer through prospectus (ii) Offer for sale (iii) Private placement
(iv) Rights issue (u) e-IPOs.

3. "SEBI is the watchdog of the securities market." Explain.

Ans. SEBI is the 'watchdog' of the securities market since it performs the following
protective, regulatory and development functions to protect the interests of investors
and to promote and develop the securities market.
(i) SEBI prohibits and controls fraudulent and unfair trade practices in the
securities market. e.g., price rigging, insider trading, making misleading
statements in prospectus, etc.
(ii) SEBI undertakes steps for investors' protection and promotes fair practices and
code of conduct in the securities market.
(iii) It registers stock brokers and sub-brokers and regulates the functioning of
stock brokers, underwriters, merchant bankers, etc.
(iv) It regulates the takeover bids by companies.
(v) SEBI levies fee or other charges and conducts enquiries, inspection and audits
of stock exchanges and intermediaries.

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 CHAPTER 11
Marketing Management
Marketing Management
It is concerned with exchange of goods and services from producers to consumers (or users)
in such a way that maximizes the satisfaction of customer needs.
Features of Marketing
(i) Needs and wants: Marketing involves satisfying needs and wants of the target
customers and developing goods and services that satisfy such needs and wants.
Needs are the basic human requirements such as food, clothing, shelter to survive,
while wants are demands for specific products. Needs give rise to wants. For
example, a person needs food for survival but when he/she demands Pizza or
Burger, his/her need becomes a want.
(ii) Creating a market offering: A good ‘market offering’ is the one which is
developed after analyzing needs and preferences of the potential buyers. For
example, offering a cell phone, with good size of memory (say, 2 GB), internet,
camera, etc. at a reasonable price, say, ` 5,000.
(iii) Customer value: The purpose of marketing is to generate customer value at a
profit. The job of a marketer, therefore, is to add to the value of the product so that
the customers prefer it in relation to the competing products and decide to
purchase it.
(iv) Exchange mechanism: The process of marketing involves exchange of goods and
services for money or for something of value to them. Exchange is referred to as
the essence of marketing.
Basis Selling Marketing
1. Meaning Selling means exchanging Marketing means identifying customer
goods for money. needs and satisfying them.
2. Scope/ Process Scope is limited; selling is Wider scope; it consists of number of
only a part of marketing and activities such as identification of
is concerned with promotion customer needs, developing the products
of the sale of products. to satisfy these needs, fixing prices and
persuading the potential buyers to
purchase the same.
3. Focus/Transfer Transfer of title and Achieving maximum satisfaction of the
of Title possession of products from customer’s needs and wants.
sellers to consumers.
4. Aim/Objective Profit maximization through Profit maximization through customer
sales maximization. satisfaction.
5. Start and End Selling activities start after Marketing activities start much before
of Activities the product has been the product is produced and continue
developed. even after the product has been sold.
6. Emphasis Bending the customer Developing the product as per the
according to the product. customer needs.
7. Strategies Selling involves efforts like Marketing uses integrated marketing
promotion and persuasion. efforts involving strategies in respect of
product, promotion, pricing and physical
distribution.

Functions of Marketing/Marketing Activities

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 1. Gathering and analyzing market information: To gather market information, the
marketer makes a SWOT analysis, i.e., the analysis of strengths and weaknesses of
the organization and the available opportunities and threats.
2. Marketing Planning: Another important function of marketing is to develop
appropriate marketing plans to achieve the marketing objectives of the organization.
For example, a marketer of LED TVs, having 10 per cent of the current market share,
aims at enhancing his/her market share to 20 per cent in the next two years. He / She
will have to develop a complete marketing plan.
3. Product designing and development: Another important marketing activity relates
to designing and developing the product in such a way that it attracts the target
customers. A good design can improve performance of a product and also give it a
competitive advantage in the market.
4. Standardization and grading: Standardization refers to producing gods of
predetermined specifications or standards of quality, price and packaging. It helps in
achieving uniformity and consistency in the output and reduces the
Need for inspection, testing and evaluation of the products by the buyers.

Grading is the process of classification of products into different groups on the basis
of some of its important characteristics such as quality, size, etc. Grading ensures that
goods belong to a particular quality and helps in realizing higher prices for high
quality products.
5. Packaging and labeling
6. Branding
7. Pricing of products
8. Physical distribution
9. Promotion
10. Customer support services: After – sales services, handling customer complaints,
maintenance services, technical services, etc. all these services aim at providing
maximum satisfaction to the customers, which in turn helps in procuring repeat sales
from the customers and developing brand loyalty for the product.

Marketing Management
Marketing management refers to planning, organizing, directing and controlling the
activities which facilitate exchange of goods and services between products and
consumers or users of products and services.
Thus, the focus of marketing management is on achieving desired exchange outcomes with
the target markets.
Marketing management involves performance of various functions such as:
(i) Analyzing and planning the marketing activities,
(ii) Implementing marketing plans and
(iii) Setting control mechanism.
A careful analysis of the definition reveals that the process of marketing management
involves the following objectives/ features:
(i) Choosing a target market, say a manufacturer may choose to make readymade garments
for children up to the age of 5 years;
(ii) Getting, keeping as well as growing the customers: The marketer has to:
• Create demand for his products so that the target customers purchase the product,
• keep them satisfied with the firm’s products and
• Attract more customers to the firm’s products so that the firm can grow.

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(iii)Creating, developing and communicating superior values for the customers: The primary
job of a marketing manager is to create superior values so that the customers are attracted
to the products and services and communicate these values to the prospective buyers and
persuade them to buy these products.
(iv) Building the goodwill/ reputation of the firm through various image building activities,
e.g., expenditure on up keep of parks and gardens in the city, sponsoring sports and
cultural events, etc.
(v) Achieving the long-term goals of profitability, growth and stability through

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Marketing Management Philosophies/ Concepts/ Orientations
Production Concept Product Concept Selling Concept Marketing Concept Societal Concept
1. Meaning Profits could be Potential exchange Customers would In the long run, and The tasks of any
maximized by would be realized not buy, or not buy organization can organization is to identify
producing at large when the product is enough unless they achieve its objective of the needs and wants of the
scale, thereby of high quality are adequately profit maximization by customers and deliver the
reducing the per unit because customers attracted and identifying customer desired satisfaction in an
cost of production favour those products convinced to do so. needs and satisfying effective and efficient
because customers which are superior in Therefore, for them better than the manner so that the long-term
would favour those quality, performance pushing the sale of competitors. The well-being of customers as
products which are and features. products, aggressive purpose of marketing well as the society is taken
widely available at selling and is to generate customer care of. An activity which
an affordable price. promotional efforts value at a profit. satisfies customer needs
should be (e.g., manufacturing a racing
undertaken. car), but is detrimental to the
interest of the society at
large (e.g., pollution created)
cannot be justified.)
2. Focus Quantity of product. Quality, Existing product, Customer’s needs Customer’s needs and
Performance, society’s well-being.
features of product.
3. Means Availability and Continuous Aggressive selling Integrated marketing Integrated marketing in
affordability of improvements in the and promotional in respect of product, respect of product, price,
product; improving quality, incorporating
efforts, e.g., price, promotion and promotion and physical
production and new features, etc. advertising, sales physical distribution. distribution.
distribution promotion, personal
efficiency. selling, etc.
4. Ends Profit through large Profit through Profit through sales Profit through Profit through customer
volume of product quality volume customer satisfaction. satisfaction and social
production. improvements. welfare.
5. Starting Factory Factory Factory Market Market, society.
Point

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Marketing Mix
“Marketing mix is the set of marketing tools that the firm uses to pursue its marketing
objective in the target market.”
The tools or variables or elements of marketing mix have been classified into four categories,
popularly called the “four P’s of Marketing:, viz. Product, Price, Place and Promotion.
Thus, marketing mix represents the total marketing programme of a firm.

Product
Product means goods or services or ‘anything of value’, which is offered to the market for
exchange.

Price
‘Price’ may 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, e.g., money paid for buying a pen,
fare of the transport service, etc.

Factors Affecting Price Determination

1. Pricing objectives: Pricing objectives of a firm may include:
• Profit maximization: If the firm decides to maximize profits in the short run,
it will charge maximum price for its products. But if it wants to maximize its
total profits in the long run, it will charge lower per unit price so that it can
capture large market share and earn greater profits through increased sales.
• Obtaining market share leadership: If a firm’s objective is to obtain larger
share of the market, it will keep the price of its products at lower levels so that
greater number of people are attracted to purchase the products.
• Surviving in a competitive market: If a firm is facing difficulties in
surviving in the market because of intense competition, it will charge the
lowest possible price and offer discounts also.
• Attaining product quality leadership: In this case, the firm charges higher
prices for providing high quality products because it incurs hevy expenditure
on research and development (R&D).
2. Product cost: The cost sets the minimum level or the floor price at which the product
can be sold. It is important that the price should recover total costs (fixed costs as well
as variable costs) in the long run including a margin of profit over and above the
costs.
3. Competition in the market: When affirm does not face any competition (under
monopoly situation). it can enjoy complete freedom in fixing its price.
But when there is intense competition, a firm should fix lower price of its products to
capture a large market share.
4. The utility and demand: When the demand of the product is inelastic, the total
revenue increase when the price is increased. So, a firm can fix higher price.
However, when the demand is elastic, a small rise in price results in decrease in the
quantity demanded by a large amount. Total revenue also decreases. So, lower price
should be fixed.
5. Government and legal regulations: In order to protect the interest of public against
unfair practices, government fixes the prices of essential commodities, e.g.,
medicines, petrol, etc. A firm should not charge a higher price; otherwise it would
invite government action.

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 6. Marketing methods used: Price determinations also affected by the distribution
system, quality of salesmen employed quality of advertising, the type of packaging,
etc. For example, if a company provides free home delivery of goods, it can fix a
relatiovely higher price for its product.
Promotion
‘Promotion’s of goods and services involves informing potential customers about the firm’s
product, its features, quality, etc. and persuading them to buy it.
These include:
(i) Advertising
(ii) Personal selling
(iii) Sales promotion
(iv) Public relations

Place/ Physical distribution

It is concerned with making the goods and services available at the right place, in right
quantity and at the right time, so that consumers can purchase the same.

Types/Methods
1. Direct channel (zero level): Direct channel of distribution means making goods
available to consumers directly by the manufactures, without involving any
intermediary,
Manufacture → Customer
Methods of Direct Selling/Direct Distribution:
(i) Selling goods through own retail outlets (e.g., McDonald’s, Bata, etc.)
(ii) Selling through own sales force (e.g., Eureka Forbes)
(iii) Mail order selling (e.g., India times)
(iv) TV selling (e.g., Asian Sky Shop)
(v) Telemarketing (e.g., ICICI bank)
2. Indirect channels: Indirect channels of distribution mean making goods available to
the consumers by employing one or more intermediaries.
(i) One level channel: In this, only intermediary adopted is the ‘retailer’, Goods
pass from the manufacturer to the retailers who, in turn, sell these goods to the
final users. for example, Maruti Udyog sells its cars and vans through
company approved retailers.
Manufacturer → Retailer → Customer
(ii) Two level channels: This is the most commonly adopted distribution network
for most consumer goods like soaps, oils, clothes, rice, sugar and pluses. Here,
two intermediaries are involved, i.e., the wholesaler and retailer. The
manufacturer sells the goods in bulk to wholesaler who sells in small lot to
retailers who then supply these to ultimate customers.
Manufacturer → Wholesaler → Retailer → Customer
(iii) Three level channels: In this network, there are three intermediaries involved
– agents, wholesalers and retailers. Manufactures use their own selling agents
or brokers who connect them with wholesalers and then the retailers.
Manufacturer → Agent → Wholesaler → Retailer → Customer
Factors determining choice of channels of distribution
1. Market Factors
(i) Size of the market, i.e., the number of buyers: In case the number of buyers
is small, such as for most industrial products (e.g., machines and equipment),
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 short channels are used. But if the number of buyers is large, as in the case of
most consumer products (e.g., soft drinks, toothpaste, etc.) longer channels
involving large number of intermediaries are used.
(ii) Geographical concentration of potential buyers: If the buyers are
concentrated in a particular area, shorter channels may be used. But if the
buyers are widely scattered over a large geographical area, longer channels
may be used.
(iii) Size of order, i.e., quantity purchased: If the size of the order is small, as in
case of most consumer products, large number of intermediaries may be used.
But if the size of the order is large, direct channels may be used.
2. product Related Factors
(i) Nature of product: Industrial products are usually technical, made to order
and expensive products purchase by few buyers. These products require short
channels, i.e., direct channel or involving few middlemen. On the other hand,
consumer products are usually standardized, less expensive, less bulky, not
technical and frequently bought products. These can be better distributed by
long network of channels, involving many middlemen.
(ii) Perishable vs. non-perishable products: Perishable products like fruits,
vegetables and dairy products are best sold through short channels. While non-
perishable products like toiletry products (e.g., soap, toothpaste, hair oil, etc.)
groceries (vegetable oil, tea, etc.) require longer channels to reach widespread
consumers.
(iii) Unit value of the product: When the goods to be distributed are costly (like
gold jewellery, industrial machines, etc.), shorter channels are preferred while
for less costly, inexpensive products, longer channels could be used.
(iv) Product complexity: In case of complex products requiring technical details
(e.g., engineering products), shorter channels are preferred but if the product is
non-complex, it is sold through long channels, involving a number of
intermediaries.
3. Company Characteristics
(i) Financial strength of the company: Direct selling involves huge funds to be
invested in fixed assets, say, for starting own retail outlasts or engaging large
number of salespersons. Indirect selling through intermediaries, on the other
hand, does not involve lots of funds. Thus, if the firm has deep pocket, it may
go for direct distribution. But if huge funds are not available, it may go for
indirect channels.
(ii) Degree of control: If the management wants to have greater control on the
channel member, short channels are used.
But if the management does not want more control over the middlemen, it
adopts longer channels involving large number of intermediaries.
4. Competitive Factors: The choice of channel is also affected by the channel selected
by competitors in the same industry.
• If the competitors have selected a particular channel, say, chemist shops for
the sale of shaving cream, the other firm may also like to select the similar
channel.
• In some cases, producers may want to avoid the channels used by competitors.
For example, if other cosmetic producers have chosen big retail stores for the
sale of their products, a particular firm may like to adopt door-to-door selling.

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 5. Environmental Factor: Environmental factors such as economic condition and legal
constraints also affect the choice of channels of distribution. For example, in a
depressed economy marketers use shorter channels to distribute their goods.

Branding
1. Branding is the process of giving a name or a sign or a symbol, etc. to a product.
2. He/ she has to decide whether the firm’s products will be marketed under a brand
name or a generic name.
3. Generic Name
Generic Name Brand Names
Shoes Reebok shoes, Woodland Shoes, Bata Shoes, etc.
Pen Parker Pen, rottomac pen, Cello pen, etc.
Car BMW car, Honda City Car, Maruti Car, etc.
Tubelight Phillips tubelight, Havells tubelight, etc

Advantages of Branding
To the Marketers:
(i) Enables making product differentiation: Branding helps a firm in
distinguishing its product from that of its competitors.
(ii) Ease in introduction of new product: If a new product is introduced under a
known brand, it is likely to get an excellent start. For example, Samsung extended
the brand name of its television to washing machines, microwave oven, etc.
(iii) Differential pricing: Branding enables a firm to charge higher price for its
products than its competitors because if customers like a brand and become
habitual of it they do not mind paying a little higher price for it.
(iv) Helps in advertising and display programmes: A brand name helps a firm in its
advertising and display programmes.

To the Customers:
(i) Helps in product identification: Branding helps the customers in identifying the
products. For example, by seeing a customer can identify that it is a Nike
product. he/ she need not make a close inspection every time he/ she buys it.
(ii) Status symbol: Some brands become status symbols because of their quality, e.g.,
woodland, Parker, Mont Blanc, etc. The consumers feel proud of using them.
(iii) Ensures quality: Branding ensures a particular level of quality of the product. If
there is any deviation in the quality, the customers can make a complaint to the
manufacturer or the marketer.

Characteristics of a Good Brand Name

1. A brand name should be short, easy to pronounce, spell, recognize and remember,
e.g., LG, NANO, VIP, Rin, Vim, etc.
2. The brand name should suggest the product’s benefits and qualities, e.g., Hajmola,
Ujjala, hair and Care, Eeco, Swift, etc.
3. A brand name should be distinctive, i.e., Zodiac, Kodak, Zerox, Safari, etc.
4. Brand name should have staying power, i.e., it should not get out of date very soon
e.g., Coca Cola, Lux, Vicco, Nirma, etc.
5. The brand name should be sufficiently versatile to accommodate new products, which
are added to the product line, e.g., Maggie, Colgate, etc.

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 6. It should be adaptable to packaging or labeling requirements, to different advertising
media and to different languages. For example, the brand name Nova (given to
Ambassador car) means ‘does not go’ in Spanish. Such types of names should be
avoided.
7. It should be capable of being registered and protected legally.

Packaging
Packaging refers to the act of designing and producing the container or wrapper of a product.
For example, Toilet Soaps come in paper boxes or plastic wrappers, Biscuits come in paper
packaging, Refrigerators or Televisions come in hard wood and board cartons and Expensive
perfumes and liquor come in glossy boxes and designer bottles.

Level of Packaging
There can be three different levels of packaging:
1. Primary package: It refers to the product’s immediate container, e.g., toothpaste
tube.
• In some cases, the primary package is kept till the consumer is ready to use the
product (e.g., plastic packet of under-garments).
• Sometimes, it is kept throughout the whole life of the product (e.g., a match-
box).
2. Secondary package: It refers to additional layers of protection that are kept till the
product is ready for use, e.g., Denim shaving cream tube comes in a card board box.
When a consumer starts using the shaving cream, he disposes off the box but retains
the primary tube.
3. Transportation package: it refers to further packaging components necessary for
storage and transportation. For example, a toothpaste manufacturer may send the
goods to retailers in corrugated boxes containing 10, 20 or 100 units.
Functions/ Importance of packaging
1. Product identification: Packaging greatly helps in identifying the product. For
Example, Uncle chips in green colour, Maggie’s noodles in yellow colours, Pounds
cream jar in white and blue colour, etc. can be easily identified.
2. Product protection: Packaging protects the contents of a product from spoilage,
breakage, leakage, pilferage, damage, climatic effect, etc. For example, airtight
containers and packets are used for chips, biscuits, jams, etc.
3. Product promotion: Packaging promotes the sale of the product by attracting
attention of the customer. The package is the buyer’s first encounter with the product
and is capable of turning the buyer on or off. The attractive, colorful and innovative
packing e.g., Packaging is, therefore, considered a silent salesman.
4. Product differentiation: Packaging creates product differentiation. For example, by
looking at the package of a product, say, hair oil, one can make some guess about
quality of the product contained in it.
5. Easy handling/facilitating use of the product: The size and shape of the package of
some products are such that it is convenient to open, handle and use them, e.g.,
cosmetics, medicines and toothpaste tubes. Etc.
6. Rising standards of health and sanitation: Packaging helps in preventing
adulteration as the product is properly packed, e.g., Aashirwaad Aata, Olive Oil, etc.
7. Innovational opportunity: By developing innovative packages the marketer can
capture new customer segment. For example, by supplying shampoo in pouch, sales

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 in rural areas can be enhanced. Family pack of Colgate, Maggi 4 in one and 6 in one
and 6 in one, etc. also enhance the sale, Similarly, milk can now be stored for 4-5
days without refrigeration in the recently developed packing materials.

Labeling
Labeling refers to designing the label to be put on the package.
Label may vary from a simple tag attached to the product (e.g., in case of local unbranded
products like sugar, wheat, pluses, etc.) to complex graphics that are part of the package (e.g.,
in case of Taj Mahal tea or India Gate Basmati rice).

Functions/Importance of Labeling
1. Describe the product and specify its contents: One of the most important functions
of labels is to describe the product, its usage, manufacturing and expiry dates,
cautions in use, etc. and specify its contents, i.e., ingredients, net weight when packed,
etc. Examples: (i) Package of fast food products like ready to eat Dosa, Idli or
Noodles, describe the procedure of cooking these products, (ii) Package of a brand of
coconut oil describes the product as pure coconut oil describes the product as pure
coconut oil with Heena, Amla, Lemon and specifies how these are good for hair.
2. Identification of the product or brand: The label helps the customers to identify the
product or brand from the various types available. For example, we can easily identify
a Cadbury chocolate from the various chocolates kept in the shelf of a shop by the
colour of its label
3. Grading of products. With the help of label, products can be graded in different
categories, For example, Brook Bond Red Label, Green Label, etc.
4. Help in promotion of products: Lables play important role in sales promotional
schemes launched by companies. For example, the label on the pack of Dettol shaving
cream mentions “40% extra Free”, pack of Colgate toothpaste mentioning” Save `
10” or the pack of Dabur Amla hair oil states, “Baalon Mein Dum, Life Mein Fun”.
5. Providing information required by law: Labelling performs the function of
providing information required by law, e.g., the statutory warning on the packet of
cigarettes, “Smoking is injurious to Health”. In case of hazardous or poisonous
material, appropriate safety warning needs to be put on the label.
Elements of Promotion Mix

Advertising
“Advertising is any paid form of non-personal presentation and promotion of ideas, goods or
services by an identified sponsor”

Role of Advertising
1. Creates demand: Advertising helps to create demand by making people aware of
new products and new uses of existing products.
2. Educate consumers and makes shopping easier: Advertising educates consumers
by providing useful information about how products can be used for better
satisfaction. It also helps consumers by informing them about the new features of the
existing products. Thus, it makes shopping easier for them.
3. Enhances consumer confidence: Advertising enhances consumer confidence as they
feel more comfortable and assured about the quality of advertised product.

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 4. Creates better organizational image: Advertising creates better organizational
image as through it, message may reach people about how the organization stands for
serving the society.
5. Facilitates introduction of new products: Advertising helps in introduction of new
products by communicating the positive features of newly introduced products.
6. Creates customer loyalty: Advertising helps in creating customer loyalty through
repeated communication.
7. Provides economies of scale: Advertising creates demand for the company’s
products, which facilitates large-scale production. As a result, per unit cost of
production decreases because of economies of scale.

Objections to Advertising / Criticisms against Advertising

Objection to Advertising Is the Objection Justified?
1. Adds to cost: Companies spend lakhs of This objection is not correct because with
rupees for few seconds of advertisement advertisements the demand for product
on TV. Similarly, an advertisement in a increases, which brings increase in sales and
newspaper or a magazine costs the this leads to increase in production. With
marketers a large amount of money. these increase in production, the companies can get
expenses are added to the cost and passed the economies of scale which reduces the per
on to the buyers in the form of higher unit cost of production and thus, the increase
prices. in cost due to expenses on advertisements
gets compensated.
2. Undermines social values: Advertising This criticism is not entirely true.
promotes materialism and multiplies Advertisement helps buyers by informing
needs. it induces the buyers to buy the them about the new products, which may be
new and latest products discarding old but improvement over the existing products.
still functional products. for example, a Advertisements only inform the consumers,
person having LCD TV may be induced the final choice of buying or not lies with the
to buy LED T. customers only. Consumers, being rational
human beings, can judge their needs
accordingly.
3. Encourages sale of inferior products: This objection is not correct because what is
Advertising does not distinguish between inferior and what is superior depends upon
superior and inferior products and the economic status and preference of the
persuades people to purchase even the customers. Everyone cannot afford to buy
inferior products. Its purpose is to superior quality expensive products. for
promote sale of goods only. example, those who cannot afford to buy
Woodland or Reebok shoes have to satisfy
themselves with local brands only.
4. Confuses the buyers rather than helps: This objection is not correct because
Everyday we come across hundreds, of advertisements give wide choice to
ads about a single product. For example, customers and today’s customer is smart
there are so many ads of televisions of enough to know and select the most suitable
different companies such as LG, Onida, brand for him/her. Buyers can analyse the
Sony, BPL Samsung, Videocon, etc. Each information provided on the advertisements
brand claims that they are the best. They and other sources before taking a decision to
confuse the customer and it becomes very purchase a product. They may consider
difficult for him/her to make a right several factors such as price, style, size, etc.

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 choice.

5. Some advertisements are in bad taste: These kinds of advertisements are certainly
They are not based on ethics and values. not good. Objectionable words and scenes
For example, ads showing women have an undesirable effect on the society.
dancing when not required or running
after a man because he is using a certain
brand of perfume are certainly not good
6. Some advertisements make false claim No advertisement should make any false
about the quality of a product, e.g., “Ek claim about the quality of a product. If a firm
boond lage, saare kapde dhoye.” makes a false claim, it must be prosecuted for
the same

Personal Selling
Personal selling means – “Selling products personally.” It involves oral presentation of
message in the form of conversation with one or more prospective customers for the purpose
of making sales.

Qualities of a Good Salesperson

1. Physical Qualities: A salesperson should be good looking. He must have sound
health and stamina.
2. Mental/ Psychological Qualities: a salesperson should be sweet natured, possess
good behavior, be mentally healthy, have presence of mind, sharp memory and
intelligence.
3. Technical Qualities: A good salesperson should have full technical knowledge about
the product he/ she is selling. He/ she must be able to explain its features, benefits,
quality, etc.
4. Good Communication Skills: A good salesperson must have fantabulous
communication skills. He/ she must be confident, and a convincing conversationalist.
5. Honesty: A good salesperson must be honest and of sound character. He/ she must be
sincere in performing his/ her duty. there is no place for dishonest salesperson in any
business. All businesses want honest people, no tricks, no scams, no frauds.
6. Courtesy: A salesperson must be very polite. Courtesy in business is what oil is to
machinery. It costs nothing but wins a reputation. So, polite language should be used
to win buyer’s confidence. This will also help him/ her to make regular and
permanent customers.
7. Persistent: Good sales person are tactful, ambitious and enthusiastic. They never give
up. They give their best to persuade customers to buy the product.
8. Capacity to inspire trust: A salesperson must have passion and ability to inspire
trust in his/ her customers. He/ she must understand the customer’s needs and
convince his/ her customer that the specific product being sold will best fill that need.

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 ADVERTISING VS PERSONAL SELLING
Basis Advertising Personal Selling
1. Form/ Impersonal form of communication Personal form of communication.
Nature
2. Reach Large number of people can be only a limited number of people can
approached. be contacted.
3. Cost Cost per person reached is very low. Cost per person is quite high
4. media used Television, radio, newspapers and Salespersons to contact prospective
magazines. buyers.
5. Feedback Lacks direct feedback. Direct and immediate feedback
6. Flexibility Inflexible; the message cannot be Flexible; sales presentation can be
adjusted to the needs of the buyer. adjusted to fit customer needs.

Sales Promotion
Sales promotion refers to short-term incentives which are designed to encourage the buyers to
make immediate purchase of product or service. Aim: To boost the sales of a firm.

Sales Promotion Activities/ Techniques/ Methods/ Tools

1. Rebate: It means offering products at special prices, to clear off excess inventory.
Example: Offer of Maruti to sell Esteem car at a discount of ` 30,000 for a limited
period say, in the month of December.
2. Discount: It means offering products at less than list price. Certain percentage of price
is reduced as discount. Examples: (i) Bata’s offer of discount up to 50%, (ii) offer of
50+ 20% discount on Peter England shirts.
3. Refund: It means refunding a part of price paid by customer on presenting some
proof of purchase, e.g., on return of empty foils or wrappers, get a refund of ` 5.
4. Product combinations: It means offering another product as gift along with the
purchase of a product. Examples: (i) Shakti Bhog Atta’s offer of ½ Kg sugar free with
a pack of 10 kg Atta, (ii) Get 2 GB memory card free with a Nokia cell-phone, (iii)
100 gm bottle of sauce free with 500 gm Kissan Jam, (iv) Buy a 32” LCD TV and get
a DVD player free.
5. Quantity gift. It means offering extra quantity of the product to increase sales.
Examples: (i) ‘buy three get one free’ offer available on Vivel and Lux soaps, (ii) ‘50
grams extra’ offer of Rin detergent bar, (iii) Dettol shaving cream’s offer of ‘40%
Extra’, (iv) A Hotel’s offer of “Take a 2 Nights 3 Days Package at the Hotel and Get
an Extra Night Stay at Just ` 500”.
6. Sampling: It means offering free sample of product to potential customers at the time
of launch of a new product. This is done to make customers try the product and learn
about it Examples: (i) HUL’s Surf Excel samples, (ii) Lakme Sunscreen samples.
7. Contests: It is a technique of sales promotion in which customers participate in some
competitive events involving application of skills or luck, say, solving a quiz or
answering some questions. The winners are given some reward. Examples: (i) Harvest
Gold, maker of ‘Premium Bread’ have children drawing competitions, (ii) Bournvita
Quiz Contest (iii) Slogan writing competition.
8. Lucky draw: It refers to taking out a draw on purchase of product and given gift to
the winner. Example: A lucky draw coupon for free petrol on purchase of certain
quantity of petrol from given petrol pump.

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 9. Instant draw and assigned gifts: It is technique of sales promotion in which assured
gifts are given to the customers instantly by participating in a draw, on purchase of a
product. For example, on purchase of a TV, scratch a card or burst a cracker and
instantly win a car, refrigerator, computer, T-shirt, etc.
10. Financing: It is technique of sales promotion in which easy financing schemes are
offered. For example, many marketers of electronic goods, automobiles, etc. offer
“Full finance @ 0%, 12 easy installments, 4 up front and 8 to be paid as post-dated
cheques.”
11. Usable benefit: Examples: (i) ‘Purchase gods worth ` 50,000 and get a holiday
package worth ` 10,000 free’, (ii) Get a Discount Voucher of ` 500 on Apparel
Purchase of ` 4,000 and above.

Public Relations
Public relations (PR) involve a variety of programmes to promote and protect a company’s
image or its products in the eyes of the public.
Traditional Public Relation Tools include: Press release and Press Kits which are distrihuted
to the media to the media to generate interest from the Press.
Other widely known Tools include:
• Brochures, Newsletters, Annual Reports and Audio-visual materials.
• Events like seminars, contests, etc.
• Public service activities, e.g., expenditure on upkeep of parks and gardens in the city.
• Sponsorships – sponsoring sports and cultural events.

Role of Public Relations

1. Press relations: Information about the organization needs to be presented in a
positive manner in the press. The public relations departments are in contact with the
media to present true facts and a correct picture about the company. Otherwise news
can get distorted if taken from other sources.
2. Product publicity: New products require special effort to publicise them. The public
relations department advises the top management that the company can draw attention
to new products by sponsoring sports and cultural events like news conferences,
seminars and exhibitions.
3. Corporate communication: The Company’s image can be promoted through
communication with the public and the employees within the organization. This is
usually done with the help of newsletter, annual reports, brochures, speeches by the
company’s executives at a meeting of trade associations or trade fairs, interviews with
TV channels, etc.
4. Lobbying: Public relations professionals help the company to maintain a healthy
relationship with government officials and ministers in charges of corporate affairs,
industry, finance with respect to policies relating to business and the economy.
5. Counseling: The public relations department advises the top management that the
company can build goodwill by contributing money and time to certain cause like
environment, wild life, children’s rights, education, etc.
6. Image building: Public relations programmes help in building corporate image that
affects favorably on its products e.g., expenditure on upkeep of parks and gardens in
the city, sponsoring sports and cultural events, etc.
7. Facing adverse publicity: for example, Pepsi, Coco-Cola was subjected to
controversy that there were pesticides found in the samples collected from different

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 areas. in this situation, the companies had to face severe criticism from various sectors
like consumers, investors, government, etc. An effective PR can remove the
misunderstanding’ and can increase mutual understanding between the company and
the public.

Application and Hots Based Questions with Answers

1. Zoom Udyog, a car manufacturing Co., has started its business with Zoom 800
and slowly launched Zoom-1000, Wagon-Z, Swy-fy etc. and offered various
services like after sale service, availability of spare parts etc. Identify the element
of marketing mix referred here.
Ans. Product

2. Radha found a worm crawling out of newly opened tetra pack of a juice
manufactured by a reputed company, Zest, Ltd. She went back to the
shopkeeper from whom the pack was purchased who directed her to call up the
customer care centre. When all her efforts failed, she went to a consumer activist
group to seek help. The group decided to help Radha and take measures to
impose restrictions on the sale of the firm's products of the particular batch and
urge customers to refrain from buying the products of the company. Zest Ltd.
lost its image in the market. The CEO gives the responsibility of bringing back
the lost image of the company to a Manager.
(a) Identify the concept of Marketing Management which will help the Manager
getting the firm out of the above crisis.
(b) Also explain the role of above identified concept by stating any two points.
Ans. (a) Public Relations
(b) Role of Public Relations:
(i) Product Publicity: New products require special effort to publicise them. The
public relations department advises the top management that the company can
draw attention to new products by sponsoring sports and cultural events like
news conferences, seminars and exhibitions.
(ii) Counseling: The public relations department advises the top management that
the company can build goodwill by contributing money and time to certain
causes like environment, wild life, children's rights, education, etc.

3. The manager of Impact Enterprise, dealing in cosmetics, is facing the problem of

poor sales. Suggest the four promotional measures that he can undertake to
improve the sales. Also, name the factors affecting their choice.
Ans. The manager of Impact Enterprise, dealing in cosmetics, should take the following
four promotional measures to improve the sales:
(i) Advertising (ii) Sales promotion
(iii) Personal selling (iv) Publicity
Factors affecting choice of promotional tool:
(i) Nature of market (ii) Nature of product
(iii) Promotions budget (iv) Objectives of promotion

4. Identify and explain any four sales promotion techniques shown in the diagram.
Ans. Sales Promotion Techniques

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 (i) Rebates: Offering a packet of 5 kg sugar at ` 30 less (MRP ` 125 at ` 95) to
clear off excess inventory.
(ii) Discount: 50% off on Bata shoes.
(iii) Quantity gift: 'Buy 2 get 1 free' offer available on squash of 700 ml (lemon
and orange) for ` 65.
(iv) Product combinations: Get a bar of soap 100 g, MRP 15 free on buying 500
ml toilet cleaner of ` 50.

5. Identify and explain the three levels of packaging shown in the diagram.
Ans. Levels of Packaging:
(i) Primary Package (e.g., toothpaste tube). It is the product's immediate
container.
(ii) Secondary Packaging (e.g., a tube of shaving cream in a cardboard box).
It is the additional layer of protection that is kept till the product is ready for
use.
(iii) Transportation Packaging: It refers to further packaging necessary for
storage, identification or transportation.

6. A mobile company is launching a new high tech mobile phone in the market.
Which department is going to look into the techniques of promoting it?
Ans. Public Relations (PR) Department

7. Identify the Marketing Management philosophy adopted in the following cases:

(i) Mansi, a shoe manufacturer for school students, decided to maximise her
profit by producing and distributing at large scale and thereby reducing
the average cost of production
(ii) Nisha, a school bag manufacturer decided to improve the product for
profit maximisation and thus added a waterbottle holder to the existing
design.
(iii) Jasdeep, a dealer in school uniforms, decided to maximise his profit by
using different aggressive promotional efforts.
(iv) Amar is engaged in manufacturing of refrigerators. He surveyed the
market and found that customers need a refrigerator with a separate
provision of water cooler in it. He decided to launch the same refrigerator
in the market.
Ans. (i) Production concept
(ii) Product concept
(iii) Selling concept
(iv) Marketing concept

8. Identify the method of sales-promotion in the following cases:

(i) A mobile company offers a discount of ` 1000 to clear off excess inventory.
(ii) A customer gets ` 5 off on return of an empty wrapper while making a new
purchase of the same product.
(iii) A Company offers a pack of V2 kg of sugar with the purchase of a 5 kg bag of
wheat flour.
(iv) A company offers 40% of extra shaving cream in a pack of 500 gms.
(v) Scratch a card and get a gold coin with the purchase of a cold drink.

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 (vi) Purchase goods worth ` 50,000 and get a holiday package worth `10,000 free.
Ans. (i) Rebate
(ii) Refund
(iii) Product-combination
(iv) Quantity-gift
(v) Instant draws and assigned gift
(vi) Usable Benefit/Lucky Draw

9. 'Various tools of communication are used by the marketers to promote their

products.'
(a) Why do companies use all tools at the same time?
(b) Name and explain the most commonly used non-personal tool of
promotion which is paid for by the marketer.
(c) Which tool of promotion will primarily be used for the following?
(i) To promote or protect a company's image or its individual products.
(ii) An existing product meant for mass usage by literate people.
(iii) To introduce a new product to a particular class of people through door-
to-door visits.
(iv) To attract attention of the people by using incentives.
Ans. (a) The companies use all tools at the same time because of the nature of market,
nature of product, promotion budget and objectives of promotion being different at
different times.
(b) The most commonly used non-personal tool of promotion which is paid for by the
marketer is advertising. It is a paid and non-personal form having an identified
sponsor to promote an idea.
(c) The tools of promotion used are:
(i) Public Relations
(ii) Advertisements
(iii) Personal Selling
(iv) Sales Promotion

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 Chapter 12
Consumer Protection
Consumer Protection Act, 1986
‘Consumer Protection’ means protecting and promoting the consumers’ interest through
speedy and inexpensive redressed of their grievances. The CPA provides safeguards to
consumers against defective goods, deficient services and unscrupulous, exploitative and
unfair trade practices of sellers.

Importance of Consumer Protection

1. Consumer ignorance: In India, consumers are ignorant about their rights and reliefs
available to them. Therefore, it becomes necessary to educate them about the same so
as to achieve consumer awareness.
2. Unorganized consumers: In India, we do have consumer organizations and non-
government organizations (NGOs) which are working in the field of educating
consumers about their rights and promoting their interest. Therefore, adequate
protection should be given to consumers till these organizations become powerful
enough to protect and promote the interest of consumers.
3. Widespread exploitation of consumers: some traders, manufactures and service
providers may be tempted to engage in exploitative and unfair trade practices such as
defective and unsafe products, adulteration, false and misleading advertising,
hoarding, black-marketing, etc. This means that consumers might be exposed to risks
due to unsafe products, might suffer from bad health or might have to pay a higher
price. Therefore, they need protection against such malpractices of the sellers.

From the Point of View of Business

1. Long-term interest of business: Satisfied customers not only lead to repeat sales but
also provide good feedback. Therefore, business firms should aim at long-term profit
maximization through customer satisfaction.
2. Government intervention: A business engaging in any form of exploitative trade
practices would invite government intervention or action. This would tarnish the
image of the company.
3. Moral justification: It is the moral duty of any business to take care of consumers
interest and avoid any form of their exploitation and unfair trade practices like
defective and unsafe products, adulteration, false and misleading advertising,
hoarding, black-marketing etc.
4. Business uses society’s resources: Business organizations earn profits by using
resources of the society. So, they have a responsibility to supply such products and
render such services which are in public interest.
5. Social responsibility: A business has social responsibilities towards various interest
groups – owners, employees, government, consumers, etc. Business organizations
earn profits by selling goods and providing services to consumers. Thus, consumers
form an important group and like other stakeholders, their interests should be well
taken care of.

Definition of a ‘Consumer’

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A ‘consumer’ is generally understood as a person who uses or consumers goods or avails of
any service. Under the Consumer protection Act, 1986, a consumer is defined as:
(a) Any person who buys any goods for a consideration, which has been paid or
promised, or partly paid and partly promised, or under any scheme of deferred
payment. It includes any user of such goods, when such use is made with the approval
of the buyers, but does not include a person who obtains goods for re-sale or for any
commercial purpose.
(b) Any Person who hires or avails of any service for a consideration which has been paid
or promised, or partly paid and partly promised, or under any system of deferred
payment. It includes any beneficiary of services when such services are availed of
with the approval of the person concerned, but does not include a person who avails
of such services for any commercial purpose.

Who can file a complaint under the Consumer Protection Act, 1986?
Under the Consumer Protection Act, 1986, a complaint before the appropriate Consumer
court can be made by:
1. any consumer;
2. any registered consumer’s association;
3. the Central Government or any State Governments’
4. One or more consumers on behalf of numerous consumers having the same interest;
and
5. a legal heir or representative of a deceased consumer.

Against whom a complaint can be filed?

1. The seller manufacturer or dealer of goods which are defective.
Defect means any fault, imperfection or shortcoming in the quality, quantity or purity
of goods.
2. The provider of services if they are deficient in any maner.
Deficiency means any imperfection, shortcoming or inadequacy in the quality, nature
and manner of performance of services.

Remedies/ reliefs available to a consumer

If the consumer court is satisfied about the genuineness of the complaint, it can issue one or
more of the following directions to the opposite party.
1. To remove the defect in goods or deficiency in service.
2. To replace the defective product with a new one, free from any defect.
3. To refund the price paid for the product or the charges paid for the service.
4. To pay a reasonable amount of compensation for any loss or injury suffered by the
consumer due to the negligence of the opposite party.
5. To discontinue the exploitative/ unfair trade practice and not to repeat it in the future.
6. Not to offer hazardous goods for sale.
7. To withdraw the hazardous goods from sale.
8. To cease manufacture of hazardous goods and to desist from offering hazardous
services.
9. To pay any amount (not less than 5% of the value of the defective goods or deficient
services provided), to be credited to the Consumer welfare Fund or any other
organization/ person, to be utilized in the prescribed manner.
10. To issue corrective advertisement to neutralize the effect of a misleading
advertisement.
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 11. To pay adequate costs to the appropriate party.

Rights and Responsibilities of Consumers

Consumer Rights
1. Right to Safety: The consumer has a right to be protected against goods and services,
which are hazardous to life and health. For instance, electrical appliances which are
manufactured with sub-standardized products or do not conform to the safety norms
might cause serious injury. Therefore, consumers are educated that they should use
ISI marked electrical appliances only for the assurance of quality.
2. Right to be informed: The consumer has a right to have complete information about
the product he/ she intends to buy including its ingredients, date of manufacture,
price, quantity, directions for use, etc. That is why the manufactures have to provide
such information on the package and table of the product.
3. Right to Choose: The consumer has the right to choose from a variety of product at
competitive prices, size, etc. and allow the consumer to make a choice from amongst
these.
4. Right to be Heard: The consumer has a right to file a complaint and to be heard in
case of dissatisfaction with goods or services. Therefore, many enlightened business
firms have set up their own consumer service and grievance cells. Many consumer
organizations and NGOs are also working towards this direction and helping
consumers in redressal of their grievances.
5. Right to Seek Redressal: The consumer has a right to get relief(s) in case of
defective goods or deficient services. The Consumer Protection Act, 1986 provides a
number of reliefs to the consumers including removal of defect in the product,
replacement of the product, compensation paid for any loss or injury suffered by the
consumer, etc.
6. Right to Consumer Education: The consumer has a right to acquire knowledge and
to be a well-informed consumer throughout life. He/she should be made aware of
his/her rights and the reliefs available to him/her in case the product or service falls
short of his/her expectations, Many consumer organizations and some reputed
business are taking an active part in educating consumers in this respect.

Consumer’s Responsibilities
1. A consumer must buy only standardized goods as they provide quality assurance, He/
she should look for ISI mark on electrical goods, FPO mark on food products,
Hallmark on jewellery, etc.
2. While buying a product, the consumer should read labels carefully to have
information about prices, net weight, manufacture and expiry dates, etc.
3. The consumer must learn about the risks associated with products and services, follow
manufacturer’s instructions and use the products safely.
4. The consumer must ask for a cash memo on purchase of goods and services. This
would serve as a proof of purchases. If there is any defect in goods purchased or
deficiency in service hired, he/she must have the cash memo to file a complaint in the
appropriate consumer court.
5. A consumer must file a complaint in an appropriate consumer court in case the goods
purchased are defective or there is deficiency in service hired. he/ she should not fail
to take an action even when the amount of loss is small because this attitude
encourages corrupt business practices to continue.

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 6. A consumer must be honest in his/her dealings, He/ she must choose only from legal
goods and services and discourage unethical practices like black – marketing
hoarding, etc.
7. Consumers should organize themselves in the form of consumer associations which
would play an active part in educating consumers and safeguarding their interests.
8. A consumer must be aware about various goods and services available in the market
so that an intelligent and wise choice can be made.

Application and Hots Based Questions with Answers

1. Harish purchased a medicine from 'Hari Govind Medical Stores' for his son who
had high fever. Even after giving the medicine his son's condition did not
improve and he had to be hospitalised. Doctor informed Harish that the
medicine given to his son was spurious. Harish complained about this to 'Hari
Govind Medical Stores'. As a result, 'Hari Govind Medical Stores' decided to file
a complaint against the manufacturer in the consumer court. Can 'Hari Govind
Medical Stores' do this? Give reason.
Ans. No, 'Hari Govind Medical Stores' cannot file a complaint against the manufacturer in
the consumer court. The Medical Stores is not a consumer since it buys medicine for
re-sale or commercial purpose.

2. Your mother purchased a colour television for ` 70,000 without cash-memo from
an authorised dealer of the manufacturer with a guarantee that the television
will be replaced with a new one if any of its parts becomes defective within three
months from the date of purchase. Within 10 days a part of the television was
burnt and on complaining the seller refused to replace the television. Name the
redressal agency under the Consumer Protection Act where your mother can file
the complaint.
Ans. No, my mother cannot file a complaint against the dealer or the manufacturer in the
consumer court since she does not have cash-memo, which serves as the proof of
purchase.

3. Himesh after completing his graduation started working with a multinational

company in Delhi. But due to ill health of his parents he had to go back to his
village. There he noticed that the villagers were literate but ignorant about their
rights. Many vegetable vendors were using stones as weights to sell their
vegetables. Some shopkeepers were selling food items without having 'FPO
mark'. Villagers did not find anything wrong with these practices. So to create
awareness among villagers Himesh decided to publish a weekly Journal 'Jan
Jagriti'. State the 'Right' which Himesh has exercised by doing so.
Ans. Right to consumer education

4. Bajaj Auto Ltd. purchased a machinery for ` 5 crore from Priya Ltd. and found
it defective. Despite many complaints the defect was not rectified. Suggest Bajaj
Auto Ltd. the appropriate forum to file their complaint in the three-tier
machinery under the Consumer Protection Act.
Ans. National Commission

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5. Rahu Bali purchased a flat for ` 50 lacs and found it different from what was
agreed. He wants his money back. Suggest him the appropriate authority to file
his complaint in the three-tier machinery under the Consumer Protection Act,
1986.
Ans. State Commission

6. Anurag bought an electric iron from a reputed showroom of a manufacturing

company but it caused electric shock to his wife while she was using it. Anurag
claimed a compensation of ` 15 lakhs. Where can he file his claim?
Ans. District Forum

7. Raj iv purchased a diesel car for ` 7 lakhs from an automobile company and
found its engine being defective. Despite many complaints the defect was not
rectified. Name the highest authority to file his complaint in the three-tier
machinery under the Consumer Protection Act.
Ans. National Commission

8. Mukul purchased a house for ` 30 lakhs from a housing company and found it
being defective. Despite many complaints, the defect was not rectified. He filed a
complaint in state commission but was not satisfied with its order. Where can he
appeal and within how many days?
Ans. National Commission, within 30 days of the passing of the order of the State
Commission.

9. Shubhangi purchased a car for ` 1.1 crore and found its engine defective. Despite
many complaints, the defect was not rectified. She filed a complaint in National
Commission but was not satisfied with its order. Suggest her the appropriate
authority where she can appeal.
Ans. The Supreme Court

10. Rita wants to buy a packet of juice. As an aware customer, how can she be sure
about the quality of juice she plans to buy?
Ans. By FPO mark label

11. Anjana wants to buy a gold ring. As an aware consumer, how can she be sure
about the quality of gold ring she is going to buy?
Ans. By Hallmark label

12. Pragya bought an iron of a reputed brand for ` 1500 but it caused an electric
shock while it was being used. Pragya wants to exercise her 'Right'. Identify the
'Right under which she can be protected.
Ans. Right to safety

13. Siddharth went to a shopkeeper to buy soap. The shopkeeper forced him to buy
a particular brand of soap out of various available brands, irrespective of the
willingness of Siddharth. Which right of Siddharth, as a consumer, has been
exploited?

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Ans. Right to choose.

14. Ahmed wants to buy an iron. As an aware customer, how can he be sure about
the quality of iron?
Ans. By ISI mark label

15. Tanya purchased some household goods from a 'General store'. After reaching
home she found a face cream which she had not billed for. After checking the
date of expiry and other details, she started using it. Her face burnt due to the
use of the cream. Where should Tanya file a complaint? Justify. Under
Consumer Protection Act, 1986 who can file a complaint?
Ans. Tanya cannot file a complaint in any consumer court since she does not have the
proof of purchase, i.e., cash memo. She did not fulfill her responsibility of an honest
consumer. She should have gone back to the general store to get its billing.
Under the Consumer Protection Act, 1986, any of the following can file a complaint:
(i) Any consumer
(ii) Any registered consumers' association
(iii) The Central Government or any State Government
(iv) One or more consumers on behalf of many consumers having same interest.
(v) A legal representative of a deceased consumer.

16. Akhil, a consumer purchased medicines without noticing the date of expiry. He
also did not obtain the cash memo. Do you think he will be able to protect
himself by the loss caused due to expired medicine? Give reasons to support your
answer.
Ans. Akhil will not be able to protect himself by the loss caused due to expired medicine
because he did not fulfill his responsibility on the following grounds:
(i) He did not read the labels of the packet of medicines. He did not notice the
date of expiry. A consumer should always read labels carefully to have
information about prices, net weight, manufacturing and expiry dates, etc.
(ii) He did not obtain the cash memo from the seller. Cash memo is a proof of
purchase and it is a must for filing a complaint in appropriate consumer court.

17. Deepak purchased a book from a book-seller and got the cash memo of ` 400
which he paid for the book. Later, he found that the actual price of the book is `
380 but the book-seller had put a sticker of ` 400 on the original price. Can
Deepak recover the extra money that he paid? What other options are available
to him against book-seller?
Ans. Deepak is a responsible consumer since he has got the cash memo for the book he
purchased. Cash memo is the proof of purchase. A consumer must have the cash
memo to file a complaint in a consumer court.
In this case, the book-seller has charged for the book a price in excess of the list price.
So, Deepak can recover the extra money he paid (` 20) from the book-seller.
Alternately, Deepak can file a complaint against the book-seller in a consumer court if
he does not get back ` 20 from the book-seller. If the consumer court is satisfied
about the genuineness of the complaint, it can issue the following directions to the
bookseller:
(i) To refund the price paid for the book (` 400).

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 (ii) To pay adequate costs to Mr. Deepak, which he incurred for filing the
complaint.
(iii) To discontinue the unscrupulous, exploitative and unfair trade practices and
not to repeat in the future.

18. Name the Consumer Court where the complaint was filed by the consumer.
Ans. District Forum (since compensation claimed is ` 5 lakh).

19. Name the products to which the following quality certification marks are
associated.
Ans. (i) Food products (ii) Electrical goods (iii) Agricultural products.

20. Dushyant, who was a vegetarian, went to a snack bar for having French fries and
later on found out that it had non-vegetarian content. Neither the advertisement
nor the packing of the product displayed that the product has non-vegetarian
content. Will Dushyant be able to claim compensation? Which right of the
consumer is violated?
Ans. Yes, Dushyant will be able to claim the compensation as the seller has violated the
"right to information".

21. Your mother purchased a washing machine for ` 10000 from an authorized
dealer of the manufacturer with an oral guarantee that the machine will be
replaced with a new one if any of its parts becomes defective within 3 months
from the date of purchase. The motor of the machine was burnt within 15 days
of its purchase. On complaining, the seller refused to replace the machine. Name
the redressal agency under the Consumer Protection Act where your mother can
file the complaint.
Ans. No, my mother cannot file a complaint against the dealer or the manufacturer in the
consumer court since she does not have cash-memo. She had purchased the washing
machine with an oral guarantee only.

22. Harsh asked for a bottle of mineral water from a shopkeeper. The maximum
retail price printed on the bottle was ` 20 only whereas the shopkeeper was
charging ` 35. In spite of many arguments the shopkeeper was not ready to sell
the bottle for less than ` 35. Harsh was in need of it and had no option except to
buy. Identify the 'Right' which Harsh can exercise.
Ans. Right to be Heard

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