Business Studies

CBSE - CLASS XII NOTES

 NATURE AND SIGNIFICANCE OF MANAGEMENT

➔ Management is required in all kinds of organisations.

➔ It is essential for all organisations, no matter the size or industry.
➔ It consists of a series of interrelated functions that are performed by managers.

CONCEPT OF MANAGEMENT
➔ Management is an activity which is necessary wherever there is a group of people working in an organisation.
➔ It aims at guiding their efforts towards achieving a common objective - a goal.
➔ It has therefore been defined as a process of getting things done with the aim of achieving goals effectively and
efficiently.

Process, Effectiveness and Efficiency

➔ Process here means the primary functions or activities management performs to get things done.
◆ These functions are planning, organising, staffing, directing and controlling.
➔ Effectiveness is concerned with finishing the given task, completing activities and achieving goals.
➔ Efficiency means doing the task correctly and with minimum cost.
◆ Management is concerned with the efficient use of these resources because they reduce costs and
ultimately lead to higher profits.
◆ Uses cost-benefit analysis.
➔ Effectiveness v. Efficiency
◆ Effectiveness and efficiency need to be balanced and management may have to compromise on
efficiency at times.
◆ Usually, high efficiency is associated with high effectiveness, which is the aim of all managers, but
undue emphasis on only efficiency without being effective is not desirable.
◆ Poor management is due to both inefficiency and ineffectiveness.

Basis Effectiveness Efficiency

Meaning Refers to completing the task on time, no Refers to completing the task with minimum
matter what the cost. cost, optimum utilisation of resources and in a
cost-effective manner.

Objective To achieve the end result. To conduct cost-benefit analysis.

Main Consideration Doing the right task. Doing the task in the right way.

CHARACTERISTICS OF MANAGEMENT
1. Management is a goal-oriented process.
○ An organisation has a set of basic goals which are the basic reason for its existence, and should be
simple and clearly stated.
○ Different organisations have different goals.
○ Management unites the efforts of different individuals in the organisation towards achieving these goals.
2. Management is all pervasive.
○ The activities involved in managing an enterprise are common to all organisations whether economic,
social or political.
3. Management is multidimensional.
○ Management of work:
■ All organisations exist for the performance of some work
■ Management translates work in terms of goals to be achieved and assigns the means to
achieve it.
■ Done in terms of problems to be solved, decisions to be made, plans to be established,
budgets to be prepared, responsibilities to be assigned and authority to be delegated.
○ Management of people:
■ Human resources or people are an organisation’s greatest asset.
■ Managing people has two dimensions:
1. It implies dealing with employees as individuals with diverse needs and behaviour
2. It also means dealing with individuals as a group of people.
○ Management of operations:
■ Any organisation has some basic product or service to provide in order to survive.
 ■ This requires a production process which entails the flow of input material and the technology
for transforming this input into the desired output for consumption.
■ Interlinked with both the management of work and the management of people
4. Management is a continuous process.
○ Series of continuous, composite, but separate functions, performed simultaneously by all managers at
all time.
○ The task of a manager consists of an ongoing series of functions.
5. Management is a group activity.
○ Management is a collection of efforts made by each individual working in the organisation.
○ The result of management affects every individual and every department of the organisation
6. Management is a dynamic function.
○ Management has to make changes in goal, objectives and other activities according to changes taking
place in the environment.
○ This is necessary to survive in the competitive world.
7. Management is an intangible force.
○ Management function cannot be physically seen but its presence is felt.
○ Thus it is intangible.

OBJECTIVES OF MANAGEMENT (Objectives are the ends toward which the activities of an organisation are directed)
Social objectives
➔ Social objectives of the organisation deal with the commitment of the organisation towards the society.
➔ Business organisations are the part of society.
➔ They earn by using the resources of society so they must do something for society also.
◆ Supply of quality products at reasonable prices.
◆ Contribution towards desirable civic activities.
◆ Generation of economic wealth.
◆ Generation of employment opportunities.
◆ Financial support to the community.

Organisational objectives
➔ Survival
◆ The basic purpose of every organisation is to survive and exist in the competitive market for a long
period of time.
◆ This is only possible when it is able to cover its costs.
➔ Profit
◆ Earning an adequate amount of profit is the most important objective of any organisation.
◆ Profit is essential for survival, growth and expansion of business.
➔ Growth
◆ The success of any organisation is measured by the growth rate.
◆ Organising educational, health and vocational training programmes.
◆ Participating actively in social service projects of Government and NGOs.
◆ Using environmental friendly methods of production.
◆ Providing employment opportunities to weaker sections of society.

Personal objectives
➔ Employees are the most important resources of every company and satisfied and motivated employees
contribute maximum for organisations.
➔ The main individual objectives of management are:
◆ Competitive salary to fulfil financial needs of employees.
◆ Promotion, training, personal growth and development of employees to fulfil esteem and other higher
level needs of employees.
◆ Peer recognition, self-respect, respect for colleague to fulfil social need.
◆ Good and healthy working conditions for safety of employees.

IMPORTANCE OF MANAGEMENT
➔ By integrating individual objectives with organisational goal, it directs individual efforts towards achieving
group goals.
➔ It increases efficiency as it ensures minimum costs and resources and maximum productivity.
 ➔ Changes have to be made constantly in the organisation following changes in the business environment,
ensuring the creation of a dynamic organisation. Efficient management motivates employees to adopt
changes willingly by convincing them that the changes help both the organisation and the employee.
➔ An efficient manager helps bring maximum prosperity for the employer as well as the employee, and leads the
people in such a way that both organisational and personal goals are achieved.
➔ Efficient management gives due importance to social obligations, towards employees, customers, suppliers,
etc., helping in development of society.

NATURE OF MANAGEMENT
Basis Management as a Science Management as a Art

Meaning Science can be defined as a systematic and Art can be defined as systematic body of
organised body of knowledge based on logically knowledge which requires skill, creativity and
observed findings, facts and events. practise other perfection.

In management there is availability of systematic In management there is availability of systematic

and organised study material, as in science. and organised study material, as in art.
Thus, this feature is present in management. Thus, this feature is present in management.

Management principles are developed through In management, all managers learn management
observation and experiments. However since it theories and principles but modify them to use in
Characteristics deals with humans, who are unpredictable, this different situations.
feature is partially present. Thus, this feature is present in management.

Management principles are not exact and thus Managers require experience to improve their
their application and use is not universal - they managerial skills and efficiency.
have to be modified according to the situation. Thus, this feature is present in management.
Thus this principle is not present in management.

Management as a Profession
➔ Profession can be defined as an occupation backed by specialised knowledge and training, in which entry is
restricted.
➔ Main features
◆ Well-defined body of knowledge
● There are large number of books available on management studies.
● Scholars are studying various business situations and are trying to develop new principles to
tackle these situations.
● Thus, this feature is present in management.
◆ Restricted entry
● Anyone can become a manager irrespective of the educational qualification, but now many
companies prefer to appoint managers only with MBA degree.
● Thus, this feature is not present in management but very soon it will be included with statutory
backing.
◆ Presence of professional associations
● Various management associations are set up at national and international levels which have
some membership rules and set of ethical codes
● For example, AIMA in New Delhi, National Institute of Personal Management at Kolkata, etc.,
but legally it is not compulsory for managers to become a part of these organisations by
registration.
● Thus, this feature is not present in management but very soon it will be included and get
statutory backing also.
◆ Existence of ethical codes
● All India Management Association (AIMA) has devised a code of conduct for Indian managers.
● But legally it is not compulsory for all the managers to get registered with AlMA and abide by
the ethical codes.
● Thus, this feature is not present in management but very soon it will be included and get
statutory backing also.
◆ Service motive
● The basic motive of every profession is to serve the clients with dedication, whereas basic
purpose of management is achievement of management goal.
● However, to survive in market for a long period of time, a businessman must give due
importance to social objectives along with economic objectives.
 ● Thus, this feature is not present but very soon it will be included.

LEVELS OF MANAGEMENT
Basis Top-Level Middle-Level Lower-Level

Authority Maximum authority Medium authority Limited authority

Management Focus on directing and

Concentrate on planning and Keep their focus on staffing and
functions controlling as they give direction
organising. coordination.
performed to workers.

Additional Consists of the senior most

Actually carry on the work or
information executive of the organisation,
Act as a link between middle and perform the activities according
who are essential for leading and
lower levels of management. to the plans of top and middle
directing the efforts of other
management.
people.

Determining the both short-term Interpretation of policies framed

Representing the problems or
and long-term objectives of the by top management to lower
grievances of workers
enterprise. level.

Framing of plans and policies to Organising the activities of their Looking to safety of workers.
achieve the set objectives. department.

Organising activities to be Finding out or recruiting/selecting Interact with the actual work
performed by persons working at and appointing the required force and pass on instruction of
middle level. employees. middle level management.

Assembling all the resources Maintaining good working

such as finance, fixed assets, Motivating the persons to conditions and developing
etc. required to carry on perform to their best ability. healthy relations between
day-to-day and other activities. superior and subordinate.

Main Responsible for welfare and Responsible for all the activities They try to maintain precise
functions survival of the organisation. of first line managers. standard of quality.

They are liaisons with outside Minimising the wastage of

world such as government materials and maintain safety
officials, suppliers, media, etc. standards.

To integrate diverse elements They are responsible for

and coordinate the activities of boosting the morale of the
different departments. Cooperate with other workers.
departments for smooth
Analyse business environment functioning.
and its implications for survival of
the firm.
Responsible for quality, quantity
of output and loyalty of workers.
They are responsible for all the
activities of the business and for
its impact on society.

FUNCTIONS OF MANAGEMENT
1. Planning
○ Planning refers to deciding in advance what to do, how to do, when to do it and who is going to do it.
○ Managers start with deciding the objectives of the organisation and how to accomplish them.
○ It is the base of all other functions of management.
2. Organising
○ The manager must next organise the activities
○ Deciding framework of departments, employees needed.
○ Distribution of authority and responsibility
3. Staffing
○ Recruiting and selecting employees
○ Assigning duties and maintaining cordial relationship with employees
○ Includes training promotion remuneration etc.
4. Directing
 ○ Giving directions and instructions to employees
○ Supervising, motivating, communicating and leadership
5. Controlling
○ Match actual performance with planned performance
○ Follow up actions to stay on path to complete goals.

COORDINATION
➔ The process by which a manager synchronises the activities of different departments is known as coordination.
◆ It is the force that binds all the other functions of management.
➔ Base or primary function of every manager because various departments of an organisation are working
independently and there is need to relate an integrate their activities.

Coordination: The Essence of Management

➔ Coordination is needed to perform all the functions of management
◆ Begins at the planning stage when top management plans for whole organisation.
◆ Based on plans then organisational structure is developed.
◆ Staff is recruited, selected and trained as per organisation structure and plan.
◆ To ensure right execution of plan directions are given.
◆ Controlling ensures no discrepancy between plan and actual performance.
➔ Coordination is required at all the levels
◆ Top level requires coordination to integrate all the activities of organisation.
◆ Middle level uses coordination to balance activities of different departments.
➔ Coordination is most important function of any organisation
◆ Through coordination a manager ensures orderly arrangement of individual and group efforts in
realisation of common objectives.
◆ It involves synchronisation of different actions of various units or departments.
◆ It makes sure that planned objectives are achieved with minimum conflicts.

Nature/Features of Coordination
➔ Integrates group efforts
➔ Ensure unity of efforts
➔ Continuous process
➔ Pervasive function
➔ Responsibility of all managers
➔ Deliberate function

Importance/Need of Coordination
➔ With growth in size of the organisation, the more the employees and departments, coordination is essential to
synchronise the efforts of each individual towards the common goal.
➔ The functions of an organisation are divided into different divisions, each of which work towards their own
objective, which requires coordination to interlink each other and minimise functional differentiation.
➔ In a large organisation there are several specialists, who all work in their own way, who require coordination to
be organised and ensure completion of organisational goal by specialisation.
 PRINCIPLES OF MANAGEMENT

➔ Principle: Statement which reflects the fundamental truth about some phenomenon based on cause and effect
relationship.
➔ Management Principles: broad and general guidelines for decision making and behaviour of managers.

Management Principles Pure Science Principles

Very flexible. Rigid.

Applied with creativity. Applied in absolute or static manner.

Have to keep up with changes in the environment. Do not change with time.

Management Principles Management Techniques

Guidelines for action. Methods and procedures which involve series of steps to be performed to accomplish goal.

More flexible. Less flexible.

Management Principles Values

Guidelines for managerial action. Guidelines for human behaviour.

Technical in nature. Ethical in nature.

NATURE/FEATURES/CHARACTERISTICS OF MANAGEMENT PRINCIPLES

1. These are pervasive, i.e., can be universally applied to all types of organisations.
2. These are general guidelines to actions but do not provide any readymade solution for any problem.
3. Developed only after deep and thorough research work, not overnight. Proper observations and experiments
are conducted before developing them and are thus evolutionary in nature.
4. These not a set of rigid statements and can be modified by the managers who are using them, to fit the
situation and are thus flexible.
5. These are formed to guide and influence the behaviour of employees and insist on improving relationship
between superior, subordinates and all members of organisation. They also establish relations between human
and material resources.
6. Principle only applied after considering the cause and effects. Though the principles can’t state perfectly
absolute result because these are applied on human beings, it helps in having some idea about the effect.
7. Their application and effect are contingent upon the nature of the organisation and the situation prevailing.

SIGNIFICANCE/IMPORTANCE OF MANAGEMENT PRINCIPLES

1. Provides managers with insight into reality to managers
○ Improve knowledge, ability and understanding under various managerial situations
○ Helps learn from mistakes
2. Optimum utilisation of resources
○ Facilitate optimum use of resources by coordinating the physical, financial and human resources.
3. Scientific decisions
○ Realistic, balanced and free from personal bias.
4. Meeting changing business environment
○ Effective and dynamic leadership and help the organisation to implement the changes.
5. Effective administration
○ Guidelines and base to form various policies and goal effectively
6. Fulfilling social responsibility
○ Made in society and uses societies resources so has to give back to society
7. Management training, education and research
○ Helpful in identifying the areas in which existing and future managers should be trained. They also
provide the basis for future research.

HENRI FAYOL’S PRINCIPLES OF MANAGEMENT

 ➔ Major contributions of Fayol
◆ He made clear distinction between technical and managerial skill.
◆ He identified the main steps in the process of management which are considered the major functions of
management - planning, organising, staffing, directing, controlling.
◆ He developed fourteen principles of management which act as guidelines for managers to perform
managerial activities.

Principles of Management Developed by Fayol

1. Division of work
○ Whole work must be divided into small tasks or units.
○ Tasks should be assigned to different people based on their capabilities, qualification and experience of
the person.
○ Not only the factory work but technical, managerial and skill jobs should also be divided into small
segments for specialisation.
○ Creating departments.
○ Base of functional foreman technique and delegation concept.
○ Positive effects
■ Specialisation: wherever work is divided into qualifications it automatically leads to
specialisation.
■ Improves efficiency: when performing one task the employee becomes an expert that results in
less wastage.
○ Consequences of violation
■ Lack of efficiency.
■ There will be no specialisation.
■ Chances of duplication of work.
2. Authority and responsibility
○ There must be balance or parity between authority and responsibility.
■ Authority means power to take decision.
■ Responsibility means obligation to complete the job assigned on time.
○ Allocation of authority as per work assigned to individual.
○ Organisation should build safeguards against misuse or abuse of managerial power.
○ Positive effects
■ No misuse of authority.
■ Helps in meeting responsibilities on time without any delay.
○ Consequences of violation
■ Delay in completion of work due to less authority.
■ Misuse of authority due to excess authority.
■ Overburden with work with excess responsibility.
3. Discipline
○ Discipline refers to:
■ Following code of conduct, rules, regulations of employment agreement.
■ Good superior at all levels.
■ Clear and fair agreement among subordinate and superior.
■ Meeting commitments at all levels.
■ Judicious application of penalties.
○ Fayol insists that discipline is required at superior as well as subordinate level.
○ Positive effects
■ Improves efficiency.
■ Systematic working in the organisation.
○ Consequences of violation
■ Disorder, confusion and chaos.
■ Wastage of resources in absence of discipline.
■ Delay in work due to absence of rules and regulations.
4. Unity of command
○ An employee should receive orders from one superior and should be accountable to the one superior
only.
○ This reduces confusion and dual subordination.
○ Promotes coordination among departments.
○ Contradicts functional foremanship.
○ Positive effects
 ■ No confusion in the mind of subordinate.
■ No ego clashes.
■ Improves effectiveness in working.
○ Consequences of violation
■ Confusion in the mind of employee.
■ Subordinate will get chance to escape from his responsibilities by giving excuses.
■ Ego clashes among the different superiors.
■ Difficulty in maintaining discipline in the organisation.
5. Unity of direction
○ Efforts of all employees and departments should be directed towards achieving organisational goal.
○ Ustilises coordination and focussed efforts, along with unity of action.
○ Positive effects
■ Achievement of organisational goal.
■ Efforts of all employees get unified towards one direction only.
○ Consequences of violation
■ Lack of coordination.
■ Difficulty in achievement of organisational goal.
■ Wastage of resources and efforts.
6. Subordination of individual interest to general interest
○ Organisation's interest is more important than personal interest of employees.
○ While taking decisions managers must give priority to benefits of organisation and not to personal
benefit.
○ Try to achieve personal goal with organisational goal not by sacrificing organisational goal.
○ Managers should not take unfair decisions by taking bribes or by giving benefits to their relatives but
decisions must be for benefit of organisation.
○ Employees must sacrifice their leaves or attending family function if the organisation needs the
presence of employee.
○ Positive effects
■ Achievement of organisational goal.
■ Coordination.
○ Consequences of violation
■ No achievement of organisational goal.
■ Employees suffer in long run.
7. Remuneration of persons
○ Payment of fair and adequate wages/salaries to employees.
○ The monetary remuneration should be able to achieve a minimal standard of living and provide
maximum satisfaction.
○ Fair wage is determined according to:
■ Financial capacity of the concern.
■ By keeping in mind the minimum wage act of government.
■ The wages and salaries paid by the competitors.
○ Positive effects
■ Motivation for employees.
■ Devotion and commitment to firms.
○ Consequences of violation
■ Increase in turnover of employees.
■ Dissatisfaction and demotivation of employees.
8. Centralisation and decentralisation
○ The concentration of decision-making authority is called centralisation whereas its dispersal among
more than one person is known as decentralisation.
○ Fayol advises to have a combination of bthe centralisation and decentralisation to ensure success.
○ Positive effects
■ Benefits of Centralisation and decentralisation.
■ Fast decision at operational level and strict control at top level.
○ Consequences of violations
■ Complete centralisation will lead to delay in decisions.
■ Complete decentralisation would lead to misuse of authority.
9. Principle of scalar chain
○ Scalar chain means line of authority or chain of superiors from highest to lowest ranks.
 ○ Very information must pass through every key of this chain, no skipping of any one key should be
allowed.
○ Sometimes in following scalar chain, passing of important information gets delayed. Thus, Fayol
permitted a short cut in the chain which is called a ‘Gang-Plank’.
■ Gang-plank permits direct communication between the
employees working in different positions without
following the scalar chain.
○ Positive effects
■ Systematic flow of information.
■ No communication gap.
○ Consequences of violation
■ Communication gap.
■ No clarity in authority.
10. Principle of order
○ Orderly arrangement of men and material that is a fixed place
for everything and everyone in the organisation.
○ Prevents time and energy from being wasted in searching for any material or person.
○ Positive effects
■ Wastage of time in search for resources.
■ Smooth and systematic working.
○ Consequences of violation
■ Wastage of time and resources.
■ Not able to contract people at the right time.
11. Principle of equity
○ Equity refers to kind, fair and just treatment to employees.
○ Employees will put in their maximum efforts only if they are treated with kindness and justness.
○ It does not mean equal salary to different levels in the organisation, but means application of same
disciplinary rules. Leave rule irrespective of the position, gender, grade, etc.
○ Positive effects
■ Satisfaction of employees.
■ Motivation and boosting of morale.
○ Consequences of violation
■ Dissatisfaction of employees.
■ Increase in turnover.
■ Unhealthy relationship between supervisor and subordinates.
12. Stability of tenure of personnel
○ No frequent termination and transfer.
○ Management must provide job security to employees to ensure they contribute their maximum.
○ Frequent transfer, turnover or rotation should be avoided since it would be a wastage of resources to
train a new person.
○ Positive effects
■ Improves efficiency.
■ No wastage of resources.
○ Consequences of violation
■ Wastage of resources.
■ Frustration and dissatisfaction.
13. Initiative
○ Initiative refers to taking the first step with self-motivation.
○ Employees in the organisation must be given an opportunity to take some initiative in making and
executing a plan.
○ It does not mean disobedience - once decisions are taken by management then every employee must
follow it, regardless of whether it is according to the employee’s suggestion or not.
○ Positive effects
■ Feeling of belongingness.
■ Achieve target on time.
○ Consequences of violations:
■ Will not work to their best.
■ Demotivation.
14. Esprit de corps
 ○ Management must promote and encourage team spirit, unity and harmony, bringing coordination and
cooperation in organisation.
○ This will give rise to mutual trust and belongingness among team members, and minimises the need for
using penalties.
○ Positive effects
■ Develops team spirit.
■ Achieves group goal.
○ Consequences of violation
■ Group goal may not be achieved.
■ No team spirit.

Fayol, Then and Now

Principle Then Now

Division of Work Specialisation in workers Job design Generalisation in workers' Job design

Authority and Managers are empowered Employees are empowered

Responsibility

Discipline Formalised Controls Informal, Peer pressure controls

Unity of Command Subordinates report to only one boss Subordinates report to multiple bosses

Unity of Direction Functions have only one plan and one boss Functions have multiple plans and multiple
bosses

Subordination of Individual Employees are committed to the Organisation is committed to the employees
Interest to General Interest organisation and vice versa

Remuneration of Persons Reasonable Pay reward system Performance based reward system

Centralisation and Trickle down decision making Task relevant ad hoc decision making
Decentralisation

Principle of Scalar Chain Hierarchical, formalised communication Less formalised, flatter communication
channel structure.

Principle of Order Internal information system for control Internal information system for coordination
purposes purposes.

Principle of Equity Commitment obtained through kindness Commitment obtained through a sense of
ownership

Stability of Tenure of Train employees and encourage them to On-going employee training and
Personnel remain development

Initiative Managers conceive and implement new Workers conceive and implement new ideas
ideas

Esprit de Corps Maintaining high morale among employees Maintaining high morale among employees
is imperative is desirable.

Unity of Command Unity of Direction

One boss, one subordinate. One unit/division, one plan.

Main purpose is to avoid confusion and fix up Main purpose is to direct the efforts of the employees of
responsibility on the employee. a department towards achieving organisational goal.

Related to functioning of employees with clarity in mind. Related to functioning of the organisation as one unit.

Results in systematic working and increase in efficiency Results in coordination of activities and achievement of
due to reduction in confusion and chaotic conditions. organisational goal.

Affects individual employee. Affects entire organisation.

 Prevents dual subordination. Prevents overlapping of activities.

Basis Centralisation Decentralisation

Meaning Concentration of power or authority at higher level only. Every distribution of powers and authority
at everly level of management.

Authority at Top management retains maximum authority. The The authority is systematically divided at
different levels authority with middle and lower management is very low. every level.

SCIENTIFIC MANAGEMENT DEVELOPED BY F.W. TAYLOR

➔ Major contributions of Taylor
◆ Taylor published books and research papers explaining his scientific view on industrial organisation and
management.
◆ His major contribution was publishing of "Shop Management, "Piece Rate System" and "Principles of
Scientific Management.
◆ He emphasised on adoption of scientific methods to the problems of management.
➔ Scientific management can be defined as ‘application of science for each and every element of management.
◆ Apply scientific tools, methods and trained personnel in order to increase the output.
◆ Insists on replacement of role of thumb by science.

Principles of Scientific Management

1. Science, not rule of thumb.
○ Each job performed in the organisation should be based on scientific enquiry and not on intuition,
experience and hit and miss methods, i.e., rule of thumb.
■ Rule of thumb means dictatorship of manager whereas scientific decisions are based on cause
and effect and scientific measurement of methods and ways of production.
○ Introduction of scientific inquiry into the domain of management practice.
○ Taylor believed that there is only best method to maximise efficiency - this method can be developed
through work study and analysis.
2. Harmony, not discord.
○ Those who work together in an organisation must work in harmony that is with mutual give and take
and proper understanding.
■ Taylor insists that workers and management must change their attitude towards each other
(mental revolution).
○ Management should share gains of the company with workers while workers must contribute to their
best level.
○ Taylor believes that prosperity of organisation depends upon prosperity of employer as well as
employees.
3. Cooperation, not individualism.
○ Extension of ‘Harmony, not discord’.
○ Work must be carried out in cooperation with each other, with mutual confidence and understanding for
each other.
○ There must be an open communication system.
■ Management should welcome good suggestions of employees and should reward them for the
same.
■ Workers should not go on strike and make unreasonable demands.
○ According to Taylor, there should be an almost equal division of work and responsibility between
workers and management.
■ They should work alongside each other.
4. Development of each and every person to his/her greatest efficiency and prosperity.
○ Industrial efficiency depends upon efficiency or workers, i.e., workers’ proper training and selection.
○ Taylor insisted due care should be taken while selecting the employees and should be given jobs
according to their skills and qualification.
○ They should be given regular training to update their knowledge,
○ This will ensure greatest efficiency and prosperity for both the company and worker.

Techniques of Scientific Management

1. Functional foremanship.
 ○ Talor suggested division of factory in two departments - planning and production as he felt workers
must be free from the burden of planning and they must concentrate on work and production.
○ To develop specialisation in the productivity he suggested under each department there must be some
functional experts to supervise, guide and instruct the worker.
○ He stressed on a minimum of 8 specialists or functional experts to supervise and give orders to
workers.
○ Extension of Principle of Division of Labour.
○ Foremen must be intelligent, educated, energetic, honest, specialised or profession expert.

2. Standardisation and simplification of work.

○ Scientific methods of production must be selected to develop a standard.
○ It enables standardisation of output, allowing maximisation of output while keeping quality in mind.
○ Objectives of standardisation:
i. To reduce a given line of product to fixed type, size and characteristics.
ii. To allow interchangeability of manufactured parts and output among different departments and
branches.
iii. To maintain quality standards.
iv. To set up performance standards of men and machine.
○ Simplification is used to improve quality of output and reduce its cost.
3. Method study.
○ Conducted to find out the one best method or way of performing the job which keeps production cost
minimum and makes maximum use of resources of the organisation.
○ Taylor suggested that method of production should not be decided by rule of thumb but all the methods
must be tried in the organisation and the one which brings maximum benefits with minimum cost must
be selected.
○ To determine the best way there are certain parameters right from procurement of raw materials till the
final product is delivered.
○ Taylor developed the concept of assembly line by using method study.
○ The objective of method study is to minimise the cost of production and maximise the quality and
customer satisfaction.
4. Motion study.
○ Objectives of motion study:
i. To determine the movements of workers when they are performing the job.
ii. To differentiate between productive and unproductive movements.
iii. For cutting down unproductive and wasteful movements.
iv. To design suitable equipment and tools to minimise the unproductive movements of workers.
○ To conduct motion study:
i. Taylor suggested to observe an average worker when he is performing the job and note down
all the movements he is doing, how many times he is getting up from his place, how many
times he is bending down, etc.
ii. Repeat it for 100 times with different workers.
iii. After writing all the movements classify them in productive and unproductive movements and
make the strategy to cut down or minimise the unproductive movements.
○ Taylor and his associate Frank Galiberth were able to reduce motions in brick layering from 18 to just 5.
Taylor demonstrated increase in productivity by four times by this process.
5. Time study.
○ Objectives of time study:
 i. The standard time required to perform a job.
ii. Setting up the standard target for workers.
iii. Determining the number of workers required to perform a job.
iv. Categorising the workers in efficient and inefficient categories.
○ To conduct Time Study:
i. Taylor suggested to observe an average worker when he is performing the job with a stop
watch in hand and note down the average time taken by the worker in completion of job.
ii. Repeat the same observations for 100 times and then take out the average time.
iii. This time should be considered the average time for performance of the job.
○ Keeping this time in mind the targets for workers should be fixed and the workers who are able to
achieve their targets in standard time are average workers.
○ If the worker is able to achieve target before standard time then he is an efficient worker and if the
worker failed to achieve target in standard time then he is an inefficient worker.
6. Fatigue study.
○ Conducted to find out:
i. Frequency of rest intervals.
ii. Duration of rest intervals.
iii. Number of rest intervals.
○ There is always a need for rest interval as a person gets tired while performing the job for a long period
of time.
○ Period and frequency of rest interval should be decided using a scientific fatigue study.
i. Observe an average worker when he is performing a job and note down the time when the
worker gets tired and when his efficiency level starts decreasing, and then give him a break.
ii. This time can be noted to decide frequency of rest interval and during break after how much
time the word became fresh again to rejoin work can be time for rest interval.
7. Differential piece wage system.
○ Emphasises on paying different rate of wage for efficient and inefficient employees.
○ Techniques insisted on by this system:
i. Paying different rate of wage to efficient and inefficient employees.
ii. Extra wages paid to efficient employees will motivate them to remain efficient.
iii. Extra wages paid to efficient employees will motivate inefficient employees to come in the
category of efficient employees.
iv. When payment is given according to number of units produced automatically the production will
be maximised.
○ Strongest motivator for employees to perform efficiently.
○ Company must fix a standard rate of wage for workers producing standard output or their target.
○ Workers who produce more than the target must be paid a higher rate of wage while those who are
producing less than standard output must be paid with a rate less than the standard rate.
8. Mental Revolution
○ Objectives:
i. Change in mental attitudes of workers and management towards each other.
ii. Cooperation between workers and management.
iii. Ruling out feeling of suspicion or prejudice from the minds of workers and management to
adapt systemic thinking.
○ Generally, workers feel like the management exploit and overburdens them while the management
feels that the workers are inefficient and careless.
○ Thus, Taylor stressed that there is a need to bring about a ‘mental revolution’, i.e., change in attitude of
both groups to develop positive thinking and feeling of cooperation for each other.

Basis Time Study Motion Study

Meaning Conducted to find out the standard time for Conducted to find out total movements of workers
performing a task. while they are performing the task.

Purpose To find out standard time to fix a fair day’s work for To eliminate wasteful and unproductive movements
the workers. of workers to increase their efficiency level.

Method of Conducted with the help of a stop watch. Conducted with the help of a movie camera which
Conducting keeps eye on worker’s movements.
Advantages of Scientific Management
➔ Improves efficiency of business through simplification and specialisation.
➔ Helps in reducing cost of production by eliminating all types of wastages.
➔ Due to decrease in price firm is enable to capture a bigger share in the market.
➔ Mutual understanding and cooperation brings workers and management closer.
➔ More trainings to improve the skill of workers.
➔ Enables the workers to earn more with the introduction of differential price wage system.

Modern Scientific Techniques

➔ Operations research
◆ It was developed during 2nd world war to optimise the deployment of war.
➔ Lean manufacturing
◆ This technique focuses on reducing seven wastes of overproduction, i.e., waiting time, transportation,
processing, motion, inventory, scrap and any manufacturing process.
➔ Kaizen
◆ It is a Japanese word which means change for better. It is a daily activity which eliminates hard and
difficult task by experimenting scientific methods.
➔ Six sigma
◆ It refers to improving efficiency by reducing quality variations.
➔ Just in time manufacturing
◆ It is an inventory management strategy to improve return and reduce cost.

Basis Fayol Taylor

Nature of He developed the theory of Functional He developed the concept of Scientific

Research management or Management process. management.

Concern His principles are concerned with management His principles and techniques are concerned
efficiency. with workers efficiency.

Level He designed principles for the top level of He designed principles for lower levels of
management. management.

Focus Improving overall administration by observing For him increasing productivity through work
certain principles was his main focus. simplification was the main focus.

Personality He developed the personality of a researcher He developed the personality of scientist and
and practitioner and was called ‘father of general was called as ‘father of scientific management
management.

Major His main contribution was to produce a He provided a basis of accomplishment on the
contribution systematic theory of management with the help production line with the help of scientific
of fourteen principles of general management. techniques and management.

Human He gave due emphasis to human elements by He ignored the human element and emphasised
element suggesting principles like equality, initiative, fair more on increasing productivity.
remuneration etc.

Rigidity and His principles were flexible. He was rigid in his approach and he felt that
flexibility there should be no deviation from fixed
standards.

Applicability His principles are applicable to business as well His principles are applicable to production and
as non-business organisations i.e. are applicable manufacturing i.e. are applicable to specific
universally. situations.

Unity of He strictly follows these principles i.e. one boss He did not follow this principle; instead he
command for one employee. insisted on a minimum of eight bosses.
 BUSINESS ENVIRONMENT
● Sum total of all individuals, institutions and other forces that are outside the control of a business enterprise but
that may affect its performance.
● Since environment factors influence business enterprise,businessmen do environment scanning.
○ Environment scanning refers to complete awareness and understanding of business environment.
○ Using this business enterprises can anticipate the effect of environment forces and factors on their
enterprise.
● Business environments provide constraints (conditions which restricts business activities) as well as
opportunities (conditions which allows growth and expansion of business activities).

FEATURES OF BUSINESS ENVIRONMENT

1. Business environment is the sum total of all external forces and is thus aggregative in nature.
2. Business environment includes both specific (affects day to day business activities directly and immediately)
and general (depends upon the social, political, legal and technical conditions) forces.
3. All forces and factors of business environment are interrelated.
4. Business environment is very uncertain as it is very difficult to predict future happenings, especially when
changes are taking place too frequently.
5. Business environment is highly dynamic.
6. Business environment is very complex since it consists of various interrelated and dynamic conditions or fices
that arise from different sources. It is easier to understand in parts but difficult to grasp in its totality.
7. Business environment is relative to countries, regions, political conditions, cultures, etc.

IMPORTANCE OF BUSINESS ENVIRONMENT

1. Enables the firm to identify opportunities and get the first mover advantage.
○ Businessmen who are able to understand and scan the opportunities of business environment at early
stage they get maximum benefit or they can capture a big share in the market.
2. Helps the firm to identify threats and early warning signals.
○ Businessmen who are able to scan and understand the business environment get a warning signal to
deal with the constraints or the negative policies of business environment.
3. Helps in tapping useful resources.
○ Business ment have to supply goods according to demand in the market.
○ They acquire raw materials and other resources keeping in mind the output demanded and their
availability in the environment.
4. Helps in coping with rapid changes.
○ Understanding changes properly assists in making necessary changes rapidly in the business.
5. Helps in assisting in planning and policy formation.
○ Major strategies or plans and policies of the business are formed keeping in mind business
environment because the poilicies and strategies have to be implemented in the business environment.
6. Helps in improvement in performance.
○ By making changes in the internal environment matching to external environment, organisations can
prosper and improve their market share.

DIMENSIONS OF BUSINESS ENVIRONMENT

➔ Dimensions of the business environment refers to the factors, forces and institutions which have direct or
indirect influence over business transactions.

Economical Environment
➔ All forces and factors which directly influence the economy of the country.
➔ Economic Environment consists of GDP, National Income, Per Capita Income, Profit Earning Rate, Productivity
and Employment Rate, Industrial, Monetary and Fiscal Policies of the government, etc.

Social Environment
➔ Customs and traditions of the society in which business is existing.
➔ Includes standard of living, taste, preferences and education level of the people living in the society where the
business exists.
➔ May not have an immediate impact but has a great impact in the long run.

Political Environment
➔ All factors related to government affairs such as type of government in power, attitude of government towards
different groups of societies, policy change implemented by different governments, etc.
 ➔ Immediate and great impact on the business transactions.

Legal Environment
➔ Business environment must keep the following in mind while operating their businesses:
◆ Various laws and legislative act.
◆ Administrative order issued by government authorities.
◆ Court judgements, as well as the decisions rendered by various commissions and agencies at every
level of the government - Centre, State or Locals.
➔ To work successfully in India, the business enterprises must have details about:
Companies Act 1956. Factories Act.

Industrial Act 1951. Industrial Disputes Act.

FEMA. Consumer Protection Act 1986.

Trade Union Act 1926. Competition Act 2002.

Technological Environment
➔ Forces related to scientific improvements and innovations which provide new ways of producing goods and
services and new way of operating business.

DEMONETISATION
➔ On November 8, 2016, the Government of India demonetised two largest denomination notes, ₹500 and ₹1,000
with immediate effect, i.e., the notes were no longer legal tender.
➔ This resulted in a withdrawal of 86% currency in circulation.
➔ People were advised to go to the bank to replace old notes with new (however there was a restriction on cash
withdrawal).
➔ Aims of demonetisation was to curb:
◆ Corruption.
◆ Counterfeiting the use of high denomination notes for illegal activities.
◆ Accumulation of ‘black money’ generated by income that has not been declared to the tax authorities.

Features
1. Tax administration measure.
○ Cash holdings arising from declared income was readily deposited in banks and exchanged for new
notes.
○ But those with black money had to declare their unaccounted wealth and pay taxes at a penalty rate.
2. Shift on the part of the government indicating that tax evasion will no longer be tolerated or accepted.
3. Tax administration channelizing savings into the formal financial system.
○ Though much of the cash that has been deposited in the banking system is bound to be withdrawn,
some of the new deposit schemes offered by the banks will continue to provide base loans, at lower
interest rates.
4. Creation of a less-cash or cash-lite economy, i.e., channelling more savings through the formal financial system
and improving tax compliance.

Impact of Demonetisation
Area Impact

Money/Interest Rates 1. Decline in cash transactions.

2. Bank deposits increased.
3. Increase in financial savings.

Private Wealth Declined since some high demonetised notes were not returned and real estate prices fell.

Public Sector Wealth No effect.

Digitisation Digital transactions amongst new users (RuPay/AEPS) increased.

Real Estate Price declined.

Tax Collection Rise in income tax collection because of increased disclosure.

 PLANNING
➔ Planning can be defined as “thinking in advance what is to be done, when it is to be done, how it is to be done
and by whom it should be done.
◆ Planning bridges the gap between where we are standing today and where we want to reach.
➔ It involves setting objectives and deciding in advance the appropriate course of action to achieve these
objectives.
➔ “Planning is the process of setting up of objectives for a fixed period of time and formulating various courses of
action then choosing the best alternative which will be more profitable for the company.

IMPORTANCE OF PLANNING
1. Planning provides direction.
○ Ensures goals/objectives are clearly given, which act as a guide for deciding what action is to be taken
and in which direction.
○ Planning, thus, allows coordination of departments, managers and employees to achieve organisational
goal.
2. Planning reduces risk of uncertainties.
○ Allows manager to look ahead and anticipate changes.
○ Thus, managerial responses to changes and uncertain events can be developed.
3. Planning reduces overlapping and wasteful activities.
○ Basis of coordinating efforts of different departments, divisions and individuals.
○ Useless and redundant activities are minimised or eliminated, and duplication of efforts is addressed
and rectified.
○ Helps in avoiding confusion and misunderstandings.
4. Planning promotes innovative ideas.
○ Guides future actions leading to growth and prosperity of the business.
5. Planning facilitates decision-making.
○ Involves setting targets and predicting future conditions, thus helping in taking rational decisions.
○ Helps the manager to look into the future and make a choice from the various alternative courses of
action.
6. Planning established standard for controlling.
○ Provides goals or standards against which actual performance is measured.
○ By comparing actual performance with some standard, managers can ascertain whether they have
actually been able to attain their goals.

FEATURES OF PLANNING
1. Planning focuses on achieving objectives.
○ Specific goals are set out in plans along with the activities to be undertaken to achieve the goals.
2. Planning is a primary function of management.
○ All other managerial functions are performed within the framework of the plans drawn.
○ ‘Primacy of planning’
3. Planning is pervasive.
○ Required at all levels of management, as well as all departments of the organisation.
○ Scope of planning differs at different levels and among different departments.
4. Planning is continuous.
○ At the end of the period of the plan, a new plan is drawn up.
○ Plan is framed, implemented and followed by another plan, and so on.
5. Planning is futuristic.
○ Purpose of planning is to meet future events effectively to the best advantage of an organisation.
○ Through forecasting, future events and conditions are anticipated and plans are drawn accordingly.
6. Planning involves decision-making.
○ The need for planning arises only when alternatives are available.
○ It involves thorough examination and evaluation of each alternative and choosing the appropriate one.
7. Planning is a mental exercise.
○ Requires application of the mind involving foresight, intelligent imagination and ousnd judgement.
○ Requires logical and systematic thinking - must be orderly and based on the analysis of facts and
forecasts.

LIMITATIONS OF PLANNING
Internal Limitations
1. Planning leads to rigidity
 ○ A well-defined plan is drawn up with specific goals to be achieved and how they are to be achieved.
○ It does not allow any changes to be made, even if circumstances have changed.
2. Planning may not work in a dynamic environment.
○ Organisation must keep up and change along with changes in the business environment.
○ It thus becomes different to assess the future of the organisation that exists in a dynamic business
environment.
3. Planning reduces creativity.
○ Done primarily by top management - rest of the members simply implement the plans.
○ Consequently the middle and lower management are not allowed to deviate from the plan nor are they
permitted to act on their own.
○ This results in a reduction or loss of creativity, and innovation.
4. Planning involves huge costs.
○ There are both incidental and consequential costs in incurred in the process of planning.
○ These costs may sometimes not justify the benefits derived from the plans.
5. Planning is a time-consuming process.
○ Sometimes plans to be drawn up take so much time that there is not much time left for implementation.
6. Planning does not guarantee success.
○ Success Of an enterprise is possible only when plans are properly drawn up and implemented.
○ Due to unknown factors and/or general ineptness, a plan may be rendered a failure.

External Limitations
1. Natural calamity.
○ Natural calamities such as flood, earthquake, famine, etc. may result in failure of plan.
2. Change in competitors' policies.
○ Sometimes plan may fail due to better policies, product and strategy of competitor which was not
expected by manager.
3. Change in taste/fashion and trend in the market.
○ Sometimes plans may fail when the taste/fashion or trend in market goes against the expectation of
planners.
4. Change in technologies.
○ The introduction of new technologies may also lead to failure of plans for products using old technology.
5. Change in government/economic policy.
○ Managers have no control over government decisions. If government economic or industrial policies are
not framed as expected by manager then also plans may fail.

PLANNING PROCESS
1. Setting objectives.
○ In planning, managers begin with setting up objectives because all plans are made to achieve
objectives.
■ Objectives or goals specify what the organisation wants to achieve.
○ Avengers set up clearly the objectives of the company keeping in mind the goals of the company and
the physical and financial resources of the company.
○ After the setting up of objectives, they are communicated to all the employees.
2. Developing premises.
○ Premises refers to making assumptions about the future, which are made on the basis of forecasting.
■ Assumptions are the base material upon which plans are to be drawn.
■ Forecast is a technique of gathering information.
○ Forecasting is done keeping in view existing plans and any past information about various policies.
○ The premises or assumptions must be the same for all and there should be total agreement on them.
All managers involved in planning should be familiar with and use the same assumptions.
3. Identifying alternative courses of action
○ Manager makes a list of alternatives through which the organisation can achieve its objectives as there
can be many ways to achieve the objective and managers must know all the ways to reach the
objectives
○ The course of action which may be taken could be either routine or innovative.
■ An 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
amongst the members of the organisation.
4. Evaluating alternative courses.
○ Managers then evaluate the pros and cons of each alternative.
 ○ The positive and negative aspects of each proposal need to be evaluated in the light of the objective to
be achieved.
○ Accurate forecasts in conditions of certainty/uncertainty then become vital assumptions for these
proposals.
○ Alternatives are evaluated in the light of their feasibility and consequences
5. Selecting an alternative.
○ The best alternative is chosen.
■ Sometimes, instead of selecting one alternative, a combination of different alternatives can also
be selected.
○ The most ideal plan is most feasible, profitable and with least negative consequences.
○ After preparing the main plan, the organisation has to make several derivative plans.
■ Support the main plan.
■ Related to performance of routine jobs in the organisation.
■ Derived from main plan, and are must for accomplishing the objective of main plan.
6. Implementing the plan.
○ Concerned with putting the plan in action and managerial functions come into working.
○ Managers communicate the plan to the employees clearly to allow them to carry out activities according
to the plan.
○ After communicating the plan, managers start allocating resources according to the specification of the
plans.
7. Follow-up action.
○ The manager carefully monitors the plan after being implemented.
○ It allows verification whether the conditions and predictions assumed in the plan are holding true in the
present situation or not.
○ During follow up, many adjustments are made in the plan.

TYPES OF PLANS
Single-Use Plan Standing Plan

Developed for a one-time event or project. Used for activities that occurs regularly over a period of
time.

Includes budgets, programmes and projects. Includes policies, procedures, methods and rules.

Duration depends upon type of the project. Developed once but modified from time-to-time.

Consist of details, including the names of employees Designed to ensure that the internal operations of an
responsible for doing the work. organisation run smoothly.

Objectives
➔ Desired future position that the management would like to reach.
➔ Objectives should be SMART, i.e., Specific, Measurable, Achievable, Relevant, Time bound.
➔ End result of activities.
➔ All managerial activities are directed towards achieving objectives.
➔ Usually set by top management of the organisation and focus on board, general issues.
➔ Define future state of affairs which the organisation strives to realise.
➔ Serve a guide for overall business planning.
➔ Need to be expressed in specific terms.

Strategy
➔ Comprehensive plan for accomplishing an organisation's objectives.
➔ Includes three dimensions:
i. Determining long-term objectives.
ii. Adopting a particular course of action.
iii. Allocating resources necessary for achieving the objective.
➔ Takes business environment into consideration during its formulation.
➔ Takes the course of forming the organisation’s identity in the business environment.

Policy
➔ General statements that guide thinking or channelise energies towards a particular direction.
➔ Provide a basis for interpreting strategy.
 ➔ Guides to managerial action and decisions in the implementation of strategy.
➔ General response to a particular problem or situation.
➔ Define broad parameters within which a manager may function.
➔ Major company policies are for all to know and minor policies are applicable to insiders and contain minute
details of information vital to the employees of an organisation.

Procedures
➔ Routine steps on how to carry out activities.
➔ Detail the exact manner in which any work is to be performed. They are specified in a chronological order.
➔ Generally meant for insiders to follow.
➔ Generally to enforce policies and to attain predetermined objectives.
➔ Steps to be carried out within a broad framework.

Methods
➔ Provide the prescribed ways or manner in which a task has to be performed considering the objective.
➔ Deals with a task comprising one step of a procedure and specifies how this step is to be performed.
➔ Selection of proper method saves time, money and effort and increases efficiency.

Rules
➔ Specific statements that inform what is to be done.
➔ Do not allow for any flexibility or discretion.
➔ Reflects a managerial decision that a certain action must or must not be taken.
➔ Simplest type of plan as there is no compromise or change unless a policy decision is taken.

Programmes
➔ Detailed statements 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.
➔ Include the entire gamut of activities as well as the organisation's policy and how it will contribute to the overall
business plan.

Budgets
➔ Statement of expected results expressed in numerical terms.
➔ Quantifies future facts and figures.
➔ Control device from which expected figures are compared with the actual figures and thus corrective action is
taken.
➔ Control device from which deviations can be taken care of.

Policies Objectives

Organisation’s own way of solving a particular problem. End results of an organisation.

Describe how the work is to be done. Describe what is to be done.

Explain the mode of achieving the objectives. End points of planning.

Framed by top, middle and lower level managers. Generally formed by top level managers.

Policies Procedures

Organisation’s own way of tackling the problem. Step by step way of doing a job.

Guide to think for decision making. Guide to actions.

Derived from objectives of the company. Required for implementation of policy.

More rigid. Less rigid.

Expressed in general terms. Expressed in specific terms.

Procedures Methods
Sequences of steps to be followed for performing some important Formalised way of doing routine and repetitive jobs.
jobs.

More rigid. Less rigid or flexible.

Help in implementation of policy. Help in standardisation and coordination of activity.

Policies Rules

Organisation’s own way of handling a problem. Norms regarding actions and non-actions of employees.

General statement. Specific statement.

Guide for decision making and thinking. Guide to behaviour of employees.

Describes what is to be done under different situations. Describe what is to be done and what is not to be done by the
employees.

Less rigid. Very rigid.

Rules Methods

Norms for action and non-action of employees. Formalised way of doing routine and repetitive jobs.

Very specific or very rigid. Specific but flexible.

Improve behaviour of the employees. Quantity improvement and standardisation.

If not followed, there is strict penalty for it. If changed then there can be warning but no penalty.

Strategy Policy

Comprehensive plan which includes various steps. Single plan.

Formulated for solving challenging and unforeseen problems. Formed to carry out routine function.

Everytime a new strategy is prepared to solve different problems. Common policy is used for all the routine problems.

Ad Hoc or temporary in nature. Permanent in nature.

Allocates humans and other resources. Uses the resources for decision-making.
 ORGANISING

➔ Identify and grouping different activities in the organisation and bringing together the physical, financial and
human resources to establish most productive relations for the achievement of specific goal of organisation
◆ Arranging everything in orderly form and making most efficient use of resources.

ORGANISING PROCESS
1. Identification and division of work
○ Makes sure there is no duplication of work and there is no burden of work on one person
○ Manager divides the work into smaller units called "jobs".
2. Departmentalisation
○ Related and similar jobs are grouped together and put under one department.
○ Types of departmentalisation
i. Functional departmentation: jobs related to common function are grouped under one
department.
ii. Divisional departmentation: jobs related to one product are grouped under one department.
3. Assignment of duties
○ Each individual is assigned a duty matching their skill, qualifications and department.
○ "Job description" is a document given to the employee, and it defines the contents and responsibilities
related to the job.
4. Establishing reporting relationship
○ All individuals are assigned to an authority matching to the job they have to perform.
○ Creates clear senior-subordinate relationship.
○ Creates managerial hierarchy (chain of command) and managerial levels.

IMPORTANCE OF ORGANISING
➔ Benefits in specialisation
◆ Specialisation automatically comes when an individual is performing one job repeatedly.
◆ Due to division of work each individual is assigned a specific job according to their skills and
qualification.
➔ Clarity in working relationship
◆ Senior-subordinate relationship is clearly defined.
◆ Authority and responsibility of each manager is clearly defined as well
➔ Optimum utilisation of resources.
◆ Very few chances of duplication of work and thus wastage of resources and efforts.
➔ Adoption to change
◆ Changes in the business environment can be easily adopted systematically within the organisation as
only the departments or groups affected by the changes have to be communicated with.
◆ Organisational structure can also be easily modified according to change.
➔ Effective administration
◆ Due to departmentalisation, there is unity and harmony in work.
◆ There is relation and coordination between different departments which allows greater administrative
efficiency.
➔ Expansion and growth
◆ With optimum utilisation of resources and proper division of work and departmentation, companies can
easily meet the challenges and can expand their activities in a planned manner.
➔ Development of personnel
◆ Delegation of authority helps managers concentrate in developing new methods and ways to perform a
job.
◆ It allows them to innovate new technologies and areas for growth of the company.

ORGANISATIONAL STRUCTURE
Meaning
➔ Network of job positions, responsibilities and authority at different levels.
◆ Framework within which managerial and operational tasks are performed.
◆ Specifies relation between people, work, resources.
◆ While managers are performing organising function, organisational structure gets created automatically
which defines the job positions, the authority, responsibilities of different employees.
➔ Span of management, i.e., how many employees or subordinates can be effectively controlled by one superior,
gives shape to organisational structure:
 ◆ Narrow span of management results in tall structure.
◆ Wide span of management results in flat structure.

Importance
1. Structure organises properly all the operations of business and ensures better flow of communications.
2. A clear structure makes it easy to check the responsibility of each part of business.
3. A clear idea about the working style of an enterprise can be known from organisational structure.
4. Organisational structure allows correlation and co-ordination among human, physical and financial resources.
5. It clearly defines the levels of management and span of control under each level.

Types of Organisational Structures

1. Functional structure
2. Divisional structure

Basis Functional Structure Divisional Structure

Basis of formation Formed on the basis of function. Formed on basis of product.

Accountability and Difficult to make accountable as departments Easy to fix accountability as departments work
responsibility are interdependent. independently.

Economy cost It is economical. Not very economical because all the resources
are required in different departments.

Development of Less changes as manager becomes More chances as managers perform many
managers specialised in one function only. functions.

Specialisation Functional specialisation. Product specialisation.

Coordination Less when company is producing more Better coordination because all the activities
products. related to one product are in one department.

Autonomy of Less autonomy of action. More autonomy of action.

operations

Suitable Suitable for all types of organisation, Suitable for multiproduct or diversified firms.
particularly uniproduct firms.

Functional Organisational Structures

➔ Activities or jobs are grouped keeping in mind the functions or jobs.
➔ Within departments grouping is done on the basis of specialised functions.
➔ Even territory wise grouping is also included here.

Advantages Disadvantages

Occupational specialisation as an employee performs Places less importance to overall objective of the
a specific task which promotes efficiency and utilisation organisation as departmental goals may be pursued
of manpower. ahead of the overall organisational goal.

By grouping similar activities in one department there is There may be problems of coordination as each
easy supervision and better control, promoting control department gives priority to their own function over that
and coordination within a department. of other departments.

Increases managerial and operational efficiency as Employees develop narrow perspectives as they are
minimum cost leads to increase in profit. skilled in a specific function only and thus cannot be
transferred to another department. Functional heads
It leads to minimum duplication of efforts, resulting in cannot be trained for top management positions as they
economies of scale and lowering of costs. are unable to gain experience in diverse areas.

Easy and effective training as it focuses only on limited Since all departments are interrelated, if the
skills or one function. organisational goal fails one department blames another
and it is hard to fix accountability.
 Due attention to due function. There can be conflict of interest between two
departments.

➔ Suitability
◆ Division of work as per functions.
◆ Specialisation in every function.
◆ Grouping of similar nature of jobs.
◆ Uniproduct or single or type of product manufacturing company

Divisional Organisational Structures

➔ When the organisation is large in size and is producing more than one type of product then activities related to
one product are grouped under one department.

Advantages Disadvantages

Product specialisation occurs as all activities related to one More resources required as every department will
product are grouped under a department. work as an independent unit.

Faster decision-making as there is no dependence on other Each department will focus only on their product
departments. and thus may sideline the organisational goal.

It is easy to gauge accountability as the departments are not Conflict may arise among departments based on
interrelated. allocation of resources.

Flexibility due to fast decision-making. May lead to increase in cost due to duplication of
efforts are similar activities are not grouped under
Allows expansion and growth as new departments can be added one department.
without disturbing other departments.

➔ Suitability
◆ Organisations producing multi-product or different line of products.
◆ Organisations which require product specialisation.
◆ Organisations which require each division to be self contained as under divisional structure each
department has production, sale finance department.
◆ Growing companies which plan to add more line of products in future.

FORMAL ORGANISATION
➔ When the managers are carrying on organising process then as a result of organising process an organisational
structure is created to achieve systematic working and efficient utilisation of resources.
➔ The formal organisational structure:
◆ Clearly spells out the job to be performed by each individual
◆ The authority, responsibility assigned to every individual
◆ The superior-subordinate relationship.
◆ Designation of every individual in the organisation.
➔ This structure is created intentionally by the managers for achievement of organisational goal.

Features
➔ Created intentionally by the process of organising.
➔ The purpose is achievement of organisational goal.
➔ Each individual is assigned a specific job.
➔ Every individual is assigned a fixed authority or decision-making power.
➔ Results in creation of superior-subordinate relations.
➔ Creates a scalar chain of communication in the organisation.

Advantages Disadvantages
 Results in systematic and smooth functioning of an organisation. Following a scalar chain and chain
of command leads to a delay in
Established to achieve organisational objectives. actions.

Since work is systematically divided among various departments and employees, Social and psychological needs of
there is no chance of duplication or overlapping of work. employees are ignored, which may
lead to them getting demotivated.
Results in coordinating the activities of various departments.

Clearly defines superior-subordinate relationship, thus creating a chain of There is emphasis on work only,
command. and human relations, creativity,
talents, etc. are ignored.
There is more emphasis on work than interpersonal relations.

INFORMAL ORGANISATION
➔ While working at the job positions assigned to them under the formal organisational structure, individuals
interact with each other and develop some social and friendly groups in the organisation, forming a network.
➔ Gets created automatically.
➔ Main purpose is to get psychological satisfaction.

Features
➔ Gets created automatically without any intended efforts of managers.
➔ Formed by the employees to get psychological satisfaction.
➔ Does not follow any fixed path of flow of authority or communication.
➔ Source of information cannot be known under informal structure as any person can communicate with anyone
in the organisation.
➔ Existence depends on formal organisational structure.

Advantages Disadvantages

Fast communication as there is no scalar According to a survey, 70% of the information spread through this
chain followed. structure are rumours, which may mislead employees.

By giving due importance to psychological There is no systematic working as it does not form a structure for
and social needs of employees, it fulfils smooth working of an organisation.
their social needs and motivates them.

Top level managers can know the real and If the informal organisation opposes the policies and changes of
correct feedback of the employees on management, it becomes difficult to implement them in the formal
various policies and plans. structure and can bring negative results.

There is more importance given to individual interest and satisfaction

as compared to organisational interest.

Basis Formal Organisation Informal Organisation

Formation Formed deliberately in a planned manner. Gets created spontaneously without any
planning.

Purpose Work systematically and achieve the Get psychological satisfaction.

organisational goal.

Behaviour of Behaviour of the employees is decided by the No control of management over behaviour of
employees managers. members. But if the behaviour of informal
group is bringing negative results then the
management may interfere.

Structure Well defined organisational structure which No well-defined structure, no fixed superior or
decides the scalar chain and defines subordinate and no scalar chain.
superior-subordinate relationship.
 Communication All the information passes through scalar No fixed path of passing of information.
chain and the managers prefer written Information can travel from any side. Mostly
channels for communication. oral communication takes place.

Leadership There is direct relation between the authority There is no relationship between the authority
and leadership. The person with highest and leadership. The person with the lowest
authority is considered as the leader. authority can also be a leader.
Generally managers act as leaders.

Stability or duration of More stable and durable (lasts for a long Not very stable because employees can
organisational period of time) because once the change their friendly and social group
structure organisational structure is made, it exists till whenever they desire.
survival of organisation.

Rules and regulations Employees strictly have to follow the rules and There are no rules or regulations for the
regulations and in case they are not following members and if they are not following anything
the rules and regulations, there will be penalty there are no penalties.
on them.

Inter-dependence Independent structure which can exist Depends upon formal organisation structure.
systematically after the organising process is
over.

Flow of authority Authority flows from top to bottom. Authority can flow in all directions.

DELEGATION OF AUTHORITY
➔ Process of entrusting responsibility and authority to the subordinates and creating accountability on those
employees who are entrusted responsibility and authority.
◆ Downward transfer of authority from superior to subordinate.
➔ Why is it done?
◆ Managers are assigned a lot of work and he alone cannot perform all the work.
◆ He divides the work among different individuals working under him according to their qualifications and
skills.
◆ He deliberately passes some of his responsibilities and authority to his subordinates.
◆ The manager takes accountability for the subordinates to ensure that they perform the work effectively
and efficiently in the expected manner.

Principle of Absoluteness of Accountability

➔ Delegation is not a process of abdication, i.e., accountability is absolute.
➔ The accountability cannot be passed or delegated.
➔ Though a superior may create accountability on subordinates, they will still be accountable.

Elements of Delegation/Process of Delegation

1. Responsibility
○ Work assigned to an individual.
○ Includes all the physical and mental activities to be performed by the employees at a particular job
position.
○ Process of delegation begins when manager passes on some of his responsibilities to his subordinates,
i.e., responsibility can be delegated.
○ Features
i. Responsibility is the obligation of a subordinate to properly perform the assigned duty.
ii. Arises from superior-subordinate relationship because subordinate is bound to perform the duty
assigned by his superior.
iii. Responsibility flows upward because subordinate will always be responsible to his superior.
2. Authority
○ Power to take decisions.
○ To carry to responsibilities, every employee needs to have some authority. Thus, when passing
responsibilities to the subordinates.
○ Delegating authority is the second step of the organising process.
○ While sharing authority, managers must keep in mind that the authority matching to the responsibility
should only be delegated. They should not pass all their authority to their subordinates.
○ Features
 i. In a formal organisation authority arises or originates from an individual’s position.
ii. Authority refers to right to take decision due to your managerial position.
iii. Determines superior-subordinate relationship. As subordinate communicates his decisions to
subordinate expecting compliance from his as per his directions.
iv. Restricted by law and rules and regulations of the organisation.
v. Arises from the scalar chain which links various job positions.
vi. Flows downward from superior to subordinate
vii. Authority = responsibility
3. Accountability
○ Subordinates are answerable for the non-completion of the task.
○ Accountability can only be shared, it cannot be passed or delegated.
○ It is the third and final step in the process of delegation.
○ Features
i. Accountability refers to answerable for the final output.
ii. Cannot be delegated or passed.
iii. Enforce through feedback on extent of work accomplished.
iv. Flows upward, i.e., subordinate will be accountable to his superior.

Basis Authority Responsibility Accountability

Meaning Power to take decision. Obligation to perform a task. Answerable for the output of
assigned task.

Delegation Can be delegated. Cannot be delegated entirely. Cannot be delegated at all.

Origin Arises from formal position. Arises from delegation of Arises from responsibility.
authority.

Flow of Flows downward from superior to Flows upwards from subordinate Flows upward from subordinate
direction subordinate. to superior. to superior.

➔ Authority is delegated, responsibility is assumed and accountability is imposed.

➔ Responsibility is derived from authority and accountability is derived from responsibility.

Importance of Delegation
1. Effective management:
○ Managers pass routine work to subordinates, allowing them to concentrate on other important matters.
○ Main job of managers is to get work done effectively and by delegating the authorities and
responsibilities managers can get the work done effectively and efficiently from the subordinates.
2. Employees’ development:
○ Due to delegation employees get more opportunities to utilise their talents.
○ It allows them to develop these skills which help them to perform complex tasks.
○ Helps in making better future managers by giving them chance to use their skill and gain experience of
work related to the higher job position.
3. Motivation of employees
○ Subordinates develop feeling of belongingness and trust due to the manager sharing his responsibilities
and authority with them.
○ Some employees are thus motivated by such non-financial incentives.
4. Facilitates organisational growth
○ Managers keeps the qualification and capabilities of all the subordinates, leading to division of work and
specialisation, which is very important for organisational growth.
5. Basis of management hierarchy
○ Delegation establishes a superior-subordinate relationship, which is the base for hierarchy of
managers.
○ The extent of power delegated to each subordinate decides the management hierarchy.
6. Better coordination
○ Subordinates are answerable for the non-completion of a task.
○ This systematic division of work allows clarity and removes the threat of duplication of efforts.
○ This brings effective coordination in the organisation.
7. Reduces the work load of managers
○ Managers can pass all their routine work to the subordinates and concentrate on important work.
CENTRALISATION AND DECENTRALISATION
➔ Centralisation refers to concentration of power of authority in few hands.
◆ An organisation is centralised when the decision-making authority is in the hands of top-level
management only.
➔ Decentralisation can be defined as even and systematic distribution of authority at every level of management.
◆ Every employee working at different levels gets some sare in the authority.
◆ It is a policy matter and managers plan in advance whether to go for centralised or decentralised policy
or a mix of the both.
➔ Decentralisation must be balanced with centralisation in areas of major policy decisions, as misuse of
decentralisation can lead to disintegration of organisation if departments start operating on their own guidelines.

Features of Decentralisation
➔ Much more than a mere transfer of authority to lower level.
➔ Implies selective dispersal of authority.
➔ Shows the belief that people are competent, capable and resourceful.
➔ Indicates that employees at middle and lower level can assume the responsibility for effective implementation of
their decisions.
➔ Recognises the need for authority for decision-makers.
➔ Top-level management carefully selects those decisions which will be pushed down to lower levels and those
that will be retained at higher level.

Relation between Delegation and Decentralisation

1. Decentralisation is an extension of delegation.
○ In delegation, we multiply authority with two.
○ However in decentralisation the authority is multiplied by many as systematic delegation taking place at
every level will result in evenly distribution of authority and responsibility at every level and result in
decentralised.
○ If delegation is restricted to certain levels only then there will be no complete decentralisation also.
2. Delegation is necessary in every organisation but decentralisation is optional.
○ Delegation is a tool to get work done effectively and efficiently through others whereas decentralisation
is required when an organisation grows and expands and only top level cannot manage it.
○ Decentralisation allows faster decision-making as it provides greater flexibility and freedom of action.
○ However it is a matter of choice and preference of top level management and not compulsory.

Importance of Decentralisation
1. It shows trust and helps subordinates develop initiative by passing of authority at middle and lower level,
allowing them to take decisions without seeking approval of superiors.
2. Managers working at middle and lower levels learn decision making, allowing them to develop managerial
talent and experience for future. This helps the managers get ready for promotion as well.
3. Since authority and power lies with all managers, there is quick-decision making.
4. Top level managers are able to delegate their responsibilities and pass on some authority, relieving their
burden and allowing them to become free to concentrate on core and important issues.
5. Decentralisation grants more autonomy to the lower levels and subordinates, which facilitates growth and
increases productivity, allowing an increase in revenue that can lead to expansion.
6. Since each employee is responsible for their own decision, accountability cannot be transferred and there can
be better control over the organisation using Score Card, Management Information System, etc.

Basis Delegation Decentralisation

Scope/parties Limited in scope as only two parties,i.e., Wider in scope as employees working at
involved manager and his immediate subordinates are different levels are involved, and thus authority is
involved. pushed down at every marginal level.

Significance Important but routine function of the managers. More significant as it is a one-time decision and
status is a policy matter.

Freedom of action Managers pass authority and responsibilities to There is more freedom of action as authority is
the subordinates and after that constantly distributed systematically there will be periodic
supervise their actions. appraisal and not continuous supervision.
Scope Narrow in scope. Wide in scope.

Responsibility Responsibility of every manager. Responsibility of top level manager.

Nature/essential Compulsory as no individual can perform all Optional policy.

tasks on their own.

Purpose To reduce burden of manager.. To increase role of subordinates and giving them
more autonomy.

Grant of authority Authority is granted by immediate superior. Authority is granted by top level.

Basis Centralisation Decentralisation

Meaning Concentration of power or authority at higher Distribution of powers and authority at every
level only. level of management.

Authority of different Top management retains maximum authority. Authority is systematically divided at every
levels Middle and lower level have very low authority. level.

Suitable Suitable for small scale and size organisations. Suitable for large scale organisations.

Freedom of actions Less freedom of actions. More freedom of actions.

 STAFFING

➔ Staffing is described as “a managerial function of filling and keeping filled positions in the organisation
structure”.
➔ It consists of manpower planning, recruitment, selection, training, compensation, promotion and maintenance of
managerial personnel.
➔ It involves finding the right person for the right job having the right qualification, doing the right job at the right
time.
➔ In a new organisation, the staffing function follows the planning and organising functions.
➔ In an existing enterprise, staffing is a continuous process because new jobs may be created and some of the
existing employees may leave the organisation.

IMPORTANCE/NEED/BENEFITS/ADVANTAGES OF STAFFING
➔ Human resources are the foundation of any business.
➔ The right people can help make the business successful while the wrong people can break the business.
➔ Thus, staffing is the most fundamental and critical drive of organisational structure.
1. Helps in discovering and obtaining competent personnel for various jobs.
2. Makes for higher performance by putting right person on the right job.
3. Ensures the continuous survival and growth of the enterprise through the succession planning for
managers.
4. Helps to ensure optimum utilisation of human resources.
5. Improves job satisfaction and morale of employees through objective assessment and fair reward for
their contribution.
6. Helps in competing through differences in human capital.
7. Key to effectiveness of other functions.
➔ If right kind of employees are not available, it will lead to wastage of materials, time, effort and energy, resulting
in lower productivity and poor quality of products.

STAFFING AND HUMAN RESOURCE MANAGEMENT

➔ Human resource management is the part of management process which develops and manages the human
elements of the enterprise, considering their knowledge, skill, creativity, talent and potential for contributing
towards organisational objectives.
◆ Involves determining the organisation’s need of human resources, recruitment, other activities related to
employees.
◆ Also includes activities related to liaison with government, trade union, etc.
➔ Separate and specialised function.
◆ Called staffing function in small-scale organisations as it is carried out by managers itself.
◆ Separate department created in large-scale organisations.

Activities followed by HRMs

1. Human resources planning (determining the number and type of personnel required to fill the vacant job
positions of an organisation).
2. Employing people.
3. Career growth through training and development of employees.
4. Motivation by offering incentives.
5. Compensation or remuneration of employees.
6. Performance appraisal and feedback.
7. Providing social security and welfare of the people.
8. Review and audit of personnel policies and procedure.

Evolution of Human Resource Management

Role/Basis Emergence/Need Responsibilities

Labour Welfare Officer Emergence of trade union movement led to the Bare minimum welfare activities of
need of a person who could act as an effective link employees.
between the owners and workers.

Personnel Officer/Manager With the introduction of factory system, thousands Recruitment, selection and
of persons began to be employed under one roof. placement of personnel.
 Human Resource Manager Fast changing technological developments and Skill development and training of
increase in scope of work. employees.

STAFFING PROCESS
➔ Staffing is a line activity as it is performed by all managers.
➔ Staffing is a staff activity as it is an important area of management.

Step 1) Estimating Manpower Requirement

➔ Find out number and type (qualifications and educational background) of employees needed by the
organisation in the near future.
➔ Policies should be made regarding number of people to be appointed from different backwards classes,
women's force, minority, etc.
➔ For estimating manpower requirement a company will take the following three steps:
◆ Workload analysis: finding out number and type of employees require to perform required jobs.
◆ Workforce analysis: assessment of the number and types of human resources already occupying job
positions and how many are over or under burdened.
◆ Comparison: manager compares both workload and workforce analysis to find out if the company is
overstaffed (workload > workforce) or understaffed (workload < workforce).
➔ Ideal number of employees can be found by equating workforce to workload.

Step 2) Recruitment
➔ Process of searching for prospective employees and stimulating/inducing them to apply for jobs in the
organisation.
➔ Involves locating the potential candidate or determining the sources of potential candidates.
➔ Essential objective is to create a pool of the prospective job candidates.
➔ Both internal and external sources of recruitment may be explored, where internal sources may be used to a
limited extent.

Step 3) Selection
➔ Pro­cess of choosing from among the pool of the prospective job candidates developed at the stage of
recruitment.
➔ Done through tests, interviews, etc.
➔ Main objectives/purposes:
◆ It ensures that the organisation gets the best among the available
◆ It enhances the self­esteem and prestige of those selected and conveys to them the seriousness with
which the things are done in the organisation.
➔ If number of selected candidates is less than number of candidates rejected, termed as “negative selection”.
➔ Those who successfully negotiate the test and the interviews are offered an employment contract - a written
document containing the offer of employment, terms and conditions and date of joining.

Step 4) Placement and Orientation

➔ Placement refers to occupying of post by candidate for which he is selected.
◆ After selection the employee is given an offer letter and is asked to occupy the vacant job position.
➔ Orientation refers to introduction of new employees to the existing employees.
◆ Large organisations utilise an orientation program while smaller ones a superior personally performs
this step.
◆ This process of familiarisation is very crucial and may have a lasting impact on his decision to stay and
his job performance.

Step 5) Training and Development

➔ Organisations have either in-house training centres or have forged alliances with training and educational
institutes to ensure continuing learning of their employees.
➔ The organisations too benefit if employee motivation is high, their competencies are strengthened, they perform
better and thus, contribute more to organisational effectiveness and efficiency.
➔ By offering the opportunities for career advancement to their members, organisations are not only able to attract
but also retain its talented people.

Step 6) Performance Appraisal

 ➔ Performance appraisal means evaluating against certain predetermined standards and the superior is to
provide the employee feedback on his/her performance.
➔ The performance appraisal process, therefore, will include defining the job, appraising performance and
providing feedback.

Step 7) Promotion and Career Planning

➔ It becomes necessary for all organisations to address career-related issues and promotional avenues for their
employees.
➔ Managers must encourage employees to grow and realise their full potential. Promotions are an integral part of
people’s career. This refers to to being placed in positions of increased responsibility, pay and job satisfaction.

Step 8) Compensation
➔ All organisations need to establish wage and salary plans for their employees. There are various ways to
prepare different pay plans, depending on the worth of the job.
➔ Basically the price of the job needs to be determined.
➔ Compensation, therefore, refers to all forms of pay or rewards going to employees. It may be in the form

RECRUITMENT
➔ Inducing or attracting more and more candidates to apply for vacant job positions in the organisation.
➔ Search for candidates who can perform the vacant roles and inducing them to apply and come forward for filling
the vacant roles.

Internal Sources
➔ Vacant job positions are filled by inducing the existing employees of the organisation.
Advantages Disadvantages

Economical. No fresh talent of new

ideas will come into the
Motivates existing employees. organisation.

Leeds amount is spent on training. Limited choice.

Employees are already familiar with the rules and regulations of the organisation and thus Not suitable for new
chances of turnover are less. organisations.

Improves performance of employees as they show better performance to gain a promotion.

Through transfer employees get training in the form of job rotation. Frequent transfers may
reduce the productivity
Through transfer surplus employees can be shifted to other departments. of employee.

➔ Transfer:
◆ Shifting of employees from one job position to other at the level of authority.
◆ Typically there is no change in compensation level and authority level
◆ No change in rank, responsibilities and prestige.
➔ Promotion:
◆ Shifting of employees from one job position to other with higher level of authority.
◆ Authority level, rank, responsibilities of employees and prestige improve or increase.
◆ There is also typically an increase in compensation or salary also.

External Sources
➔ Candidates outside the organisation are invited to fill the vacant job position.r
Advantages Disadvantages

Fresh and new talent comes into the organisation. Morale of existing employees falls.

Wider choice. Lengthy process.

Qualified personnel. New employees may not adjust to the rules and
regulations of the organisation which means more
Employees with latest technological knowledge. chances of turnovers.
Develops competitive spirit in existing employees of the Expensive as there is heavy burden to borne by the
organisation. company for advertising.

➔ Direct recruitment
◆ Organisations paste notice at the gate of their office or factory or workshop stating the vacant job
positions.
◆ The people who are interested in those jobs walk in for interview.
◆ This method of external recruitment is most suitable for unskilled job positions.
➔ Casual callers.
◆ Large organisations maintain an application file in which they keep all the pending applications which
the job seekers leave with the reception, sometimes the applications of suitable candidates who were
not selected in previous year's selection process are also kept in application file.
◆ This application file is considered as a waiting list. Whenever there is a job vacancy the suitable
candidates from the waiting list are called.
➔ Advertising.
◆ The most common and popular method.
◆ The organisations select the media of advertisement keeping in mind the requirement of job position.
➔ Employment exchanges.
◆ Government employment exchanges act as middlemen between the job seekers and the organisations
who have vacant job positions.
◆ The job seekers leave their bio-data and details of their qualifications with the employment exchanges
and when the organisations approach employment exchanges the suitable candidates are sent.
➔ Placement agencies and management consultant.
◆ Placement agencies provide nationwide service of matching demand and supply of workforce.
◆ These agencies invite the bio data and record from various job seekers and send them to suitable
clients and these agencies charge fees for providing such service.
◆ These are a kind of employment exchange run by private enterprises.
➔ Campus recruitment:
◆ Sometimes the senior managers of the organisations visit various professional colleges, technical
institutes to get fresh graduates or the people with the latest technological know-how.
◆ The organisations prefer fresh graduates because they can be moulded according to the requirement of
the organisation.
➔ Recommendations from present employees.
◆ Many firms encourage their employees to recommend the names of their relatives, friends and other
known people to fill the vacant job position.
◆ The organisations prefer recommendation by trusting the goodwill of the present employees and the
organisations can catch hold of existing employees if there is any problem with the new employee
recommended by him.
➔ Labour contractors.
◆ Jobbers and contractors are the people who keep in touch with the labour in villages and rural areas
and whenever there is vacancy or requirement for labour in factory or in the construction site, they bring
the labour from villages and supply to businessman.
◆ The jobbers and contractors charge commission for the same.
◆ This is suitable for labourers and unskilled workers.
◆ Labour contractors maintain close contact with labours and they can provide the required number of
unskilled workers at short notice.
➔ Advertising on television.
◆ A new trend of external recruitment is telecast on various channels regarding vacant job position. They
telecast the requirement of the job along with the qualification necessary to apply.
➔ Web publishing.
◆ In internet there are certain websites specifically designed provide information regarding job seekers
and companies which have vacant job position.
◆ These websites can be visited by job seekers as well as companies.

Basis Internal recruitment External recruitment

Meaning Making use of existing staff to fill up the vacant job Making use of new personable or outsiders to fill up
positions in the organisation. the vacant job positions in the organisation.
 Time Less time-consuming. More time-consuming.

Economy More economical as there is no cost of searching Less economical as vacancies have to be notifies in
external sources. newspapers, magazines, etc.

Quality Limited choice so better quality may not be Provides wider choice and best quality is assumed.
assumed.

Morale of Boosts morale of employees as existing staff gets Brings down morale of employees as they do not
employees chance of promotion. get a chance of growth and development.

SELECTION
➔ Discovering most promising and most suitable candidate to fill up the vacant job position in the organisation.
➔ Since there are more applicants than vacant job positions, selection is considered a negative process.

Selection process
1. Preliminary screening
○ Done to eliminate unqualified and misfit candidates based on information supplied in the application
form.
2. Selection test
○ An employment test is a mechanism that attempts to measure certain characteristics of individuals,
such as their practical knowledge.
Test Characteristic

Intelligence Used to measure the intelligence quotient of an

test individual.

Indicator of a person’s learning ability or the ability to

make decisions and judgements.

Aptitude test Measure of an individual’s potential for learning new

skills.

Indicates person’s capacity to develop and of a

person’s future success score.

Personality Measures human behaviour of the candidate, and

test relates to the intelligence, aptitude and interest of the
candidate.

Indicates a person's emotions, motivations, reactions,

maturity and value system.

Trade test Measures existing skills of the individual, the level of

knowledge and proficiency in the area of professions
or technical training.

Interest test Used to know the pattern of interests or involvement

of a person.

3. Employment interview
○ Interview is a formal, in depth conversation conducted to evaluate the applicant’s suitability for the job.
○ Consultants who are specialised in their fields ask questions from the candidate to test their
professional or specialised knowledge related to the job.
○ The interviewee can also clarify their queries regarding salary, working conditions, posting, etc.
4. Checking references and background
○ In the application form the candidate is asked to give names and details of references, for the purpose
of verifying information and gaining additional information on an applicant.
○ Previous employers, known persons, teachers and university professors can act as references.
5. Selection decision
○ The final decision has to be made from among the candidates who pass the tests, interviews and
reference checks.
 ○ The views of the concerned manager will be generally considered in the final selection because it is
he/she who is responsible for the performance of the new employee.
6. Medical examination
○ After the selection decision and before the job offer is made, the candidate is required to undergo a
medical fitness test.
○ The job offer is given to the candidate being declared fit after the medical examination.
7. Job offer
○ The next step in the selection process is job offer to those applicants who have passed all the previous
hurdles.
○ Job offer is made through a letter of appointment/confirm his acceptance.
○ Such a letter generally contains a date by which the appointee must report on duty.
➢ The appointee must be given reasonable time for reporting.
8. Contract of employment
○ After the job offer has been made and candidate accepts the offer, certain documents need to be
executed by the employer and the candidate:
i. Attestation form.
● This form contains certain vital details about the candidate, which are authenticated
and attested by him or her.
● Attestation form will be a valid record for future reference.
ii. Contract of employment.
● Basic information that should be included in a written contract of employment will vary
according to the level of the job, but the following checklists sets out the typical
headings: Job Title, Duties, Responsibilities, Date when continuous employment starts
and the basis for calculating service, rates of pay, allowances, hours of work, leave
rules, sickness, grievance procedure, disciplinary procedure, work rules, termination of
employment.

Basis Recruitment Selection

Meaning Process of searching suitable candidates to fill up Process of screening and selecting the most eligible
vacant job positions. candidates and offering them jobs.

Stage Precedes the staffing function. Starts where recruitment ends.

Nature Positive process as more and more candidates are Negative process and more candidates are rejected
induced to apply for the job. than the number of selected candidates.

Contract of No contractual relation created. Contract of service between employer and

service employee.

TRAINING AND DEVELOPMENT

➔ Training means equipping the employees with the required skill to perform the job. The candidates are sent for
training so that they can perform the job in the expected manner.
➔ Development refers to to overall growth of the employee, and focuses on personal growth and successful
employees’ development.

Benefits of training and development for organisation

1. Training is a systematic learning, always better than hit and trial methods which lead to wastage of efforts and
money.
2. It enhances employee productivity both in terms of quantity and quality, leading to higher profits.
3. Training equips the future manager who can take over in case of emergency.
4. Training increases employee morale and reduces absenteeism and employee turnover.
5. It helps in obtaining effective response to fast changing environment – technological and economic.

Benefits of training and development for employees

1. Better career options.
○ Improved skill and knowledge due to training bring better career options for employees.
2. Earning more.
○ Improvement in efficient performance of employees helps the employees to earn more.
3. Boost up the morale of employees.
 ○ Training increases the satisfaction and morale of employees.
4. Less chances of accidents.
○ Training makes employees more efficient so there are less chances of accidents..

Basis Training Development

Concept/depth of Concerned with teaching technical skill only. Concerned in teaching technical, human and
knowledge conceptual skill.

Suitability More suitable for technical staff. More suitable for managerial staff.

Nature Concentrates on developing the skill already Concentrates on development of hidden qualities
possessed by the employees. of the employees.

Methods used On-the-job methods of training are preferred. Off-the-job methods of training are preferred.

Focus/purpose Focuses on present requirements of the Focuses on present as well as future

organisation. requirements of the organisation.

Time Short-term process Long-term process

Initiative Boss/superior takes initiatives for imparting Individual takes initiatives himself for his growth
training to his subordinates. and development.

Duration Short-term process, its duration is fixed and Never-ending procedures, its duration is never
certain. defined.

Levels of trainees Useful for non-managerial, i.e., operative Useful for managerial personnel, i.e., middle and
involved employees or lower level of managers. top level managers.

Centred Work-centred Person-centred

Basis Training Education Development

Meaning Act of imparting knowledge or Concerned with improving the Process for the overall growth of
skill for performing a particular general knowledge and employee for future management
job. understanding of employee. tasks of increasing difficulty and
scope.

Orientation Job-oriented. Knowledge-oriented. Career-oriented

Focus Improve work efficiency. Develop a logical and rational Personality development of
mind. employee.

Goal Give importance to organisational Gives importance to goal of Gives importance to

goal. individuals. organisational as well as
individual goals.

TRAINING METHODS
On-the-Job Training
➔ Employees are training while there are performing the job.
➔ Suitable for only technical jobs, and allows employees to learn the practical problems while working on the job.
➔ Its biggest disadvantage is that it results in wastage of resources.
➔ Methods:
◆ Apprenticeship Programmes
● Apprenticeship programmes put the trainee under the guidance of a master worker.
● These are designed to acquire a higher level of skill. People seeking to enter skilled jobs are
often required to undergo apprenticeship training.
● These apprentices are trainees who spend a prescribed amount of time working with an
experienced guide, or trainer, who performs the job while the apprentice observes him.
● A uniform period of training is offered to trainees, in which both fast and slow learn here, are
placed together. Slow learners may require additional training.
◆ Coaching
● In this method, the superior guides and instructs the trainee as a coach.
 ● The coach or counsellor sets mutually agreed upon goals, suggests how to achieve these
goals, periodically reviews the trainees progress and suggests changes required in behaviour
and performance.
● The trainee works directly with a senior manager and the manager takes full responsibility for
the trainee’s coaching.
● Classically the trainee is being groomed to replace the senior manager and relieve him from
some of his duties. This gives a chance for the trainee to learn the job also.
◆ Internship Training:
● Agreement between the professional institutes and the corporate sector where professional
institutes send their students to various companies so that they can practise the theoretical
knowledge acquired by them through professional institutes.
● Organisations get people with fresh ideas and latest knowledge and the companies have to pay
a very low amount of salary, known as stipend.
● Students get the chance to practise under the real work situation.
◆ Induction or Orientation Training
● Process of receiving and welcoming an employee when they first join the company and giving
them the basic information they need to settle down and start work.
● Purpose is to make the new employee feel at home and develop a feeling of belongingness.
● Enables the new employee to have a good start and develop their overall effectiveness on the
job.
● Objectives:
○ To help the newcomer to overcome his/her shyness and nervousness in meeting new
people.
○ To build up the confidence of new employee.
○ To develop a sense of belongingness and loyalty.
○ To develop cordial relationship between the newcomer and old employees and their
superiors.
○ To ensure newcomers do not form negative attitude towards the organisation or the job.
○ To give the newcomers necessary information such as location of washrooms, rest
periods, cafeteria, leave rules, etc.
● A formal induction programme must provide following information to the employees:
○ Brief history and operation of the company.
○ Products and services of the company.
○ Company’s organisational structure.
○ Rules, regulations, policies and procedures of the company.
○ Responsibilities and authorities of employee.
○ Grievance procedures and safety rules.
○ Suggestion schemes.
○ Terms and conditions of service such as wages, working hours, holidays, etc.
○ Disciplinary procedures.
○ Opportunities for training, promotions, transfer, etc.
◆ Job Rotation:
● This kind of training involves shifting the trainee from one department to another or from one
job to another, which enables the trainee to gain a broader understanding of all parts of the
business and how the organisation as a whole functions.
● The trainee gets fully involved in the departments operations and also gets a chance to test her
own aptitude and ability, allows them to interact with other employees facilitating future
cooperation among departments.
● When employees are trained by this method, the organisation finds it easier at the time of
promotions, replacements or transfers.

Off-the-Job Training
➔ Training the employees by taking them away from their work.
➔ Suitable for managerial job positions as conferences, seminars are held to train the managers.
➔ Methods:
◆ Class Room Lectures/ Conferences:
● The lecture or conference approach is well adapted to conveying specific information rules,
procedures or methods.
 ● The use of audio­visuals or demonstrations can often make a formal classroom presentation
more interesting while increasing retention and offering a vehicle for clarifying more difficult
points.
◆ Films:
● They can provide information and explicitly demonstrate skills that are not easily represented
by the other techniques.
● Used in conjunction with conference discussions, it is a very effective method in certain cases.
◆ Case Study:
● Taken from actual experiences of organisations, cases represent attempts to describe, as
accurately as possible real problems that managers have faced.
● Trainees study the cases to determine problems, analyse causes, develop alternative solutions,
select what they believe to be the best solution, and implement it.
◆ Computer Modelling:
● It simulates the work environment by programming a computer to imitate some of the realities
of the job and allows learning to take place without the risk or high costs that would be incurred
if a mistake were made in real life situation.
◆ Vestibule Training:
● Employees learn their jobs on the equipment they will be using, but the training is conducted
away from the actual work floor.
● Actual work environments are created in a class room and employees use the same materials,
files and equipment.
● This is usually done when employees are required to handle sophisticated machinery and
equipment.
◆ Programmed Instruction:
● This method incorporates a prearranged and proposed acquisition of some specific skills or
general knowledge.
● Information is broken into meaningful units and these units are arranged in a proper way to
form a logical and sequential learning package i.e. from simple to complex.
● The trainee goes through these units by answering questions or filling the blanks.
 DIRECTING
➔ Directing refers to the process of instructing, guiding, counselling, motivating and leading people in the
organisation to achieve its objectives.
➔ It does not mean only instruction but also includes supervising the employees when they are performing the job,
motivating them to perform more efficiently and leading them towards the achievement of organisational goal.

CHARACTERISTICS OF DIRECTING
➔ Initiates action.
◆ While other functions prepare a setting for action, directing initiates action in the organisation.
➔ Takes place at every level of management.
◆ Performed by managers at all levels and in all locations.
◆ However, time spent in directing is comparatively more at the operational level of management.
◆ Takes place wherever superior-subordinate relation exists.
➔ Continuous process.
◆ It takes place throughout the life of the organisation irrespective of people occupying managerial
positions.
◆ After issuing orders, the manager has to continuously guide, supervise and motivate subordinates.
➔ Flows from top to bottom.
◆ Directions are given from supervisors to subordinates.
◆ Therefore, it is initiated at the top level and flows downwards through the organisational hierarchy.
➔ Performance oriented.
◆ Main motive of organisation is to bring efficiency in performance.
◆ It converts planning into performance of individuals towards achieving organisational goals.
➔ Human element.
◆ Involves study and moulding of human behaviour.
◆ Improves interpersonal and intergroup relationship.
◆ Motivates employees to work with their best ability.

IMPORTANCE OF DIRECTING
➔ Helps to initiate action.
◆ Supervisors direct the actions of employees towards the predetermined goals of the organisation.
◆ Employees start working only after receiving direction.
➔ Integrates employees’ efforts.
◆ Every individual effort thus contributes to achievement of organisational goal.
◆ Directing enables coordination and provides supervision to the employees to work together.
➔ Guides employees and motivates them.
◆ Directing also involves the motivation of subordinates by superiors to perform the jobs to their best
capabilities.
◆ Develops the feeling of belongingness and encourages employees to perform their best ability.
➔ Brings stability and balance in the organisation.
◆ Fosters cooperation and commitment among people and helps to achieve balance among various
groups, activities and the departments.
◆ It also patches over difference in attitude between employee and employer by instructing the
employees that their interests and organisation’s interest are in the same direction.
➔ Facilitates change.
◆ Generally employees are hesitant in accepting changes but through directing the changes can be
implemented more easily as supervisors adapt their directions to accommodate changes.
◆ They communicate changes, and motivate employees to accept and incorporate them in their actions.

PRINCIPLES OF DIRECTING
1. Maximum individual contribution.
○ Directing techniques must help every individual in the organisation to contribute to his maximum
potential for achievement of organisational objectives.
○ It should bring out untapped energies of employees for the efficiency of organisation.
2. Harmony of objectives.
○ Very often, we find that individual objectives of employees and the organisational objectives as
understood are conflicting to each other.
○ The organisation may expect employees to improve productivity to achieve expected profits, but good
directing should provide harmony by convincing that employee rewards and work efficiency are
complimentary to each other.
 3. Unity of command.
○ A person in the organisation should receive instructions from one superior only.
○ If instructions are received from more than one, it creates confusion, conflict and disorder in the
organisation.
○ Adherence to this principle ensures effective direction.
4. Appropriateness of direction technique.
○ Appropriate motivational and leadership technique should be used while directing the people based on
subordinate needs, capabilities, attitudes and other situational variables.
5. Managerial communication.
○ Effective managerial communication across all the levels in the organisation makes direction effective.
○ Directing should convey clear instructions to create total understanding to subordinates.
○ Through proper feedback, the managers should ensure that subordinate understands his instructions
clearly.
6. Use of informal organisation.
○ A manager should realise that informal groups or organisations exist within every formal organisation.
○ They should spot and make use of such organisations for effective directing.
7. Leadership.
○ While directing the subordinates, managers should exercise good leadership as it can influence the
subordinates positively without causing dissatisfaction among them.
8. Follow through.
○ Mere giving of an order is not sufficient - managers should follow it up by reviewing continuously
whether orders are being implemented accordingly or any problems are being encountered.
○ If necessary, suitable modifications should be made in the directions.

ELEMENTS OF DIRECTING
1. Supervision
2. Motivation
3. Leadership
4. Communication

SUPERVISION
➔ Supervision is the process of guiding the efforts of employees and other resources to accomplish the desired
objectives.
◆ Super - over and above and vision - seeing.
➔ Means overseeing what is being done by subordinates and giving instructions to ensure optimum utilisation of
resources and achievement of work targets.
➔ The functions and performance of the supervisor are vital to any organisation because he is directly related with
workers whereas other managers have no direct touch with bottom level workers.

Importance of Supervision/Roles of a Supervisor

➔ Supervisor maintains day-to-day contact and maintains friendly relations with workers.
◆ Acts as a guide, friend and philosopher to the workers
➔ Supervisor acts as a link between workers and management.
◆ Conveys management ideas to the workers on one hand and workers problems to the management on
the other.
◆ This role played by supervisor helps to avoid misunderstandings and conflicts between management
and workers/employees.
➔ Supervisor plays a key role in maintaining group unity among workers placed under their control.
◆ Sorts out internal differences and maintains harmony among workers.
➔ Supervisor ensures performance of work according to the targets set.
◆ Takes responsibility for task achievement and motivates his workers effectively.
➔ Supervisor provides good on-the-job training to the workers and employees.
◆ A skilled and knowledgeable supervisor can build efficient team of workers.
➔ Supervisory leadership plays a key role in influencing the workers in the organisation.
◆ A supervisor with good leadership qualities can build up high morale among workers.
➔ A good supervisor analyses the work performed and gives feedback to the workers.
◆ Suggests ways and means of developing work skills.

MOTIVATION
➔ Incitement or inducement to act or move.
 ➔ In context of an organisation, it means the process of making subordinates to act in a desired manner to
achieve certain organisational goals.
➔ Motive
◆ Inner state that energises, activates or moves and directs behaviour towards goals.
◆ Arise out of the needs of individuals.
◆ Realisation of a motive causes restlessness in the individual which prompts some action to reduce such
restlessness.
➔ Motivation
◆ Process of stimulating people to action to accomplish desired goals.
◆ Depends upon satisfying needs of people.
➔ Motivator
◆ Technique used to motivate people in an organisation.

Features of Motivation
➔ Psychological phenomenon.
◆ Internal feeling that cannot be forced on employees.
◆ Influence human behaviour to behave in a particular manner.
➔ Produces goal-directed behaviour.
◆ Induces people to behave in such manner so that they can achieve their goal.
◆ Motivated person need no supervision or direction - they will always work in desired manner.
➔ Positive as well as negative.
◆ If employee does not improve his performance with positive motivators then manager uses negative
motivators.
➔ Complex process.
◆ In order to motivate people a manager must understand various types of human needs.
◆ If they are measured accurately, they can utilise different motivation techniques to satisfy their needs.
◆ Individuals are heterogeneous in their expectations, perceptions and reactions.
◆ Any type of motivation may not have uniform effect on all the members.
➔ Dynamic and continuous process.
◆ Since human beings are ever changing, their needs are also changing continuously.
◆ Therefore motivation is a continuous process.

Motivation Process

Importance of Motivation
1. Motivation helps to improve performance levels of employees as well as the organisation.
○ Good motivation in the organisation helps to achieve higher levels of performance as motivated
employees contribute their maximum efforts for organisational goals.
2. Motivation helps to change negative or indifferent attitudes of employee to positive attitudes so as to
achieve organisational goals.
3. Motivation helps to reduce employee turnover and thereby saves the cost of new recruitment and
training.
○ The main reason for high rate of employee turnover is lack of motivation.
 ○ If managers identify motivational needs of employees and provide suitable incentives, employees may
not think of leaving the organisation.
○ High rate of turnover compels management to go for new recruitment and training which involve
additional investment of money, time and effort. Motivation helps to save such costs.
○ It also helps to retain talented people in the organisation.
4. Motivation helps to reduce absenteeism in the organisation.
○ Through sound motivational system, all these deficiencies leading to absenteeism can be covered.
○ If motivation is adequately provided, work becomes a source of pleasure and workers attend to the
work regularly.
5. Motivation helps managers to introduce changes smoothly without much resistance from people.
○ Normally, for any change introduced in the organisation, there may be resistance for changes.
○ If manager can convince employees that proposed changes will bring additional rewards to employees,
they may readily accept the change.

Maslow’s Need Hierarchy Theory

➔ Considered fundamental to understanding of motivation.
➔ Abraham Maslow, a well-known psychologist in a classic paper published in 1943, outlined the elements of an
overall theory of motivation.
➔ His theory was based on human needs. He felt that within every human being, there exists a hierarchy of five
needs.
➔ Hierarchy
◆ Basic Physiological Needs
● These needs are most basic in the hierarchy and corresponds to primary needs, i.e., basic
requirements for survival and maintenance of human life.
● Hunger, thirst, shelter, sleep and sex are some examples of these needs.
● In the organisational context, basic salary helps to satisfy these needs, along with other
monetary incentives.
◆ Safety/Security Needs
● These needs provide security and protection from physical and emotional harm.
● It also refers to economic security, which means having sufficient funds to meet future
physiological needs.
● Motivated by monetary incentives.
● Examples: job security, stability of income, Pension plans etc.
◆ Affiliation/Belonging Needs
● These needs refer to affection, sense of belongingness, acceptance and friendship.
● Managers use teamwork and formal and informal get-togethers to fulfil these needs.
◆ Esteem Needs
● These include factors such as self-respect, autonomy status, recognition and attention.
● More common in higher level employees.
● Can be satisfied through non-monetary incentives.
◆ Self-Actualisation Needs
● It is the highest level of need in the hierarchy.
● It refers to the drive to become what one is capable of becoming or realising or reaching to the
aim of your life.
● These needs include growth, self-fulfilment and achievement of goals.
 ➔ Assumptions
◆ People’s behaviour is based on their needs.
◆ People’s needs are in hierarchical order.
◆ A satisfied need can no longer motivate a person.
◆ A person moves to the next higher level of the hierarchy only when the lower need is satisfied.

Incentives
➔ Monetary/non-monetary reward offered to the employees for contributing more efficiently.
➔ Acts as a very good stimulator/motivator because it encourages employees to improve their efficiency and
reach the target.

Financial/Monetary Incentives
➔ Reward/incentive that can be calculated in terms of money.
◆ Direct monetary form or measurable in monetary term and serve to motivate people for better
performance.
➔ These incentives may be provided on individual or group basis.
◆ Offered to employees who have more physiological, social and security need active in them.
➔ Common Incentives:
◆ Pay and allowances.
● Salary is a basic monetary incentive, and it includes basic pay, dearness allowance and other
allowances.
● Regular increments in salary and grant of allowance, which are usually directly linked with the
performance of the employee.
◆ Productivity linked wage incentives.
● Certain wage rate plans, which offer higher wages for higher productivity.
◆ Bonus.
● One time extra reward offer for sharing high performances, i.e., when they reach/exceed their
target.
● Sometimes given during festive seasons.
◆ Profit sharing.
● Generally companies fix a percentage of profit and if the profit exceeds that percentage then
the surplus profit is distributed among the employees.
● Encourages employees to work efficiently to increase the profit of the company so that they can
get a share in the profit.
◆ Co-partnership/stock option.
● Employees are offered company shares at a set price which is lower than market price.
● Creates feeling of ownership to employees and makes them to contribute for growth of the
organisation.
● Additionally, share in management/participation in management is also offered.
◆ Retirement benefits.
● Several retirement benefits such as provident fund, pension, and gratuity provide financial
security to employees after their retirement.
● This acts as an incentive when they are in service in the organisation.
● Suitable for people who have safety and security need.
 ◆ Perquisites/fringe benefits/perks.
● Benefits such as car allowance, housing, medical aid, and education to the children etc., over
and above the salary.
● Related to performance of the employee.
◆ Commissions.
● Common incentive offered to employees working under sales department.
● Directly linked to effort put in - more orders, more commission.

Non-Financial/Non-Monetary Incentives
➔ Employees who have more of esteem and self-actualisation need active in them get satisfied with
non-monetary incentives.
➔ The emphasis is to provide psychological and emotional satisfaction rather than money driven satisfaction.
➔ Cannot be calculated in terms of money..
➔ Generally more powerful for higher level employees.
➔ Common Incentives:
◆ Status.
● Status refers to rank, authority, responsibility, recognitions and prestige related to job.
● By offering higher status/rank in the organisation managers can motivate employees.
◆ Organisational climate.
● Relations between superior/subordinates.
● Characteristics which describe an organisation and distinguish one organisation from the other.
○ Some of these characteristics are–individual autonomy, reward orientation,
consideration to employees, risk-tasking etc.
● This has direct influence over the behaviour of a member.
● If managers take positive measures regarding these aspects, it helps to develop better
organisational climate.
◆ Career advancement.
● Managers must provide promotional opportunities to employees.
● Appropriate skill development programmes, and sound promotion policy will help employees to
achieve promotions.
● Promotion works as a tonic and encourages employees to exhibit improved performance.
◆ Job enrichment/assignment of challenging job.
● Concerned with designing jobs that include greater variety of work content, require higher level
of knowledge and skill; give workers more autonomy and responsibility; and provide the
opportunity for personal growth and a meaningful work experience.
● If jobs are enriched and made interesting, the job itself becomes a source of motivation to the
individual.
◆ Employees’ recognitions.
● Recognition means acknowledgment with a show of appreciation.
● It satisfies the ego of the subordinates.
● When such appreciation is given to the work performed by employees, they feel motivated to
perform/work at higher level.
◆ Job security.
● Refers to life time bonding between employee and organisation, i.e., giving
permanent/confirmation letter ensuring that the employee’s job is safe.
● Can have a negative impact as once the employee’s job is secured, they may get complacent
and lazy.
◆ Employees’ participation
● Involving employees in decision making of issues related to them.
● Employees follow the decision more sincerely when these are taken in consideration with them.
● Can be in place in the form of joint management committees, work committees, canteen
committees etc.
◆ Autonomy/employee empowerment
● Giving more autonomy and powers to subordinates.
● Empowerment makes people feel that their jobs are important.
● This feeling contributes positively to the use of skills and talents in the job performance.

LEADERSHIP
➔ Process of influencing the behaviour of people at work towards the achievement of specified goal.
 ◆ Indicates the ability of an individual to maintain good interpersonal relations with followers and motivate
them to contribute for achieving organisational objectives.
➔ The following elements must be present in the leadership.
◆ It is the process of influence.
◆ The influence is always for achievement of common goal.
◆ There must be minimum two or more persons present, influencing your own behaviour is not
leadership.
◆ The influence should be to get the willing cooperation of the employees and not the forceful
cooperation.

Features of Leadership
1. Leadership indicates ability of an individual to influence others.
2. Leadership tries to bring change in the behaviour of others.
3. Leadership indicates interpersonal relations between leaders and followers.
4. Leadership is exercised to achieve common goals of the organisation.
5. Leadership is a continuous process.

Importance of Leadership
1. Leadership influences the behaviour of people and makes them to positively contribute their energies
for the benefit of the organisation.
○ Good leaders always produce good results through their followers.
2. A leader maintains personal relations and helps followers in fulfilling their needs.
○ Provides needed confidence, support and encouragement and thereby creates congenial work
environment.
3. Leader plays a key role in introducing required changes in the organisation.
○ Persuades, clarifies and inspires people to accept changes whole-heartedly. Thus, he overcomes the
problem of resistance to change and introduces it with minimum discontentment.
4. A leader handles conflicts effectively and does not allow adverse effects resulting from the conflicts.
○ Always allows his followers to ventilate their feelings and disagreement but persuades them by giving
suitable clarifications.
5. Leader provides training to their subordinates.
○ Always builds up his successor and helps in smooth succession process.

Qualities of a Good Leader

1. 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.
2. Knowledge.
○ A good leader should have required knowledge and competence.
○ Only such person can instruct subordinates correctly and influence them.
3. Integrity.
○ A leader should posses high level of integrity and honesty. He should be a role model to others
regarding the ethics and values.
4. Initiative.
○ A leader should have courage and initiative.
○ He should not wait for opportunities come to his way, rather he should grab the opportunity and use it to
the advantage of organisation.
5. Communication skills.
○ A leader should be a good communicator.
○ He should have the capacity to clearly explain his ideas and make the people to understand his ideas.
○ He should be not only good speaker but a good listener, teacher, counsellor and persuader.
6. Motivation skills.
○ A leader should be an effective motivator.
○ He should understand the needs of people and motivate them through satisfying their needs.
7. Self confidence.
○ A leader should have high level of self confidence.
○ He should not lose his confidence even in most difficult times. In fact, if the leader lacks self confidence,
he can not provide confidence to his followers.
8. Decisiveness.
○ Leader should be decisive in managing the work.
 ○ Once he is convinced about a fact, he should be firm and should not change opinions frequently.
9. Social skills.
○ A leader should be sociable and friendly with his colleagues and followers.
○ He should understand people and maintain good human relations with them.

Different Styles of Leadership

➔ Autocratic/Authoritative Leadership
◆ Boss-centred.
◆ Autocratic leader exercises complete control
over subordinates.
◆ Centralises power in himself and takes all
decision without consulting subordinates.
◆ Not delegation of authority.
◆ Gives reward and puts penalty to direct the
subordinate.
◆ Advantages
● Quick decision-making.
● Provides strong motivation and satisfaction to the leader who dictates terms.
● Less competent subordinates are needed at lower level.
● May bring positive result when great speed is required.
◆ Disadvantages
● Leads to frustration and low moral among subordinates.
● Initiative level of subordinates goes down.
● Potential and creativity of subordinates are not utilised.
● No development of subordinates takes place.
◆ Suitability
● When subordinates are uneducated, unskilled, lack of knowledge and experience on part of
subordinates.
● When company follows fear and punishment disciplinary technique. A leader prefers to be
dominant in decision making.
➔ Consultative/Democratic Leadership
◆ Group-centred.
◆ Leader takes decisions in consultation and participation with
employees.
◆ Delegates and decentralises authority.
◆ Follows opinion of majority.
◆ Provides freedom of thinking and expressions.
◆ Advantages
● Improves job satisfaction and morale of the
employee.
● Improves decision-making ability of subordinates.
● Develops positive attitude and reduces labour
turnover and labour absenteeism.
● Quality of decision improves.
● Leader multiplies his abilities through the contribution of his followers.
◆ Disadvantages
● Time-consuming and may result in delay in decision.
● It may not yield positive result when subordinates prefer minimum interaction with the leader.
● Leader may pass the work to subordinates and abdicate responsibility.
● Consultation with subordinates, may be considered as sign of incompetence of leader.
◆ Suitability
● When goal of company is to increase job satisfaction and independence of employees.
● When leader wants to share decision making with the subordinates.
● When subordinates have accepted the goal of organisation.
➔ Free-Rein/Laissez Faire Leadership
◆ Complete delegation of authority so that subordinates themselves take decision.
◆ Leader avoids power - instead serves only as a contact t bring information and resources needed by te
subordinates.
◆ Advantages
● Positive effect on the job satisfaction and morale of subordinates.
 ● Maximum scope for development of subordinates.
● Full utilisation of potential and capacity of employees.
◆ Disadvantages
● Subordinates do not get the guidance and support of the leader.
● It ignores the contribution of leader.
● Subordinates may work in different direction and result in chaos.
◆ Suitability
● When subordinates are well trained and highly knowledgeable.
● When subordinates are self motivated and are ready to assume responsibility.

Basis Authoritative Democratic Free-Rein

Decision-making Leader only makes Leader makes decision in Subordinates themselves make
decision. consultation with subordinates. decisions.

Communication One way- downward Two-way communication. Free flow communication.

communication.

Motivation technique Fear and punishment Reward and involvement Self-direction and self-control.
(negative motivation). (positive motivation)

Delegation of authority No delegation. Delegation of authority to some Complete delegation of authority.

extent.

Focus Leader control. Group-centred. Individual-centred.

Role of leader Provides direction. Maintains team work. Provides support and resources.

Growth & development No scope for initiative Scope for initiative and Full scope for initiative and style
of employees and creativity - ‘I’ Style creativity ‘We’ Style. ‘You’ Style.

Discipline Obedience of order Interchange of ideas. Self-discipline or control.

and discipline.

COMMUNICATION
➔ Transmission or exchange of ideas, views, message, information or instructions between two or more persons
by different means, to reach a common understanding.
◆ Derived from the Latin word ‘communis’ which means ‘common’ which consequently implies common
understanding.
➔ Two-way process - begins with sended and ends when the feedback comes from receiver to sender.

Elements of Communication Process

1. Sender
○ Sender means person who conveys his thoughts or ideas to the receiver.
○ The sender represents source of communication.
2. Message
○ It is the content of ideas, feelings, suggestions, order etc., intended to be communicated.
3. Encoding
○ It is the process of converting the message into communication symbols such as words, pictures,
gestures etc.
4. Media
○ It's the path through which encoded message is transmitted to receiver.
○ The channel may be in written form, face to face, phone call, Internet etc.
5. Decoding
○ It is the process of converting encoded symbols of the sender.
6. Receiver
○ The person who receives communication of the sender.
7. Feedback
○ It includes all those actions of receiver indicating that he has received and understood message of
sender.
8. Noise
 ○ Noise means some obstruction or hindrance to communication. This hindrance may be caused to
sender, message or receiver.
○ Some examples of noise:
i. Ambiguous symbols that lead to faulty encoding.
ii. A poor telephone connection.
iii. An inattentive receiver.
iv. Faulty decoding (attaching wrong meanings to message).
v. Prejudices obstructing the poor understanding of message.
vi. Gestures and postures that may distort the message.

Importance of Communication
1. Acts as a basis of coordination.
○ It provides coordination among departments, activities and persons in the organisation.
○ Such coordination is provided by explaining about organisational goals, the mode of their achievement
and inter relationships between different individuals etc.
2. Helps in smooth working of an enterprise.
○ Communication makes possible for the smooth and unrestricted working of the enterprise.
○ All organisational interactions depend on communications.
○ When communication stops, organised activity ceases to exist.
3. Acts as basis of decision making.
○ Communication provides needed information for decision making.
○ In its absence, it may not be possible for the managers to take any meaningful decision.
○ Only on the basis of communication of relevant information one can take right decision.
4. Increases managerial efficiency.
○ Communication is essential for quick and effective performance of managerial functions.
○ The management conveys the goals and targets, issues instructions, allocates jobs and responsibilities
and looks after the performance of subordinates.
○ Thus, communication lubricates the entire organisation and keeps the organisation at work with
efficiency.
5. Promotes cooperation and industrial peace.
○ Efficient operation is the aim of all prudent management.
○ It may be possible only when there is industrial peace in the factory and mutual cooperation between
management and workers.
○ The two way communication promotes cooperation and mutual understanding between the
management and workers.
6. Established effective leadership.
○ Communication is the basis of leadership - effective communication helps to influence subordinates.
○ While influencing people, leader should possess good communication skills.
7. Boosts morale and provides motivation.
○ An efficient system of communication enables management to motivate, influence and satisfy the
subordinates.
○ Good communication assists the workers in their adjustment with the physical and social aspect of work
- it improves good human relations in industry.
○ Communication is the basis of participative and democratic pattern of management.

Formal Communication
➔ Official communication taking place in the organisations.
➔ Generally takes place in written form so that there is proof or record of the communication.
➔ Features
◆ Goal oriented.
◆ Systematic as it follows scalar chain.
 ◆ Source of information as there is proof of information communicated, it is easy to fix responsibility.
◆ Impersonal.
◆ Delay in information as it follows scalar chain.
➔ Types
◆ Vertical Communication
● Downward Communication
○ Flow of information from top level (superior) to lower level (subordinate).
○ Manager passes instructions to superiors.
● Upward Communication
○ Flow of information to top level (superior) from lower level (subordinate).
○ Generally consists of work performance, grievance, opinions or problems of the
employees.
◆ Horizontal Communication
● Communication between two or more persons working at same level of authority.
● Generally between two department heads/managers at same rank.
◆ Diagonal Communication
● Flow of information between persons working in different levels and holding different levels of
authority.
➔ Communication Network: pattern through which communication flows within the organisation.
◆ Single Chain
● This network exists between a supervisor and his subordinates.
● Since many levels exist in an organisation structure, communication flows from every superior
to his subordinate through single chain.
◆ Wheel
● In wheel network, all subordinates under one superior communicate through him only as he
acts as a hub of the wheel.
● The subordinates are not allowed to talk among themselves.
◆ Circular
● In circular network, the communication moves in a circle.
● Each person can communicate with his adjoining two persons.
● In this network, communication flow is slow.
◆ Free Flow
● In this network, each person can communicate with others freely.
● The flow of communication is fast in this network.
◆ Inverted V
● In this network, a subordinate is allowed to communicate with his immediate superior as well as
his superiors superior.
● However, in later case, only prescribed communication takes place.

Informal Communication
➔ Communication between members of organisation who are not officially attached to each other.
➔ Informal system of communication is generally referred to as the ‘grapevine’ because it spreads throughout the
organisation with its branches going out in all directions in utter disregard to the levels of authority.
➔ An intelligent manager should make use of positive aspects of informal channels and minimise negative
aspects of this channel of communication.
➔ Features
◆ Focus on psychological satisfaction as employees develop friendly relationships.
◆ Fast flow of information as no scalar chain is followed.
 ◆ Can lead to spreading of rumours as it is not possible to find the source of information.
◆ Since information travels in an unsystematic manner, it can get distorted.
◆ There may be leakage of confidential information.
➔ Grapevine Network
◆ Single Strand Network
● Each person communicates to the other in sequence.
◆ Gossip Network
● Each person communicates with all on non-selective basis.
◆ Probability Network
● The individual communicates randomly with other individual.
◆ Cluster Network
● The individual communicates with only those people whom he trusts.
● Most popular.

➔ Strategic use of informal communication

◆ The managers can fill up communication gap if there is any information through informal
communication.
◆ Informal communication travels very fast. So urgent matters can be communicated informally.
◆ The managers can get true and accurate response of subordinates on various policy matters.
◆ Informal communication provides emotional relief to employees and results in reducing union and
management problems.

Basis Formal Communication Informal Communication

Meaning It refers to communication taking place within the It refers to communication between individuals
official chain of command. and groups which are not officially recognised.

Relations It establishes relation between the subordinates, It establishes personal relationship among
superiors and relations are highly impersonal. individuals irrespective of the levels.

Nature It is more rigid in nature and cannot be modified. It is flexible, dynamic and varies from individual to
individual.

Channel It follows formal or established line of command. It is based on informal relationship and no fixed
line of command is followed.

Expression It is mostly expressed in written form. It mostly tends to be oral.

Need It serves the need of organisation. It serves the need of individuals working in
organisation.

Speed The speed of formal communication is generally The speed of informal communication is very fast
slow because all information has to pass through as it cuts across all the official channels.
an established chain of command.

Fixation of It is easy to fix the responsibility in formal It is not possible to fix the responsibility because
responsibility communication because source of information is source of information is not known.
known.

Record The records of formal communication are No records of information communication are
maintained for future reference. maintained.
Barriers to Effective Communication
➔ Semantic Barriers
◆ Semantics is the branch of linguistics dealing with the meaning of words and sentences.
◆ Semantic barriers are concerned with problems and obstructions in the process of encoding and
decoding of message into words or impressions.
◆ The barriers are:
● Badly expressed message.
○ Sometimes due to lack of vocabulary manager may use wrong words, omission of
needed words.
○ Due to this the manager may fail to convey the same meaning to his subordinates.
● Symbols with different meanings.
○ Sometimes a word may have different meanings. Receiver may understand the other
meaning.
● Faulty translations.
○ Some times the workers do not understand the language which is used by manager so
workers get it translated.
○ If translator is not efficient he may make mistake in translation. Due to wrong
translation there may be transfer of wrong message.
● Technical jargon.
○ Sometimes the worker may misinterpret the assumptions due to usage of technical
jargon that he is not privy to.
● Body language and gesture decoding.
○ Along with verbal communication another important mode of communication is body
language and gestures shown by person who is talking.
○ If the verbal communication is not matching with the body language, then workers may
get confused and misunderstand the meaning.
➔ Psychological Barriers
◆ Emotional or psychological factors acts as barriers to communicators.
◆ The state of mind of both sender and receiver of communication reflects in the effective communication.
◆ The barriers are:
● Premature evaluations.
○ It means deriving conclusions before completion of message.
○ Sometimes people evaluate the meaning of message before the sender completes the
message. In such case the receiver may not have an open mind.
○ He may have some personal prejudice against the sender. He may resist change.
○ He jumps to conclusions without logical deduction from the situation.
● Lack of attention.
○ It means when receiver does not pay complete attention to the message as a result
communication becomes ineffective as the receiver may be preoccupied
○ Sometimes managers do not give attention due to extreme emotions for example,
depression or jubilation.
○ This lack of attention may disappoint the employees.
● Loss by transmission and poor retention.
○ When communication passes through various levels, this results in filtering or loss of
information.
○ Specially when is oral information sometimes manager may not be able to retain all
information for a longer time.
○ They may ignore or misinterpret some of the information when they are not interested.
● Distrust.
○ Distrust between communicator and receiver also acts as a barrier to effective
communication.
○ They may not understand each other's message in the original sense, secondly they do
not give much importance to the information exchanged between them.
➔ Organisational Barriers
◆ The factors related to organisation structure, authority relationships, rules and regulations may,
sometimes, act as barriers to effective communication.
◆ The barriers are:
● Organisational policy.
○ If organisational policy does not support free flow of information it may result in
barriers.
 ●Rules and regulations.
○ Rigid rules, regulations may also create barriers as following rules may lead to red
tapism, delay of action and delay in movement of information.
● Status difference.
○ Sometimes the people working at higher level do not believe in the information supplied
by the lower level employees as they feel how would he know about my job and who is
he to give me suggestions.
● Complex organisation.
○ When the information passes through various levels then there can be screening or
filtering of information at different levels.
● Organisational facilities.
○ In large organisation free and effective flow of communication is possible only when
some facilities like social get together, complaint box, task force, etc. exist.
○ In absence of such facilities there can be delay and barrier to effective communication.
➔ Personal Barriers
◆ The personal factors of both sender and receiver may exert influence on effective communication.
◆ The barriers are:
● Lack of confidence of superior in his subordinates.
○ If superiors have no confidence and trust in their subordinates then they pay no
attention to their advice, opinion or suggestions.
● Lack of incentives.
○ If there is no incentive for communication then subordinates may not take initiatives to
give suggestions.
● Fear of authority.
○ Sometimes superiors conceal and hide information if they have fear of losing their
authority over the subordinates.
● Unwillingness to communicate.
○ Sometimes employees are unwilling to communicate with superiors if they feet it may
negatively effect their own interest.

Improving Communication Effectiveness

1. Clarify the idea before communication.
○ The problem to be communicated to subordinates should be clear in all its perspective to the executive
himself.
○ The entire problem should be studied in depth, analysed and stated in such a manner that is clearly
conveyed to subordinates.
2. Communication according to the need of the receiver.
○ The level of understanding of receiver should be crystal clear to the communicator.
○ Manager should adjust his communication according to the education and understanding levels of
subordinates.
3. Consult others before communicating.
○ Before actually communicating the message, it is better to involve others in developing a plan for
communication. Participation and involvement of subordinates may help to gain ready acceptance and
willing cooperation of subordinates.
4. Use of proper language, tone and contents of message.
○ The contents of the message, tone, language used, manner in which the message is to be
communicated are the important aspects of effective communication.
○ The language used should be understandable to the receiver and should not offend the sentiments of
listeners.
○ The message should be stimulating to evoke response from the listeners.
5. Proper feedback.
○ The communicator may ensure the success of communication by asking questions regarding the
message conveyed.
○ The receiver of communication may also be encouraged to respond to communication.
○ The communication process may be improved by the feedback received to make it more responsive.
6. Communication for the present as well as for future.
○ Generally, communication is needed to meet the existing commitments to maintain consistency, the
communication should aim at future goals of the enterprise also.
7. Follow-up communication.
○ There should be regular follow up and review on the instructions given to subordinates.
 ○ Such follow up measures help in removing hurdles if any in implementing the instructions.
8. Good listener.
○ Manager should be a good listener. Patient and attentive listening solves half of the problems.
○ Managers should also give indications of their interest in listening to their subordinates.
9. Open mind.
○ The parties to communication must have open mind.
○ They should not try to withhold information for their personal interest.
○ They should not react before receiving and listening the full message.
10. Completeness of message.
○ A message is effective only when it is given completely.
○ The receiver should not be left guessing as it may lead to misunderstanding.
○ A complete message carries all necessary facts and figures.
 CONTROLLING
➔ Controlling means ensuring that activities in an organisation are performed as per plans.
➔ It is a function of management that brings back the management cycle to planning.
➔ By identifying deviations, its causes and taking corrective actions based on the same, it helps in formulation of
future plans.

IMPORTANCE
➔ Accomplishing organisational goals.
◆ Function measures progress towards organisational goals and identifies any deviations.
◆ Guides the organisation so that organisational goals are achieved.
➔ Judging accuracy of standards.
◆ A good control system enables management to verify whether the standards set are accurate and
objective.
◆ Keeps check on changes taking place in the organisation and environment, helping to review and
revise the standards in light of such changes.
➔ Making efficient use of resources.
◆ Each activity is performed in accordance with predetermined standards and norms.
◆ This ensures that resources are used in the most effective and efficient manner.
➔ Improving employee motivation.
◆ A good control system ensures that employees know well in advance what they are expected to do and
what are the standards of performance, on the basis of which they will be appraised.
◆ This motivates employees, allowing them to give their best performance.
➔ Ensuring order and discipline.
◆ Helps to minimise dishonest behaviour on the part of employees by keeping a check on their activities.
➔ Facilitating coordination in action.
◆ Provides direction to all activities and efforts for achieving organisational goals.
◆ Each department and employee is governed by predetermined standards, which are well coordinated
with one another.

LIMITATIONS
➔ Difficulty in setting quantitative standards.
◆ Some areas such as employee morale, job satisfaction, human behaviour, etc. cannot be measured in
quantifiable terms.
◆ This makes setting standards, measuring performance and thus comparing them with the standards
difficult.
➔ Little control on external factors.
◆ External factors such as government policies, technological changes, competition, etc. cannot be
controlled by an organisation.
➔ Resistance from employees.
◆ Control is often resisted by employees as they see it as a restriction on their freedom.
➔ Costly affair.
◆ Involves a lot of expenditure, time and effort.
◆ Small enterprises cannot justify installing expensive control systems.
◆ A manager must ensure that the costs of installing and operating a control system should not exceed
the benefits derived from it.

RELATIONSHIP BETWEEN PLANNING AND CONTROLLING

➔ Thus, planning and controlling are interrelated and, in fact, reinforce each other in the sense that
◆ Planning based on facts makes controlling easier and effective; and
◆ Controlling improves future planning by providing information derived from past experience.

➔ Nature and concept.

◆ Planning is the basic function of every enterprise and it bridges the gap between where we are standing
today and where we want to reach.
◆ Controlling refers to keeping a check that everything is in accordance with pan and if there is any
deviation, taking preventative measures to stop that deviation.
➔ Planning and controlling are independent and interlinked.
◆ Controlling depends on planning as planning sets standards to compare actual performance to.
◆ Planning depends on controlling as controlling ensures everyone follows the plan strictly.
➔ Planning and controlling both are backward and forward looking.
 ◆ Planning is forward looking because plans are prepared for the future and is backward looking because
it is guided by past experiences.
◆ Controlling is forward looking because controlling involves understanding why deviations occur and how
to ensure they do not occur in the future and is backward looking because the manager utilises past
performances to analyse deviations and take corrective measures.
➔ Planning is prescriptive whereas controlling is evaluative.
◆ Planning is an intellectual process involving lot of thinking, comparison to prescribe a particular course
of action for achieving objectives.
◆ Controlling evaluates or checks whether the desired cause of action is followed or not.

CONTROLLING PROCESS
Step 1: Setting Performance Standards
➔ Standards are the criteria against which actual performance would be measured.
◆ Serve as benchmarks towards which an organisation strives to work.
◆ Can be set in quantitative as well as qualitative terms.

STANDARDS USED IN FUNCTIONAL AREAS TO GAUGE PERFORMANCE

Production Marketing Human Resources Management Finance and Accounting

Quantity Sales volume Labour relations Capital expenditure

Quality Sales expense Labour turnover Inventories

Cost Advertising expenditure Labour absenteeism Flow of capital

Individual job Individual Liquidity

Performance Sales-person’s performance

➔ At the time of setting standards, a manager should try to set standards in precise quantitative terms as this
would make their comparison with actual performance much easier.
➔ However, when qualitative standards are set, an effort must be made to define them in a manner that would
make their measurement easier.
➔ Standards should be flexible enough to be modified whenever required.

Step 2: Measurement of Actual Performance

➔ Performance should be measured in an objective and reliable manner.
◆ Personal observation, sample checking, performance reports, etc.
➔ Performance should be measured in the same units in which standards are set as this would make this
comparison easier.
➔ Wherever possible, measurement of work should be done during the work and not after it is completed.
◆ Measurement of performance of an employee may require preparation of performance report by his
superior.
◆ Measurement of a company’s performance may involve calculation of certain ratios.
➔ Progress of work in certain operating areas like marketing may be measured by considering the number of units
sold, increase in market share, etc. whereas efficiency of production may be measured by counting number of
pieces produced and number of defective pieces in a batch.
◆ In larger organisations, sample checking is followed.

Step 3: Comparing Actual Performance with Standards

➔ Such comparison will reveal the deviation between actual and desired results.
➔ Comparison becomes easier when standards are set in quantitative terms.

Step 4: Analysing Deviations

➔ Some deviation in performance can be expected in all activities.
◆ Types of Deviations:
● Positive Deviations: When actual performance is better than the planned performance.
● Negative Deviations: When actual performance is less than the planned performance.
➔ Thus, it is important to determine the acceptable range of deviations.
➔ Techniques of analysing deviations:
 ◆ Critical Point Control
● Control should focus on key result areas (KRAs) which are critical to the success of an
organisation.
● These KRAs are set as the critical points.
● If anything goes wrong at the critical points, the entire organisation suffers.
◆ Management by Exception
● Also known as control by exception, based on the belief that an attempt to control everything
results in controlling nothing.
● Only significant deviations which go beyond the permissible limit should be brought to the
notice of management.
➔ Advantages of Management by Exception
◆ It saves the time and efforts of managers as they deal with only significant deviations.
◆ It focuses managerial attention on important areas. Thus, there is better utilisation of managerial talent.
◆ The routine problems are left to the subordinates. Management by exception, thus, facilitates
delegation of authority and increases morale of the employees.
◆ It identifies critical problems which need timely action to keep the organisation in right track.
➔ After identifying deviations, they have to be analysed for their causes.
◆ Deviations may have multiple causes for their origin.
◆ Possible causes are: unrealistic standards, defective process, inadequacy of resources, structural
drawbacks, organisational constraints and environmental factors beyond the control of the organisation
➔ It is necessary to identify the exact cause(s) of deviations, failing which, an appropriate corrective action might
not be possible.

Step 5: Taking Corrective Measures

➔ No corrective action is required when the deviations are within acceptable limits.
➔ However, when the deviations go beyond the acceptable range, especially in the important areas, it demands
immediate managerial attention so that deviations do not occur again and standards are accomplished.
➔ Taking corrective measures may involve:
◆ Let the situation remain same if the deviations are minor.
◆ Redesign or re-frame the plans or strategies if these are overstated or not matching with the present
day business environment.
◆ Taking corrective measures to improve the performance so that in future it matches with the plan.
➔ In case the deviation cannot be corrected through managerial action, the standards may have to be revised.

Step 6: Feedback in Controlling

➔ The controlling function does not end by taking corrective action as it is a continuous process.
➔ After suggesting the corrective measure a feedback report is prepared.
◆ Feedback refers to list of reasons for deviations of plans or for inefficiency in overall working of
organisation; along with reasons the corrective measures are also specified in the feedback report
➔ This. acts as a base to establish the standard for next year and controlling process again starts from the first
step.
 FINANCIAL MANAGEMENT

➔ Financial Management: efficient acquisition of finance, efficient utilisation of finance and efficient distribution
and disposal of surplus for smooth working of company.

Role/Importance of Financial Management:

➔ Size and composition of fixed assets: depends directly on how much capital the company is planning to
invest.
➔ Amount and composition of current assets: quantum of current assets and its break up tiny cash, inventory,
receivables.
➔ The amount of long-term and short-term funds: firms with policies of liquidation prefer to have more of
long-term finance although profit will decrease as company has to pay more interest on long-term debts as
compared to short-term debts.
➔ Breakup of long-term financing into debt, equity, etc.: financial management helps in fixing the ratio of rising
of long-term debts by issue of equity shares as well as issue of debentures and other borrowed fund security.
➔ All items in P&L a/c: all items in this account are affected.

OBJECTIVES OF FINANCIAL MARKETING

➔ Main and foremost objective: maximise wealth of the equity shareholder.
➔ If equity shareholders are gaining, all other claimants are also gaining as they are given dividends only from
residual income.
➔ With the objective of maximisation of wealth of equity shareholders, the following objectives are also achieved:
◆ Profit maximisation
◆ Maintenance of liquidity
◆ Proper utilisation of funds
◆ Meetings of financial commitments with creditors

FINANCIAL DECISIONS
Investment Decisions
➔ Careful selection of assets in which funds will be invested by a firm.
➔ When decision regarding fixed assets is taken it is known as capital budgeting decision.
➔ Importance/scope of investment decisions
◆ Long-term growth: funds invested in long-term assets bring return in future and future prospects and
growth of company depends on these decisions.
◆ Large amount of funds involved: since a lot of capital is required for buying or investing in fixed
assets, a wrong decision can result in wastage of huge amounts of funds.
◆ Risk involved: since these decisions involve huge amounts of funds, there is significant risk involved.
◆ Irreversible decision: these cannot be changed or reversed overnight as they involve huge funds and
heavy decisions, changing which can lead to huge losses.
➔ Factors affecting investing decisions
◆ Cash flow of the project: a regular amount of cashflow is required to meet day-to-day operation
requirements. Thus, the amount of cashflow generated by an investing decision has to be assessed
before taking the decision.
◆ Return on investment: the investment proposal should be able to bring back a rate of return suitable
for the company.
◆ Investment criteria: availability of labour, technologies, inputs, etc. need to be assessed before taking
the decision.

Financing Decisions
➔ Decides source of finance (primarily from owners’ fund and borrowed funds).
➔ Factors affecting financing decisions
◆ Cost: finance managers prefer sources with minimum cost.
◆ Risk: more risk is associated with borrowed funds as compared to owners’ funds - thus, finance
managers prefer securities with moderate risk factors.
◆ Cash flow position: with smooth and steady cashflow companies can choose to use borrowed fund
securities but if there is a shortage of cashflow companies must go with owners’ fund securities only.
◆ Control considerations: if current shareholders want to retain complete control of the company, they
prefer to go for borrowed fund securities.
◆ Floatation cost: firms prefer sources which involve minimum flotation costs (broker’s commission,
underwriter’s fees, etc.)
 ◆ Fixed operating cost: if a company has a higher fixed operating cost, they must go with owners’ fund.
◆ State of capital market: during boom periods it is easy to sell equity shares as compared to
depression periods.

Dividend Decisions
➔ Also known as appropriate distribution of profit.
➔ This decision is concerned with the distribution of surplus funds.
➔ Under dividend decision the finance manager decides how much to be distributed in the form of dividend and
how much to keep aside as retained earnings.
➔ Factors affecting dividend decisions
◆ Earning
● Dividend is paid out of current and previous year’s earnings
● If there are more earnings then the company declares high rate of dividend whereas during low
earning period the rate of dividend is lower.
◆ Stability of earning
● Companies with stable or smooth earnings give high rates of dividend as compared to
companies with unstable earnings which give low rates of dividend.
◆ Cash flow position
● Paying dividend is an outflow of cash.
● High rates of dividends are declared only if the company has surplus cash.
● If there is a shortage of cash there is no or a low rate of dividend.
◆ Growth opportunities
● To invest in investment projects, a company has to either raise additional capital or invest its
retained earnings, with retained earnings are cheaper sources of finance as they don’t involve
any flotation costs and legal formalities.
● If companies don’t have any investment of growth plans, a higher rate of dividend is declared
as compared to one growing.
◆ Stability of dividend
● Stability of dividend improves reputation of company in the share market, and satisfies the
investor.
● The increase in dividend is made only when there is confidence to company that their earning
potential has increased and not just the earnings of the year.
● i.e., dividend per share is not altered if change in earnings is small or seems to be temporary in
nature.
◆ Preference of shareholders
● If a company has a large number of retired and middle class shareholders, then it will declare
more dividend and keep aside less retained earnings.
● If the company however has a large number of young and wealthy shareholders then it will
prefer to keep aside more retained earnings and announce a low rate of dividend.
◆ Taxation policy
● Under present system dividend income is tax free income for the shareholders whereas
company has to pay tax on dividend given to shareholders.
● If tax rate is higher, then company prefers to less in the form of dividend whereas if tax rate is
low then company may declare higher dividend.
◆ Access to capital market consideration
● If the capital market can be easily accessed or approached and there is high demand for
securities then the company can give a higher dividend.
● But if the capital market cannot be easily accessed or approached then the company gives a
lower rate of dividend.
◆ Legal restrictions
● Companies’ Act has given certain provisions regarding the payment of dividends.
● There are also internal provisions of the company, which ensure that the payment of dividend
should not affect the liquidity of the company.
◆ Contractual constraints
● When companies take long-term loans then the financier may put some restrictions or
constraints on distribution of dividend and companies have to abide by these constraints.
◆ Stock market reactions
● Increase in dividend leads to rise in price of security rise whereas a decrease in dividend may
have a negative impact on the share price in the stock market.
FINANCIAL PLANNING
➔ Deciding in advance how much to spend, what to spend on according to the funds at your disposal.
➔ In the words of Gerestenbug, financial planning includes:
◆ Determination of amount of finance needed by an enterprise to carry out its operations smoothly.
◆ Determination of sources of funds (patterns of securities to be issued).
◆ Determination of suitable policies for proper utilisation and administration of funds.
● Determination of total capital requirement.
● Determination of how to raise the required finance.
● Determination of long-term investments.

Objectives of Financial Planning

➔ To ensure availability of funds whenever these are required
◆ Sufficient funds should be available in company for different purchases.
◆ Ensures timely availability of finance.
◆ Also specifies the sources of finance.
➔ To see that firm does not raise resources unnecessarily
◆ Excess funding is as bad as inadequate funds.
◆ If there is surplus money, financial planning must invest in the best possible manner as idle funds are a
loss to the company.

Importance of Financial Planning

➔ Makes the firm better prepared to face the future by helping in forecasting what may happen in the future under
different business situations.
➔ Help in avoiding business shocks and surprises by preparing blueprint to face different types of situations.
➔ Coordinate various functions by providing clear policies and procedures.
➔ Proper utilisation of finance by reducing wastes, duplication of efforts and gaps in planning through details plans
of action.
➔ Link present with future by anticipating sale, growth, etc.
➔ Link between investing and financing decisions on a continuous basis.
➔ Makes evaluation of actual performance easier by spelling out detailed objectives for various business
segments.

Basis Financial Management Financial Planning

Meaning Refers to efficient acquisition, utilisation and disposal Refers to estimation of capital required and
of surplus for the smooth flow of an organisation. deciding the sources of funds and optimum
utilisation of funds.

Scope Wider in scope Narrow in scope

Objective To manage all the activities related to finance To ensure availability of funds and to see that the
firm does not raise funds unnecessarily.

CAPITAL STRUCTURE
➔ Proportion of debt and equity used for financing the operations of business, i.e., capital structure = debt/equity.

Basis Debt Equity

Cost less more

Risk Riskier as payment of regular interest is a legal Safer from company’s POV as company has no
obligation of a business. legal obligation to pay dividend to equity
shareholders.

Financial leverage/trading on equity

➔ Financial leverage refers to proportion of debt in overall capital
➔ With debt fund, companies’ funds and earnings increase because debt is a cheaper source of finance but is
riskier.
➔ However if rate of interest is more than the earnings or ROI of the company then more debt means loss for the
company.
➔ Numerical
 ◆ Calculate earnings before tax (EBT) by subtracting interest on debt from earnings before interest and
tax (EBIT).
◆ Calculate earnings after tax (EAT) by subtracting tax from EBT.
◆ Find earnings per share (EPS) by dividing EAT with the number of shares.
● Number of shares = equity capital/cost of each share (if cost of each share is not given,
calculate for both Rs.10 and Rs.100)

Factors determining capital structure

Factor What is is debt Equity

Cashflow Ability of company to generate enough More debt is employed if the More equity is employed
position cashflow. company is sure of if there is shortage of
generating enough cashflow cash as the company
as it has legal obligation to has no liability to pay its
pay interest equity shareholders.

Interest Number of times company’s earnings High ICR means the Low ICR means the
coverage ratio before interest and taxes cover interest company can employ more company can employ
payment obligation (EBIT/Interest) debt. more equity.

Debt service DSCR = If DSCR is high then If DSCR is less then the
coverage ratio profit after tax + depreciation + interest + company can have more company depends on
non cash exp. written off debt employed as it equity.
-------------------------------------------------- indicates better ability of
Preference dividend + interest + company to pay back its
repayment obligation debt.

Return on - If ROI is more than rate of If ROI is less than rate of

investment interest then the company interest then the
employs more debt. company employs more
equity.

Cost of debt - If the cost of debt is low then If the cost of debt is high
a company employs more then the company
debt. employs more equity.

Tax rate High tax rate makes debt cheaper as Higher tax rate leads to the Lower tax rate leads to
interest paid to debt security holders is company employing more the company employing
subtracted from income before calculating debt. more equity.
tax whereas companies have to pay tax
on dividend.

Cost of equity - If debt increases EPS then it If debt decreases EPS

is employed by the then only equity is
company. employed by the
company.

Floatation Floatation cost is the cost involved in the There is less floatation cost There is more floatation
costs issue of shares or debentures. These involved in employing debt. cost involved in raising
include costs of advertisement, equity capital.
underwriting statutory fees, etc.

Risk Financial risk refers to a position when a If business risk is low it uses If business risk is high
consideration company is unable to meet its fixed more debt. then a company should
financial charges such as interest, use equity.
preference dividend, payment to creditors,
etc.

Flexibility Excess debt may restrict the firm’s capacity to borrow further. To maintain flexibility it must maintain
some borrowing power to take care of unforeseen circumstances.

Control The equity shareholders are considered If shareholders want If shareholders don’t
owners of the company and they have complete control they can mind sharing control they
control over it. use debt. use equity.

Regulatory Issue of shares and debentures have to If SEBI guidelines are If SEBI guidelines are
framework be done within SEBI guidelines and for complicated and monetary easy and monetary
 taking loans they have to follow policies are flexible the policies are inflexible the
regulations of monetary policies. company uses debt. company uses equity.

Stock market Depression period refers to a slowing If there is a depression If there is a boom period
condition down of market business whereas boom period the company can use the company can use
period refers to a flourishing of business. debt capital as it is less equity capital as more
risky. people will invest.

Capital Some companies frame their capital structure according to Industrial norms. But proper care must be
structure of taken as blindly following Industrial norms may lead to financial risk. If firm cannot afford high risk it
other should not raise more debt only because other firms are raising.
companies

FIXED CAPITAL
➔ Allocation of firm’s capital to long-term assets or projects
➔ Also called capital budgeting - it affects growth and profitability of the company.
➔ It is financed through sources of finance such as equity shares, preference shares, debentures, long-term
loans.

Factors affecting requirement of fixed capital

➔ Nature of business
◆ Manufacturing companies need more fixed capital as compared to a trading company as they require
fixed assets such as machinery, plant, etc,
➔ Scale of operation
◆ Companies operating at a larger scale require more fixed capital as compared to a company operating
at a smaller scale.
➔ Technique of production
◆ Companies that use capital intensive production methods require more fixed capital where companies
that use more labour intensive production methods need less fixed capital.
➔ Technology of production
◆ Industries where technology upgradation is fast need more fixed capital as they need to constantly
upgrade whereas compared to companies where the technological advancement is slow.
➔ Growth prospects
◆ Companies which are expanding had have higher growth plans require more fixed capital.
➔ Diversification
◆ Companies which plant to diversify their activities require more fixed capital.
➔ Availability of finance and leasing facilities
◆ If finance and leasing is easily arranged then they require less fixed capital but if these aren’t readily
available then they’ll have to use more fixed capital.
➔ Level of collaboration/joint ventures
◆ If companies are going for joint collaborations, they will require less fixed capital as the companies can
share fixed assets but if they operate independently they will need more fixed capital.

WORKING CAPITAL
➔ Working capital refers to excess of current assets over current liabilities.

Types of Working Capital

◆ Gross working capital
● Investment in all current assets which get converted into cash with an accounting year.
◆ Net working capital
● Excess of current assets over current liabilities.
● Positive net working capital implies positive liquidity position whereas negative net working
capital implies weak and poor liquidity position.

Factors affecting Working Capital

Factor More Working Capital Less Working Capital

Nature of business Manufacturing companies, i.e. company trading/retail companies, i.e., companies
with long operating cycles with short operating cycles

Scale of operation Large scale companies as they have to Small scale companies
 maintain more inventory

Business cycle fluctuation During boom period During depression period

Seasonal factors Companies that operate throughout seasons require a constant flow of WC
whereas companies that operate during specific seasons need huge amount of WC
during their peak seasons.

Technology and production cycle Labour-intensive production methods Capital-intensive production methods

Credit allowed (credit policy - If the company has liberal credit policy - If the company is following
avg. period for collection) sales on credit basis strict/short-term credit policy - sales on
cash basis

Credit avail If suppliers are giving only short period If suppliers are giving long term credit -
credit - purchase on credit basis purchase on cash basis

Operating efficiency Low degree of efficiency High degree of efficiency

Availability of raw materials Raw materials are not easily available Raw materials are easily available

Level of competition Competitive market as high inventories Less competition or monopoly as they
have to be maintained can dictate terms for itself

inflation During inflation During deflation

Growth prospects Firms planning to expand Firms who aren’t planning to expand
 FINANCIAL MARKETS

WHAT IS FINANCIAL MARKET

➔ Financial market is a link between the savers and borrowers - it transfers money from those who have surplus
(surplus units) to those who are in need of investment (deficit units).
➔ It is the market for the creation and exchange of financial assets.
➔ There are two types of financial markets -
◆ Money market
◆ Capital market

Basis Capital Market Money Market

Participants Financial institutions, banks, public and private Financial institutions, banks, public and private
companies, foreign investors, and ordinary retail companies but foreign and ordinary retain
investors from public. investors do not participate.

Duration Medium and long-term securities. Short-term securities having maximum tenure of
1 year.

Instruments Equity shares, debentures, preference shares, Treasury bills, trade bills, commercial papers,
bonds and other innovative securities. certificates of deposit and call money.

Investment Does not require large financial investment as The instruments are quite expensive as huge
outlay value of securities is generally low, i.e., financial investment is required.
₹10-₹100.

Liquidity Less liquid as compared to money market Higher degree of liquidity.

instruments.

Safety Riskier in respect of returns as well as respect to Safe or less risky due to short duration and
principal repayment as issuing company may fail. soundness of issuers.

Expected Higher as along with regular dividend or interest Less due to short duration.
return there are chances of capital gain.

Type of Fixed capital requirement. Working capital requirement.

capital

Concept of financial market:

➔ Consists of two main sectors-
◆ Household sector which save funds
◆ Business firms which invest these funds
◆ By doing this it performs allocative function
● Consequences of allocative function:
○ Rate of return offered to households is higher
○ Scarce resources are allocated to those firms which have the highest production in the
economy
● Process by which allocation of funds is done is called financial intermediation.
● Financial markets exist wherever financial transactions occur.

Functions of Financial Markets

➔ Mobilisation of savings and channelising them into productive uses: acts as link between savers and
borrowers - transfers the savings to most appropriate investment opportunities.
➔ Facilitate price discovery: Demand and supply of financial assets and securities in financial markets help in
deciding prices of various financial securities.
➔ Provide liquidity to financial assets: provides a platform to convert securities in cash.
➔ Reduce cost of transaction: since it provides complete information, investors and companies do not have to
spend much to get this information.

MONEY MARKET
➔ Market for short-term funds meant for use for upto one year, i.e., source of working capital.
➔ No fixed geographical location or timings.
 ➔ Major institutions involved are RBI, commercial banks, LIC, GIC, etc.
➔ There are 5 most common instruments of money market.

Instruments of Money Market

Basis Call Money Treasury Bills Commercial Bills Commercial Certificate of
Papers Deposit

Meaning Call money is short An instrument of Written Short-term Unsecured,

term finance short-term acknowledgement unsecured negotiable,
repayable on borrowing by the of debt. promissory note, short-term
demand, with a Government of negotiable and instruments in
maturity period of India maturing in transferable by bearer form, issued
one day to fifteen less than one year endorsement and by commercial
days, used for and is a promissory delivery with a fixed banks and
inter-bank note. maturity period. development
transactions. financial
institutions.

Why is it Used to maintain Short term Used in credit Used to meet Used during
issued/ CRR in banks borrowings for purchase and sale floatation cost, & for periods of tight
used government seasonal and liquidity when
working capital deposit growth is
needs slow but demand
for credit is high.

Other Interbank call Zero coupon bond Trade bills or Bridge financing C.D.
names money accommodation
bills

Maturity 1-15 days 14-364 days 90 days 15-365 days 91-365 days
Period

Issued By Banks By RBI on behalf of By one business By public or private By banks only
by government firm sector companies
with good
creditworthiness
and reputation.

Issued For banks For general public For another For commercial For individuals,
for and banks business firm banks and mutual corporations,
funds companies

Additional Information
1. Call Money:
i. When one bank faces a temporary shortage of cash, a bank with surplus cash lends them
money for one-two days.
ii. Most of the times, call money is used by bank to meet minimum requirement of Cash Reserve
Ratio.
b. Market over telephone
c. Highly liquid - next to cash.
d. Interest paid on this is called ‘call rate’ - highly volatile and varies day-to-day, sometimes hour-to-hour.
i. Inverse relationship between call rate and rate of interest of other securities.
2. Treasury Bills
a. Assured yield and negligible risk involved
b. Negotiable instruments and are freely transferable.
c. Issued at discount, redeemed at par,
i. if a bill is worth ₹1,000, it is issued at ₹900 and bought back at ₹1,000.
ii. Also called ‘Zero Coupon Bonds’ or ‘T. Bills’
d. Considered safest investment as it is issued by RBI and has a maturity period of 4-364 days
e. Available for a minimum amount of 25,000 and in multiples thereof.
3. Commercial Bills
a. Written acknowledgement of debt.
b. Bill of exchange
c. Drawn by one business firm on another.
 i. The seller (drawer) of the goods draws the bill and the buyer (drawee) accepts it.
ii. On being accepted, the bill becomes a marketable instrument and is called a trade bill.
iii. When a trade bill is accepted by a commercial bank it is known as a commercial bill.
d. Used in credit purchase and sale.
e. Negotiable instruments and are easily transferable
f. Self liquidating instrument
4. Commercial Papers
a. Unsecured promissory note issued by public/private sector companies with a fixed maturity period of 15
days to one year.
i. Since they are unsecured, they can be issued by any company with good creditworthiness and
reputation.
b. Commercial banks and mutual funds are main investors.
c. It is sold at a discount and redeemed at par.
d. Funds raised by this is used to meet flotation cost (bridge financing) and for seasonal and working
capital needs.
5. Certificates of Deposits
a. Unsecured, negotiable, short-term instruments in bearer form, issued by commercial banks and
development financial institutions against deposits kept by companies and businesses.
b. Can be issued to individuals, corporations and companies during periods of tight liquidity when the
deposit growth of banks is slow but the demand for credit is high.
c. Help to mobilise a large amount of money for short periods.
d. Negotiable and easily transferable.

Certificate of deposit (CD) Fixed deposit (FD)

Freely negotiable. Not freely negotiable.

Maturity period of 91 days upto one year. Issued for a period of minimum 14 days and no maximum limit.

Issued at discount on the actual amount of deposit. Issued at actual amount of deposit held.

CAPITAL MARKET
➔ Market for long-term and medium-term funds.
➔ Common instruments used are shares, debentures, bonds, mutual funds, public deposits.

Features
1. Link between savers and investment opportunities as it transfers money from savers to entrepreneurial
borrowers.
2. Deals in long-term investment, not short-term investments with a maturity period of less than one year.
3. Utilises intermediaries such as brokers, underwriters, depositories, etc. who act as working organs of the
capital market.
4. Determinant of capital formation as those with surplus funds invest more in the capital market and save for
more profitable opportunities.
5. Government rules and regulations guide the actions of the market.

➔ An ideal capital market is one/that:

a. Where finance is available at reasonable cost.
b. Which facilitates economic growth.
c. Where market operations are free, fair, competitive and transparent.
d. Must provide sufficient information to investors.
e. Must allocate capital productively.

Types
1. Primary Market
2. Secondary Market

Basis Primary Market Secondary Market

Types of securities Sale of new securities. Existing or secondhand securities.

 Securities issued by Directly issued by companies. Transferred between investors only.

Capital formation Contributes directly for capital formation as Contributes indirectly for capital formation as
funds are transferred from surplus units to funds are exchanged between surplus units
deficit units. only.

Entry All companies enter to raise capital for their Only listed companies’ securities are bought
operations. and sold.

Geographical No fixed geographical area. All institutions, Fixed geographical area and working hours.
location banks, foreign investors, etc. constitute primary
market.

Price Prices of securities are fixed by the Prices of securities are mixed by the demand
management of the company. and supply factors of stock exchange market.

PRIMARY CAPITAL MARKET

➔ Also known as “new issues market” as here market securities are sold for the first time.
➔ Directly contributes to capital formation as the company goes directly to investors for raising capital.
➔ The essential function of a primary market is to facilitate the transfer of investible funds from savers to
entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities
for the first time.
➔ Funds raised may be for setting up new projects, expansion, diversification, modernisation of existing projects,
mergers and takeovers, etc.

Methods of Floatation
1. Offer through Prospectus:
○ Companies issue a prospectus to invite subscription from the public.
■ In the prospectus, the company provides details about the purpose for which funds are being
raised, past financial performance of the company, background and future prospects of the
company.
■ This information helps public know about the risk and earning potential of the company.
■ The contents of the prospectus have to be in accordance with the provisions of the Companies
Act and SEBI disclosure and investor protection guidelines.
○ Issuing a prospectus is a direct appeal to the investors from the company to raise capital.
○ The issues may be underwritten and also are required to be listed on at least one stock exchange.
○ The company can approach a large number of persons and can approach public at large.
○ Most popular method.
2. Offer for Sale
○ A company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the
investing public.
■ Generally the intermediaries are firms of brokers, issuing houses or stock brokers.
○ Securities are not issued to the public directly by the company.
○ Company is thus saved form the formalities and complexities of issuing securities directly to public.
3. Private Placement
○ Private placement is the allotment of securities by a company to institutional investors and some
selected individuals.
○ It helps to raise capital more quickly than a public issue.
○ Access to the primary market can be expensive on account of various mandatory and non-mandatory
expenses.
○ Small and new companies, therefore, cannot afford a public issue and choose to use private placement.
4. Rights Issue (for existing companies)
○ Privilege given to existing shareholders to subscribe to a new issue of shares according to the terms
and conditions of the company.
■ Called right issue because it is the preemptive right of shareholders that company must offer
them the new issue before subscribing to outsiders.
■ Mandatory for companies under Companies Act 1956.
○ The shareholders are offered the ‘right’ to buy new shares in proportion to the number of shares they
already possess.
 ○ The stock exchange does not allow existing companies for going for new issue without giving
pre-emptive rights to existing shareholders because if new issue is directly issued to new subscribers
then the existing equity shareholders may lose their share in capital and control of the company.
5. e-IPOs
○ A company proposing to issue capital to the public through the on-line system of the stock exchange
has to enter into an agreement with the stock exchange.
■ This is called an Initial Public Offer (IPO).
○ Process:
■ SEBI registered brokers have to be appointed for the purpose of accepting applications and
placing orders with the company.
■ The issuer company should also appoint a registrar to the issue having electronic connectivity
with the exchange.
■ The issuer company can apply for listing of its securities on any exchange other than the
exchange through which it has offered its securities.
■ The lead manager coordinates all the activities amongst intermediaries connected with the
issue.

SECONDARY MARKET (STOCK EXCHANGE)

➔ The securities contract and regulation act defines a stock exchange as “an organisation or body of individuals,
whether incorporated or not established for the purpose of assisting, regulating and controlling of business in
buying, selling and dealing in securities”.
○ A Stock Exchange is an institution which provides a platform for buying and selling of existing
securities. It facilitates the exchange of a security i.e. share, debenture etc. into money and vice versa.
➔ Functions:
i. Providing Liquidity and Marketability to Existing Securities
● The basic function of a stock exchange is the creation of a continuous market where securities
are bought and sold.
● It gives investors the chance to disinvest and reinvest and the assurance that their investment
and be converted into cash whenever they want.
● The investors thus invest in long-term investment projects without any hesitation.
● This provides both liquidity and easy marketability to already existing securities in the market.
ii. Pricing of Securities
● A stock exchange is a mechanism of constant valuation through which the prices of securities
are determined.
○ Share prices on a stock exchange are determined by the forces of demand and supply.
● Such a valuation provides important instant information to both buyers and sellers in the
market.
○ The investors can know value of their investments, creditors can value the
creditworthiness and government can impose taxes on values of securities.
iii. Safety of Transaction
● The membership of a stock exchange is well-regulated and its dealings are well defined
according to the existing legal framework.
○ Only listed securities are traded and stock exchange authorities include the companies’
names in the trade list only after verifying the soundness of the company.
● This ensures that the investing public gets a safe and fair deal on the market.
iv. Contributes to Economic Growth
● Through the process of disinvestment and reinvestment savings get channelised into their most
productive investment avenues.
● This leads to capital formation and economic growth.
v. Spreading of Equity Cult
● The stock exchange can play a vital role in ensuring wider share ownership by regulating new
issues, better trading practices and taking effective steps in educating the public about
investments.
vi. Providing Scope for Speculation
● The stock exchange provides sufficient scope within the provisions of law for speculative
activity in a restricted and controlled manner.
○ It is generally accepted that a certain degree of healthy speculation is necessary to
ensure liquidity and price continuity in the stock market.
vii. Economic Barometer
 ● Reliable barometer to measure economic condition of a company.
○ Every major change in country and economy is reflected in the price of shares.
● Stock exchange is also known as pulse of economy or economic mirror which reflects the
economic conditions of a country.
viii. Better Allocation of Capital
● Shares of profit making companies are quoted at higher prices and are actively traded so such
companies can easily raise fresh capital.
● The general public hesitates in investing in securities of loss making companies.
● So the stock exchange facilitates allocation of investor’s fund to profitable channels.
ix. Promotes Habits of Savings and Investment
● The attractive opportunities of investment in various securities encourage people to save more
and invest in securities of corporate sector rather then investing in unproductive assets such as
precious metals.

Trading and Settlement Procedure

➔ In open outcry system - securities were sold on the floor of the stock exchange.
➔ Now, everything is done online, and trading has shifted to the broker’s office.
◆ Everything is done during business hours.
◆ The broker has access to a computer terminal that is connected to the main stock exchange.
◆ Computer software is constantly matching the orders at the best bid and offer price.
➔ Benefits of Electronic Trading Settlement
◆ Ensures transparency as they are able to see the full market during real time.
◆ Increases efficiency of information being passed on, thus helping in fixing prices efficiently.
◆ Increases efficiency of operations, since there is reduction in time, cost and risk of error.
◆ It enables a larger investor base since the entire process is done online, improving liquidity in the
market.
◆ All trading centres spread across the country can be accessed on one platform.

Trading Procedure on Stock Exchange

➔ Before selling securities through the stock exchange, the companies have to get their securities listed in the
stock exchange.
◆ The name of the company is included in listed securities only when stock exchange authorities are
satisfied with the financial soundness and other aspects of the company.
➔ The steps to trade on the stock exchange are:
1. Selecting a broker.
○ Buying and selling of securities can only be done through SEBI registered brokers who are members of
the stock exchange.
○ Before placing order to registered broker, investor has to provide other details and information, which
include:
i. PAN number (This is mandatory)
ii. Date of birth and address.
iii. Educational qualification and occupation.
iv. Residential status (Indian/ NRI).
v. Bank account details.
vi. Depository account details.
vii. Name of any other broker with whom registered.
viii. Client code number in the client registration form.
2. Setting up a demat account.
○ Dematerialised account or beneficial account refer to an account which an Indian citizen must open with
a depository participant to trade in listed securities in electronic form.
○ He will also have to open a bank account for cash transactions in the securities market.
3. Placing an order
○ The investor then places an order with the broker to buy or sell shares.
○ Clear instructions have to be given about the number of shares and the price at which the shares
should be bought or sold.
4. Match the share and best price.
○ The broker will then go online and connect to the main stock exchange and match the share and best
price available.
5. Executing order.
 ○ When the shares can be bought or sold at the price mentioned, it will be communicated to the broker
terminal and the order will be executed electronically.
○ The broker will issue a trade confirmation slip to the investors.
6. Issue of contract note.
○ After the trade has been executed within 24 hours, the broker issues a contract note.
i. This note contains the details of number of shares bought or sold, the price, the date, time of
deal and brokerage charges.
ii. This is an important legal document as it helps to settle disputes claims between investors and
the brokers.
○ A unique order code number is assigned to each transaction by the Stock Exchange and is printed on
the contract note.
7. Delivery of shares and making payment.
○ Now the investor has to deliver the shares sold or pay cash for the shares bought.
○ This should be done immediately after receiving the contract note or before the day when the broker
shall make payment or delivery of shares to the exchange.
○ This is called Pay in day.
8. Settlement cycle.
○ Cash is paid or securities are delivered on pay in day, which is before.
○ T +2 (Transaction + 2 days) day as the settlement cycle is T +2 days on w.e.f. April 2003 rolling
settlement basis.
9. Payout day.
○ On the T+2 day, the Stock Exchange will deliver the share or make payment to the other broker.
○ This is called Pay out day.
○ The broker then has to make payment to investor within 24 hours of the pay out day since he has
already received payment from the exchange.
10. Delivery of shares.
○ The broker can make delivery of shares in demat form directly to the investor's demat account.
○ The investor has to give details of his demat account and instruct his Depository participant (DP) to take
delivery of securities directly in his beneficial owner account.

Dematerialisation
➔ Process where securities held by the investor in the physical form are cancelled and the investor is given an
electronic entry or number so that she/he can hold it as an electronic balance in an account.
● Dematerialisation, thus refers to holding securities in electronic form.
➔ Now, all IPs are issued in dematerialisation form and more than 90% of the turnover is settled by delivery in
Demat form.
➔ SEBI has made it mandatory into trade in demat for only for certain selected securities.
➔ Benefits of Dematerialisation
● Holding shares in demat form is very convenient as it is just like a bank account.
● Physical shares can be converted into electronic form or even electronic form can be converted back to
physical certificate, i.e., Dematerialisation.
● These demat securities can even be pledged or mortgaged to get loans.
● There is no danger of loss, theft or forgery of share certificates.
● Reduces paper work.
● It is broker's responsibility to credit the correct number of shares in the investor's account.
● Securities of different companies can be held in a single demat account.
➔ Working of the Demat System
1. A depository participant (DP), either a bank, broker, or financial services company, may be identified.
2. An account opening form and documentation (PAN card details, photograph, power of attorney) may be
completed.
3. The physical certificate is to be given to the DP along with a dematerialisation request form.
4. If shares are applied in a public offer, simple details of DP and demat account are to be given and the
shares on allotment would automatically be credited to the demat account.
5. If shares are to be sold through a broker, the DP is to be instructed to debit the account with the number
of shares.
6. The broker then gives instruction to his DP for delivery of the shares to the stock exchange.
7. The broker then receives payment and pay the person for the shares sold.
8. All these transactions are to be completed within 2 days, i.e., delivery of shares and payment received
from the buyer is on a T+2 basis, settlement period.
Depositories
➔ The depository is the apex organisation or unit in the depository system.
◆ Depository is like a bank where a depositor/investor can deposit and withdraw the money/securities.
➔ In a depository, an investor can deposit and withdraw his shares.
➔ Features of Depository
◆ Depository is an institution which holds securities such as shares, debentures, etc.
◆ Depository interacts with the investors through agents called Depository Participants.
◆ DPs can offer services only after obtaining a certificate from SEBI.
◆ Investors have to open depository account with any DP called demat account.
◆ Depository with the help of DPs controls electronic transfer of securities and settlement of transactions.
◆ Depository can hypothecate dematerialised securities against bank loan.
◆ Depository issues receipt of bonus shares in electronic form.
◆ Depository offers nomination facility of demat account.
➔ In India, there are two depositories.
◆ National Securities Depository Limited
● First and largest depository presently operational in India.
● It was promoted as a joint venture of the IDBI, UTI, and the National Stock Exchange
◆ Central Depository Services Limited
● Second depository to commence operations.
● Promoted by the Bombay Stock Exchange and the Bank of India.
➔ A depository participant is an agent of the depository.
◆ An investor interacts with only the DP and not the depository.
◆ It is the vital intermediary in depository system and all buying and selling of shares under depository
system take place through DP only.
◆ Financial institutions, banks, clearing corporations, stock brokers and non-banking finance corporations
are permitted to become depository participants.
◆ If the investor is buying and selling the securities through the broker or the bank or a non-banking
finance corporation, it acts as a DP for the investor and complete the formalities.

National Stock Exchange (NSE)

➔ Incorporated in 1992, recognised as a stock exchange in April, 1993.
➔ Started operations in 1994, with trading on wholesale debt market segment.
➔ Launched capital market segment in November, 1994 and futures and options segment in July, 2000.
➔ managed by professionals, who do not directly or indirectly trade on the exchange.
◆ The trading rights are with the trading members who offer their services to the investors.
◆ The Board of NSE comprises senior executives from promoter institutions and eminent professionals,
without having any representation from trading members.
➔ Objectives:
◆ Establishing a nationwide trading facility for all types of securities.
◆ Ensuring equal access to investors all over the country through an appropriate communication network.
◆ Providing a fair, efficient and transparent securities market using electronic trading system.
◆ Enabling shorter settlement cycles and book entry settlements.
◆ Meeting international benchmarks and standards.
➔ Provided a nation wide screen based automated trading system with a high degree of transparency and equal
access to investors irrespective of geographical location.
➔ Market Segments of NSE
◆ Whole Sale Debt Market Segment
● Provides a trading platform for a wide range of fixed income securities that include central
government securities, treasury bills, state development loans, bonds issued by public sector
undertakings, floating rate bonds, zero coupon bonds, index bonds, commercial paper,
certificate of deposit, corporate debentures and mutual funds.
◆ Capital Market Segment
● Provides an efficient and transparent platform for trading in equity, preference, debentures,
exchange traded funds as well as retail Government securities.
➔ Stock Exchange Index - Nifty
◆ Calculated by taking prices of 50% key stocks listed in NSE.

Bombay Stock Exchange (BSE)

➔ Established in 1875 and was Asia’s first Stock Exchange.
◆ Was established as the Native Share Stock Brokers Association in 1875
 ➔ Was granted permanent recognition under the Securities Contract (Regulation) Act, 1956.
➔ Contributed to the growth of the corporate sector by providing a platform for raising capital.
➔ Even before the actual legislations were enacted, BSE ltd already had a set of rules and regulations to ensure
an orderly growth of the securities market.
➔ BSE has an exchange set up as a corporate entity with a broad shareholder base.
➔ Objectives:
◆ To provide an efficient and transparent market for trading in equity, debt instruments, derivatives, and
mutual funds.
◆ To provide a trading platform for equities of small and medium enterprises.
◆ To ensure active trading and safeguard market integrity through an electronically-driven exchange.
◆ To provide other services to capital market participants, like risk management, clearing, settlement,
market data, and education.
◆ To conform to international standards.
➔ BSE has a global reach with customers around the world.
◆ It has stimulated innovation and competition across all market segments.
➔ It has established a capital market institute, called the BSE Institute ltd, which provides education on financial
markets and vocational training to a number of people seeking employment with stock brokers.
➔ The exchange has about 5000 companies listed from all over the country and outside, and has the largest
market capitalisation in India.
➔ Stock Exchange Index - Sensex
◆ Calculated by taking prices of 30 stocks across key sectors of BSE.

Demutualisation
➔ Separation of ownership and control of stock exchange from trading rights of members.
➔ There is thus a reduction of chances of brokers using stock exchange for personal gain.
➔ Started as earlier brokers used to own, control and manage the stock exchanges, which led to conflicts of
interests between brokers and their clients.

Important Terms
1. Bourses
○ Another word for the stock market
2. Bulls and Bears
○ The term does not refer to animals but to market sentiment of the investors.
○ A Bullish phase refers to a period of optimism and a Bearish phase to a period of pessimism on the
Bourses.
3. Badla
○ This refers to a carry forward system of settlement, particularly at the BSE. It is a facility that allows the
postponement of the delivery or payment of a transaction from one settlement period to another.
4. Odd Lot Trading
○ Trading in multiples of 100 stocks or less.
5. Penny Stocks
○ These are securities that have no value on the stock exchange but whose trading contributes to
speculation.

SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

➔ Set up on 12th April,1988 as an interim administrative body to promote orderly and healthy growth of securities
market and for investor protection.
➔ Promotes orderly and healthy development in stock market.
➔ Granted legal status in May, 1992 t
◆ Has separate legal existence and perpetual succession.
◆ Was granted this status as earlier it used to be a watch dog and could not control or regulate stock
market transactions and activities.
➔ Given a statutory status on 30 January 1992 through an ordinance.
◆ The ordinance was later replaced by an Act of Parliament known as the Securities and Exchange Board
of India Act, 1992.

Reasons for Establishment of SEBI

➔ With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price
rigging, unofficial premium on new issue, delay in delivery of shares, violation of rules and regulations of stock
exchange and listing requirements.
 ➔ Due to these malpractices the customers started losing confidence and faith in the stock exchange.
➔ So government of India decided to set up an agency or regulatory body known as Securities and Exchange
Board of India (SEBI).

Purpose and Role of SEBI

➔ SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of
investors. It was set up to meet the needs of three groups:
◆ Issuers. For issuers it provides a market place in which they can raise finance fairly and easily.
◆ Investors. For investors it provides protection and supply of accurate and correct information.
◆ Intermediaries. For intermediaries it provides a competitive professional market.

Objectives of SEBI
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory
regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

Functions of SEBI
➔ Protective Functions
i. Prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations,
price rigging etc.
ii. Controlling insider trading and imposing penalties for such practices.
iii. Prohibits fraudulent and unfair trade practices.
iv. Undertaking steps for investor protection and education.
v. Promotion of fair practices and code of conduct in securities market.
● Issuance of guidelines to protect the interest of debenture-holders wherein companies cannot
change terms in mid term.
● Empowered to investigate cases of insider trading and has provisions for stiff fine and
imprisonment.
● Stopped the practice of making preferential allotment of shares unrelated to market prices.
➔ Developmental Functions
i. Training of intermediaries of the securities market.
ii. Conducting research and publishing information useful to all market participants.
iii. Undertaking measures to develop the capital markets by adapting a flexible approach.
● Permitted internet trading through registered stock brokers.
● Made underwriting optional to reduce the cost of issue.
● IPO of primary market is permitted through stock exchange.
➔ Regulatory Functions
i. Registration of brokers and sub- brokers and other players in the market.
ii. Registration of collective investment schemes and Mutual Funds.
iii. Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business
in stock exchanges and any other securities market.
iv. Regulation of takeover bids by companies.
v. Calling for information by under- taking inspection, conducting enquiries and audits of stock exchanges
and intermediaries.
vi. Levying fee or other charges for carrying out the purposes of the Act.
vii. Performing and exercising such power under Securities Contracts (regulation) Act 1956, as may be
delegated by the Government of India.

Advisory Committees of SEBI

➔ They are the Primary Market Advisory Committee and the Secondary Market Advisory Committee.
➔ These committees consist of the market players, the investors associations recognised by the SEBI and the
eminent persons in the capital market.
➔ They provide important inputs to the SEBI’s policies.
➔ The objectives of the two Committees:
◆ To advise SEBI on matters relating to the regulation of intermediaries for ensuring investors protection
in the primary market.
◆ To advise SEBI on issues related to the development of primary market in India.
◆ To advise SEBI on disclosure requirements for companies.
 ◆ To advise for changes in legal framework to introduce simplification and transparency in the primary
market.
◆ To advise the board in matters relating to the development and regulation of the secondary market in
the country.
➔ The committees are however non- statutory in nature and the SEBI is not bound by the advice of the
committee.
➔ These committees are a part of SEBI’s constant endeavour to obtain a feedback from the market players on
various issues relating to the regulations and development of the market.
 MARKETING

➔ It is a social process by which individuals and groups obtain what they want through creating, offering and freely
exchanging goods and services for a value with others.
Features of marketing:
➔ Need and wants:
◆ Focuses on the wants and needs of consumer
◆ Needs: basic necessities
◆ Wants: more than needs
◆ Demand: purchasing power to back up wants
➔ Creating market offering:
◆ Offering features of a product like shape, size, colour etc.
◆ Good market offer should keep in mind of needs and wants of consumer
➔ Customer value:
◆ Customers only pay for products from which they derive satisfaction
◆ Producers should add value to their products so consumers prefer it over the competitor
➔ Exchange mechanism:
◆ Marketing involves exchange of goods and services for money or moneys worth

MARKETER
➔ Marketer refers to any person who takes more active part in the process of exchange.
➔ Anybody who takes more active role in the exchange process will be taken as the marketer, be it the seller
convincing the buyer to buy the product or vice versa.

MARKETING PILLARS/ pre conditions for exchange mechanism:

➔ Presence of two parties
➔ Free will of both parties to accept or reject
➔ Both parties should have something valuable to each other
➔ Both parties should communicate and deliver
➔ Both should feel desirable towards the deal

MARKETING MANAGEMENT
➔ Planning, organising, directing and control of the activities which facilitate exchange of goods and services
between producers and consumers or users of products and services.
➔ Focus is on achieving desired exchange outcomes with the target markets.
➔ Involves performance of various functions such as analysing and planning the marketing activities,
implementing marketing plans and setting control mechanism.
➔ Marketing management is not only concerned with creating demand but with managing the demand effectively,
as per the situation in the market.

Marketing and Selling

Marketing Selling

Much wider term consisting of number of activities such as Only part of the process of marketing and is
identification of the customer’s needs, developing products to satisfy concerned with promoting and transferring
these needs, fixing prices and persuading the potential buyers to buy possession and ownership of goods from seller
the same. to the buyer.

Main focus is achieving maximum satisfaction of customer’s needs Main focus is on affecting transfer of title and
and wants. possession of goods from sellers to consumers
or users.

Maximisation of profit through maximisation of customer satisfaction. Maximisation of profit through maximisation of
sales.

Starts before product is produced and continues after product is sold. Starts after product has been developed.

Emphasis is to develop product and other strategies according to Emphasis is on bending the customer according
customer needs. to the product.

Involves strategies in respect of product, promotion, pricing and Involves efforts like persuasion and promotion.
 physical distribution.

Marketing Management Philosophies

➔ Production concept-
◆ Firms that follow this concept believe in producing goods that are inexpensive and easily available
◆ Drawback: customers don't always buy cheap and readily available goods
◆ Main focus: large scale production at lower cost
➔ Product concept:
◆ Firms that follow this concept believe in producing high quality goods
◆ Drawback: customers would purchase these goods only when needed
◆ Main focus: good quality, added features
➔ Selling concept:
◆ Firms that follow this believe customers need to be convinced to buy products hence they adopt intense
selling and promotional efforts
◆ Drawback: customers can be manipulated only once, this form can only work short term
◆ Main focus: sell anything and everything through aggressive promotional techniques
➔ Marketing concept:
◆ Firms that follow this believe the products should be designed and manufactured in such a way keeping
in mind customer wants and needs
◆ Process of marketing concept:
● Identification of target market
● Understanding needs of target market
● Satisfaction of target market more than competitors
● Doing all of this at a profit
➔ Societal concept:
◆ Customer satisfaction should stay within ethical and ecological boundaries.
Basis Production Product Selling Marketing Societal

Starting point Factory Factory Factory Market Market & society

Main focus Quantity of product Quality of product Selling existing Customer Customer
products by hook satisfaction satisfaction within
and crook the tradition of
society

Means Availability and Improvement of Selling and Marketing Marketing

affordability quality promoting techniques techniques

Ends Profit through large Profit through Profit through sales Profit through Profit through
volume of quality of product volume customer customer
production satisfaction satisfaction and
social welfare

FUNCTIONS OF MARKETING
1. Gathering and Analysing Market Information (Market Research)
○ This allows the marketer to identify needs of the customers.
○ He performs a SWOT (strengths, weaknesses, opportunities, threats) analysis to capture and grab
opportunities and prepare policies and plans to overcome their weaknesses and threats.
2. Market Planning
○ The marketer now plans the steps necessary to achieve marketing objectives.
3. Product Designing and Development
○ The product is then developed, with quality, design, type of packing, shape/design, etc. kept in mind.
4. Standardisation and Grading
○ Standardisation refers to maintaining quality standards to achieve uniformity in the market. It provides
assurance and consistency to the consumer.
○ Grading means classifying the product on some bases
i. It is necessary when companies are not strictly following standardisation.
ii. It allows a marketeer to get higher prices for quality product.
5. Packaging and Labelling
○ Packaging refers to the design of different types of packets used for the product.
○ It plays an important role in selling as attractive packaging attracts customers - slent salesman.
 ○ Labelling refers to informative part of packaging - it gives important information to a customer.
6. Branding
○ This refers to giving a special name and image to the product.
○ The brand name must be selected very carefully as the customer’s loyalty depends on the brand name.
7. Customer Support Services
○ Customer support is a very important function of marketing management.
○ A customer will become your permanent customer only when he is satisfied with customer support
services.
8. Pricing of Products
○ This is the most crucial element of marketing as customer is highly price sensitive.
○ The marketer keeps in mind various factors such as objective of firm, demand, competition, etc.
9. Promotion and Selling
○ While offering the goods to the customer, the marketer performs two main functions - promotion and
selling.
○ Promotion includes all the activities which are undertaken to communicate with the customer and
increase the sale.
○ For promotion, the marker performs various functions such as advertising, sales promotion, personal
selling, publicity, etc.
10. Physical Distribution
○ Physical distribution includes decisions like choice of channel of distribution, maintaining inventory,
storage, warehouses, etc.
11. Transportation
○ goods are not consumed at the same place where they are produced.
○ this gap is covered using various modes of transport.
○ The marketer compares various modes of transport on various criteria and selects the best and most
suitable to transport raw materials, inputs and finished goods.
12. Storage and Warehousing
○ Goods must be stored as they not consumed as soon as they are produced.
○ They must also be kept safe from the environment, thefts, etc.
○ Thus the marketer maintains either their own warehouse or makes use of public warehouses to keep
the goods sfe and fresh until there is a demand.

ROLE OF MARKETING
Role in a Firm
➔ Emphasises that customer satisfaction is the key to survival and growth of an organisation in the contemporary
competitive marketing environment.
➔ Helps in focusing activities of an organisation on the needs and wants of the customers.
➔ As a business philosophy, it helps in serving customers by satisfying their needs.

Role in the Economy

➔ Acts as a catalyst in the economic development of a country and helps in raising the standards of living of the
people.
➔ It can inspire people to undertake new activities and to set up enterprises for producing goods that are needed
by the customers.
➔ Helps in overcoming obstacles posed by high prices due to imbalances in levels of production and
consumption.
➔ Linkage between the business and consumption centres, accelerates the economic activity leading to higher
incomes, more consumption and increased savings and investment.

MARKETING MIX
➔ Set of marketing tools that a firm uses to pursue its marketing objectives in a target market.
➔ There are a large number of factors affecting marketing decisions.
◆ Controllable Factors
● Factors which can be influenced at the level of the firm.
◆ Non-Controllable Factors
● Also known as environmental factors.
● Cannot be controllable at firm level.
➔ The controllable variables become marketing tools, which are constantly shaped and reshaped by marketing
managers, to achieve marketing success.
➔ Essence of any marketing endeavour.
Elements
➔ Product
◆ Goods or services or ‘anything of value’ which is offered to the market for sale.
◆ Also relates to benefits offered by it from customers point of view.
◆ Includes the extended product or what is offered to customers by way of sales services, customer
service, repairs, etc.
➔ Price
◆ Amount of money customers have to pay to obtain the product.
◆ Most cases, level of price affect level of demand.
➔ Place/physical distribution
◆ Include activities that make firm’s products available to target customers.
➔ Promotion
◆ Include activities that communicate availability, features, merits, etc. of the products and persuade them
to buy it.

PRODUCT AND PRODUCT MIX

➔ Product:
◆ Tangible or intangible product offered to the customer which is the satisfier of the need.
◆ It is a bundle of utilities from the customer’s point of view.
◆ Has social, functional and psychological benefits.
➔ Product Mix:
◆ Important decisions related to product such as quality, design, packing.
➔ Number of products and items a particular producer offers to the market is known as product assortment.

Classification of Products
➔ Consumers’ Products
◆ Products, which are purchased by the ultimate consumers or users for satisfying their personal needs
and desires are referred to as consumer products.
◆ Classified based on Shopping Efforts Required and Durability factors
◆ Shopping Efforts Required:
Basis Convenience Products Shopping Products Speciality Products

Meaning Those consumer products, Consumer goods, in the Those consumer goods which have
which are purchased frequently, purchase of which buyers certain special features because of
immediately and with least time devote considerable time, to which people make special efforts in
and efforts. compare the quality, price, style, their purchase.
suitability, etc., at several stores,
before making final purchase.

Features Purchased at convenient Purchases of shopping products Demand is limited as a relatively

locations, with least time and are generally pre-planned and small number of people buy these
efforts. there is little degree of impulse products.
buying in these products
Regular and continuous demand After sales services are very
(generally essential products) important.

Small unit of purchase and low Unit price as well as margin of Available at sale at few places as the
prices. profit is generally high, thus number of customers is small and are
customers compare similar willing to take extra efforts in the
Standardised price. products before purchase. purchase of these products

High competition. Generally durable in nature. Generally costly and unit price is high.

Sales promotion schemes or Retailers play an important role An aggressive promotion is required
short-term incentives play an as there is a lot of persuasion for the sale of speciality products, in
important role in marketing them. required to convince the buyers. order to inform people about their
availability, features, etc.
➔ Durability Products
◆ Non-Durable Products
● Consumer products which are normally consumed in one or few uses.
● Generally command a small margin, should be made available in many location and need to be
heavily advertised.
 ◆ Durable Products
● Tangible consumer products which normally survive many uses.
● Command a higher price per unit margin, requires greater personal-selling efforts, guarantees
and after-sales services.
◆ Services
● Intangible activities, benefits or satisfactions, which are offered for sale.
● Characteristics:
○ Intangible.
○ Inseparable from its source.
○ Cannot be stored.
○ Highly variable as their type and quality depends on the person providing them.
➔ Industrial Products
◆ Those products, which are used as inputs in producing other products.
◆ Characteristics:
● Limited number of buyers as compared to consumer goods.
● Made with help of shorter channels of distribution.
● Markets are highly concentrated geographically.
● Demand is derived from demand of consumer goods.
● Technical considerations have greater significance in their purchase since these products are
complex.
● Stimulates reciprocal buying.
● Leasing is a more common practice than purchase.
◆ Classification

Branding
➔ Identification of a product in the form of name, symbol, design, etc; done to make your product more superior
than a competitor’s product.
➔ Seller’s promise to deliver quality and satisfier of buyer’s expectations.
➔ Various terms related to brand
◆ Brand
● Name, term, sign, symbol, design or some combination of them, used to identify the
products—goods or services of one seller or group of sellers and to differentiate them from
those of the competitor.
◆ Brand name
● That part of a brand, which can be spoken.
◆ Brand mark
● That part of a brand which can be recognised but which is not utterable is called brand mark
◆ Trade mark
● A brand or part of a brand that is given legal protection is called trademark
➔ Qualities/features of a good brand name
◆ Short and simple
◆ Easy to pronounce
◆ Suggestive of products utility
◆ Unique and distinctive
◆ Meaning in other languages
◆ Should be capable of being registered and legally protected.
 ◆ Chosen name should never go out of date.
➔ Advantages of brand name
◆ Helps in product differentiation.
◆ Helps in advertising.
◆ Differential pricing.
◆ Easy introduction of new product.
➔ Advantages to a customer
◆ Helps in identification of product.
◆ Ensures quality.
◆ Status symbol.
Packaging
➔ Set of tasks or activities which are concerned with the designing, production of an appropriate wrapper,
container or bag for the product.
➔ Levels of packaging
◆ Primary packaging is the immediate packaging of the product, and it remains with the product until the
consumer is ready to use it.
◆ Secondary packaging is additional packaging which give more protection, and is generally thrown when
the consumer starts using the product.
◆ Transportation packaging is used during storage/transportation of goods, and is used to provide extra
protection.
➔ Importance of Packaging
◆ Due to rising standards of health and sanitation, people have started purchasing packaged goods as
the chances of adulteration in these is minimised.
◆ Due to rise in self-service outlets, the traditional role assigned to personal selling has gone to
packaging.
◆ Innovational opportunities in packaging have changed marketing and features of the products being
sold.
◆ Packaging allows for product differentiation.
➔ Functions/features of packaging
◆ Helps in identification of products.
◆ Protects product from damage ,spoilage, leakage, pilferage, climatic effect, especially during storage
and transportation.
◆ Size and shape of the packaging facilitates convenient handling and usage of the product.
◆ Attractive and innovative packaging acts as a silent salesman and assists in product promotion and
marketing.
Labelling
➔ Refers to putting identification marks on package.
➔ It is a carrier of information.
➔ Product labels can be simple (local items) or elaborate (reputed brands use this to provide full information).
➔ Functions/features of labelling
◆ Describe the product and specify its contents, as the manufacturer cannot communicate with each and
every consumer personally.
◆ Provide identification of the product and brand, which will ultimately play a major role in persuading the
consumer to purchase the product.
◆ Helps in grading of products according to different features or qualities of the product.
◆ Helps in promotion of the product by carefully designing the label to be attractive and informative.
◆ Provides information required by the law such as declarations of ingredients used in food items or
issuing necessary safety warnings.

PRICE AND PRICE MIX

➔ Price
◆ Amount of money paid by a buyer in consideration of the purchase of a product or service.
◆ Usually as a regulator of demand of a product.
◆ Effective competitive weapon.
➔ Price Mix
◆ Important decisions related to fixing of price of a commodity.
◆ These decisions can be related to price of competitors, decisions related to demand, decisions related
to fixing cost, etc.
Factors kept in mind while pricing a commodity/service
➔ Product costs
 ◆ There are three types of costs that the firm has to keep in mind while pricing its products:
● Fixed costs, which are costs that do not vary with level of activity of the firm.
● Variable costs, which are costs that vary in direct proportion with the level of activity.
● Semi Variable Costs, which are costs that vary with the level of activity but not in direct
proportion with it.
◆ Keeping these costs in mind, the firm tries to achieve a high profit margin while maintaining customer
satisfaction.
➔ Pricing objectives
◆ Main pricing objectives of the firm are:
● Profit maximisation.
● Obtaining market share leadership by keeping its price low so that more people are attracted to
purchase the products.
● Surviving in a competitive market by reducing their price by offering discounts.
● Attaining product quality leadership due to which generally high prices are charged to cover the
cost and high cost of research and development
➔ Extent of competition in market
◆ The price will tend to reach the upper limit in case there is lesser degree of competition while under
conditions of free competition, the price will tend to be set at the lowest level.
◆ Competitors’ prices and their anticipated reactions must be considered before fixing the price of a
product.
◆ Not only the price but the quality and the features of the competitive products must be examined
carefully, before fixing the price.
➔ Customer’s demand and utility
◆ When demand of the product is inelastic i.e., no or very less substitutes are available then company
can fix up high price, whereas when demand is elastic i.e., more substitutes are available then price
has to be brought down.
◆ On the other hand, if product is highly demanded then price can be high but at the time of low demand
price has to be brought down.
◆ If product is offering higher utility one can easily charge high price as customer is ready to pay high
price if he gets high value from the product. Whereas if utility is low, you cannot charge high price.
➔ Government and legal regulation
◆ In order to protect the interest of public against unfair practices in the field of price fixing, Government
can intervene and regulate the price of commodities.
◆ Government can declare a product as essential product and regulate its price.
➔ Marketing methods used
◆ Price fixation process is also affected by other elements of marketing.

PLACE AND PLACE MIX

➔ Place
◆ Set of decisions that need to be taken in order to make the product available.
◆ Place element is a process by which the goods are transferred from the place of production to the place
of consumption.
➔ Physical distribution
◆ Physical handling and movement of goods from place of production to the place of distribution.
◆ Covers all the activities required to physically move goods from manufacturers to the customers.
➔ Place mix
◆ Important decisions related to physical distribution of goods and services.
Channels of distribution
➔ Set of firms and individuals that take title, or assist in transferring title, to particular goods or services as it
moves from the producers to the consumers.
◆ Channel refers to a team of merchants, agents, and business institutions that combine physical
movement and title movement of products to reach specific destinations
➔ Functions of distribution channels
◆ Middlemen assist in sorting the large variety of products received into homogenous groups on the basis
of various factors.
◆ Accumulation of goods into larger homogeneous stocks, which help in maintaining continuous flow of
supply.
◆ Allocation involves breaking homogenous stock into smaller, marketable lots.
◆ Middlemen build assortment of products for resale, but there is usually a difference between the
product lines made by manufacturers and the assortment or combinations desired by the users.
 ◆ Middlemen also participate in certain promotional activities such as demonstrations, special displays,
contests, etc., to increase the sale of products.
◆ Channels negotiate with manufacturers and customers so that transfer of ownership is properly
affected.
◆ They take risks as they assume the ownership of the goods.
➔ Types of channel/distribution levels
◆ Zero level channel/direct channel
● Straight and direct relationship is established between the manufacturer and the customer.
◆ Indirect channel
● Manufacturer employs one or more intermediary to move goods from the point of production to
the point of consumption.
● Forms:
○ One-level channel
○ Two-level channel
○ Three-level channel

➔ Factors determining choice of channels

◆ The type of product significantly determines the type of distribution channel used.
● Industrial, perishable, convenience and complex products typically use direct channels while
consumer, non-perishable, high-value and non-complex products utilise longer channels and
networks.
◆ The important company characteristics affecting the choice of channels of distribution include the
financial strength of the company and the degree of control it wants to hold on other channel members.
● Direct channels are costlier than indirect channels.
● If the management wants greater control on channel members then direct channels are used
but if they do not need such large control, they utilise longer channels.
◆ The choice of channel is also affected by the channel selected by competitors in the same industry.
◆ Important market factors affecting the choice of channel of distribution include size of market,
geographical concentration of potential buyers and quantity purchased
● If the market is smaller or concentrated, shorter channels are used and vice versa.

Components/decisions of physical distribution

➔ Order processing
◆ Products flow from manufacturers to customers via channel members while orders flow in the reverse
direction, from customers to the manufacturers.
◆ A good physical distribution system should provide for an accurate and speedy processing of orders, in
the absence of which goods would reach the customers late or in wrong quantity or specifications.
➔ Transportation
◆ Transportation is the means of carrying goods and raw materials from the point of production to the
point of sale.
◆ It is important because unless the goods are physically made available, the sale cannot be completed.
➔ Warehousing
◆ Warehousing refers to the act of storing and assorting products in order to create time utility in them.
◆ The basic purpose of warehousing activities is to arrange placement of goods and provide facilities to
store them.
◆ The need for warehousing arises because there may be difference between the time a product is
produced and the time it is required for consumption.
 ●Generally the efficiency of a firm in serving its customers will depend on where these
warehouses are located and where are these to be delivered
◆ The firm has to strike a balance between the cost of warehousing and the level of customer service.
➔ Inventory
◆ Higher the level of inventory, higher will be the level of service to customers but the cost of carrying the
inventory will also be high because lot of capital would be tied up in the stock.
◆ With advancements in computers and information technology the need for keeping higher inventory is
reducing and the new concept of Just-in- Time-Inventory decision is becoming popular in an increasing
number of companies.
◆ Maintenance of stock of goods
◆ Factors determining level of inventory
● Firm’s policy on customer service
● Degree of accuracy of sales forecast
● Responsiveness of distribution system
● Cost of inventory

PROMOTION AND PROMOTION MIX

➔ Promotion
◆ Use of communication with the twin objective of informing potential customers about a product and
persuading them to buy it.
● Important element of marketing mix by which marketers makes use of various tools of
communication to encourage exchange of goods and services in the market.
➔ Promotion mix
◆ Promotion mix refers to combination of promotional tools used by an organisation to achieve its
communication objectives.

Advertising
➔ Most commonly used tool of promotion.
➔ Impersonal form of communication, which is paid for by the marketers (sponsors) to promote some goods or
service.
➔ Standard/common messages regarding metrits, price and availability of product or service is given.
➔ The most common modes of advertising are ‘newspapers’, ‘magazines’, ‘television’, and ‘radio’.
➔ Features
◆ Paid Form
● Advertising is a paid form of communication, i.e., the sponsor has to bear the cost of
communicating with the prospects.
◆ Impersonality
● There is no direct face-to-face contact between the prospect and the advertiser.
● It is therefore, referred to as impersonal method of promotion.
● Advertising creates a monologue and not a dialogue.
◆ Identified Sponsor
● Advertising is undertaken by some identified individual or company, who makes the advertising
efforts and also bears the cost of it.
➔ Advantages
◆ Reach.
● Advertising can reach a large market.
● As through various media of advertising there is benefit of mass reach.
◆ Choice.
● There is wide variety of media available for advertising for video, audio, visual audio, print
media etc.
● Under each category large variety is available.
● This variety or choice helps the marketer to select the media, keeping in mind the target
customer.
◆ Legitimacy.
● In advertisement the messages regarding the product or service are given publicly to
customers so there is always a proof for it and customers believe that publicly the company will
not give false information of the product.
● The customer feels comfortable to buy a product which is widely advertised.
◆ Expressiveness.
 ●Advertising provides enough opportunities to marketers to dramatise the message with the help
of drawings, colours, pictures, music, dance etc.
● They can easily express the use of product through various techniques, and can add
multimedia effect also.
◆ Economy.
● It is always felt that advertising increases the cost of product or service but advertising is
considered economical as compared to other promotional techniques because it reaches
masses and if we calculate cost per customer it is very low or nominal.
◆ Enhancing customer satisfaction and confidence.
● Customer feel more assured about quality and feel more comfortable if sponsors claim these
benefits in advertising.
➔ Limitations
◆ Less Forceful
● Advertising is an impersonal form of communication. It is less forceful than the personal selling
as there is no compulsion on the prospects to pay attention to the message.
◆ Lack of Feedback
● The evaluation of the effectiveness of advertising message is very difficult as there is no
immediate and accurate feedback mechanism of the message that is delivered.
◆ Inflexibility
● Advertising is less flexible as the message is standardised and is not tailor made to the
requirements of the different customer groups.
◆ Low Effectiveness
● As the volume of advertising is getting more and more expanded it is becoming difficult to make
advertising messages heard by the target prospects. This is affecting the effectiveness of
advertising.
➔ Objections to Advertising
◆ Adds to Costs
●
◆ Undermines Social Values
●
◆ Confuses to Buyers
●
◆ Encourages Sale of Inferior Products
●
◆ Some Advertisements are in Bad Test
●

Sales Promotion
➔ Short term use of incentives or other promotional activities that stimulate the customer to buy the product.
➔ Very useful because they bring:
◆ Short and immediate effect on sale.
◆ Stock clearance is possible with sales promotion.
◆ Sales promotion techniques induce customers as well as distribution channels.
◆ Sales promotion techniques help to win over the competitor.
➔ Merits
◆ Attention Value:
● Sales promotion activities attract attention of the people because of the use of incentives.
◆ Useful in New Product Launch:
● Sales promotion tools can be very effective at the time of introduction of a new product in the
market.
● It induces people to break away from their regular buying behaviour and try the new product.
◆ Synergy in Total Promotional Efforts:
● Sales promotion activities are designed to supplement the personal selling and advertising
efforts used by a firm and add to the over all effectiveness of the promotional efforts of a firm.
➔ Limitations
◆ Reflects Crisis:
● If a firm frequently rely on sales promotion, it may give the impression that it is unable to
manage its sales or that there are no takers of its product.
◆ Spoils Product Image:
● Use of sales promotion tools may affect the image of a product.
 ●
The buyers may start feeling that the product is not of good quality or is not appropriately
priced.
➔ Commonly used Sales Promotion Activities
◆ Rebate:
● Offering products at special prices, to clear off excess inventory.
◆ Discount:
● Offering products at less than list price.
◆ Refunds:
● Refunding a part of price paid by customer on some proof of purchase, say on return of empty
foils or wrapper.
● This is commonly used by food product companies, to boost their sales.
◆ Product combinations:
● Offering another product as gift along with the purchase of a product.
◆ Quantity gift:
● Offering extra quantity of the product commonly used by marketer of toiletry products.
◆ Instant Draws and assigned gift:
◆ Lucky Draw:
◆ Usable Benefit:
◆ Full finance @ 0%:
● Many marketers of consumer durables such as electronic goods, automobiles etc offer easy
financing schemes such as ‘24 easy instalments, Eight Up Front and 16 To Be Paid as Post
Dated Cheques’.
● However, one should be careful about the file charges, which sometimes is nothing but interest
recovered in advance.
◆ Sampling:
● Offer of free sample of a product, say a detergent powder or tooth paste to potential customers
at the time of launch of a new brand.
◆ Contests:
● Competitive events involving application of skills or luck, say salving a quiz or answering some
questions.

Personal Selling
➔ Involves oral presentation of message in the form of conversation with one or more prospective customers for
the purpose of making sales.
➔ It is a personal form of communication.
➔ Companies appoint salespersons to contact prospective buyers and create awareness about the product and
develop product preferences with the aim of making sale.
➔ Features
◆ Personal Form:
● In personal selling a direct face-to-face dialogue takes place that involves an interactive
relationship between the seller and the buyer.
◆ Development of Relationship:
● Personal selling allows a salesperson to develop personal relationships with the prospective
customers, which may become important in making sale.
➔ Merits
◆ Flexibility:
● There is lot of flexibility in personal selling. The sales presentation can be adjusted to fit the
specific needs of the individual customers.
◆ Direct Feedback:
● As there is direct face-to-face communication in personal selling, it is possible to take a direct
feed back from the customer and to adapt the presentation according to the needs of the
prospects.
◆ Minimum Wastage:
● The wastage of efforts in personal selling can be minimised as company can decide the target
customers before making any contact with them.
➔ Importance of Personal Selling to Businessmen
◆ Effective Promotional Tool:
● Personal selling is very effective promotional tool, which helps in influencing the prospects
about the merits of a product and thereby increasing its sale.
◆ Flexible Tool:
 ●Personal selling is more flexible than other tools of promotion such as advertising and sales
promotion. It helps business persons in adopting their offer in varying purchase situations.
◆ Minimises Wastage of Efforts:
● Compared with other tools of promotion, the possibility of wastage of efforts in personal selling
is minimum. This helps the business persons in bringing economy in their efforts.
◆ Consumer Attention:
● There is an opportunity to detect the loss of consumer attention and interest in a personal
selling situation. This helps a business person in successfully completing the sale.
◆ Lasting Relationship:
● Personal selling helps to develop lasting relationship between the sales persons and the
customers, which is very important for achieving the objectives of business.
◆ Personal Rapport:
● Development of personal rapport with customers increases the competitive strength of a
business organisation.
◆ Role in Introduction Stage:
● Personal selling plays very important role in the introduction stage of a new product as it helps
in persuading customers about the merits of the product.
◆ Link with Customers:
● Sales people play three different roles, namely persuasive role, service role and informative
role, and thereby link a business firm to its customers.
➔ Importance of Personal Selling to Customers
◆ Help Identifying Needs:
● Personal selling helps the customers in identifying their needs and wants and in knowing how
these can best be satisfied.
◆ Latest Market Information:
● Customers get latest market information regarding price changes, product availability and
shortages and new product introduction, which help them in taking the purchase decisions in a
better way.
◆ Expert Advice:
● Customers get expert advice and guidance in purchasing various goods and services, which
help them in making better purchase.
◆ Induces Customers:
● Personal selling induces customers to purchase new products that satisfy their needs in a
better way and thereby helps in improving their standards of living.
➔ Importance of Personal Selling to Society
◆ Converts Latest Demand:
● Personal selling converts latest demand into effective demand. It is through this cycle that the
economic activity in the society is fostered, leading to more jobs, more incomes and more
products and services. That is how economic growth is influenced by personal selling.
◆ Employment Opportunities:
● Personal selling offers greater income and employment opportunities to the unemployed youth.
◆ Career Opportunities:
● Personal selling provides attractive career with greater opportunities for advancement and job
satisfaction as well as security, respect, variety, interest and independence to young men and
women.
◆ Mobility of Sales People:
● There is a greater degree of mobility in sales people, which promote travel and tourism in the
country.
◆ Product Standardisation:
● Personal selling increases product standardisation and uniformity in consumption pattern in a
diverse society.

Basis Advertising Personal Selling

Form Impersonal form of communication. Personal form of communication.

Flexibility Less flexible as standardised messages are Flexible messages can be changed according
used. to type of customers.

Reach Reaches masses. Only limited number of customers can be

 contacted.

Cost Cost per person is less as at it covers large Cost per person is high at a time limited
number of people. members can be contacted.

Coverage Covers market in short time. Takes long time to cover market.

Use of mass media Makes use of mass media. Do not make use of mass media.

Feedback No direct feedback can be obtained. Direct feedback can be collected by

salesman.

Useful for More useful for standardised and customer More useful for industrial and customised
products. products.

Public Relation
➔ Maintaining public relations with public, which creates goodwill.
➔ Evaluate public attitudes, identify the policies and procedures of an organisation with the public interest to earn
public understanding and acceptance.
➔ The consumers’ group is the most important part of public as success of business depends upon the support
and demand of customers only.
➔ Role of Public Relations
◆ Press relations:
● Information about the organisation needs to be presented in a positive manner in the press.
● Generating news requires skill in developing and researching a story and getting the media to
accept press releases is a difficult task.
● The public relations department is 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.
◆ Product publicity:
● New products require special effort to publicise them and the company has to sponsor such
programmes.
● The public relations department manages the sponsoring of such events.
● The company can draw attention to new products by arranging sports and cultural events like
news conferences, seminars and exhibitions.
◆ Corporate communication:
● The image of the organisation needs to be promoted through communicat-ing with the public
and the employees within the organisation.
● This is usually done with the help of newsletter, annual reports, brochures, articles and
audio-visual materials.
● Companies rely on these materials to reach and influence their target markets.
● Speeches by the company’s executives at a meeting of trade associations or trade fairs can
really boost the company’s image.
● Even interviews with TV channels and responding to queries from the media go a long way in
promoting public relations.
◆ Lobbying:
● The organisation has to deal with government officials and different ministers in charge of
corporate affairs, industry, finance with respect to policies relating to business and the
economy.
● The government also seeks to maintain a healthy relationship with associations of commerce
and industry and solicits the opinion of major stakeholders while formulating industrial, telecom,
taxation policies, etc.
● The public relations department then has to be really proactive in promoting or decoding
regulations that affect them.
◆ Counselling:
● The public relations department advises the management on general issues which affect the
public and the position the company would like to the take on a particular issue.
● The company can build goodwill by contributing money and time to certain causes like
environment, wildlife, children’s rights, education, etc.
● Such cause-related activities help in promoting public relations and building goodwill.
 ➔ Ways/methods and tools of public relations
◆ News
● Sometimes companies get involved in such king of activities or make such policies so that they
get some positive coverage in news.
◆ Speeches
● The speeches given by the leaders of corporate sectors influence various members of public
specially banks, shareholders etc.
● Public relations department creates occasion when the speeches are delivered by the leader of
company.
◆ Events
● Events refer to organising press conferences, multimedia presentation, matches, stage shows
etc.
◆ Written material
● Sometimes written materials such as Balance Sheet, Annual Reports, Special documents,
Brochures, etc., are circulated to various parties to improve and maintain public image of the
company.
◆ Public service activities
● Big business houses often associate themselves with various social service projects such as
women welfare programmes, charity shows, up-keeping of parks, planting trees on road side,
training schools, running schools, colleges, hospitals, etc.
➔ Helps in achieving the following marketing objectives:
◆ Building awareness:
● Public relations department can place stories and dramatise the product in the media.
● This will build marketplace excitement before the product reaches the market or media
advertising takes place.
● This usually creates a favourable impression on the target customer.
◆ Building credibility:
● If news about a product comes in the media whether print or electronic it always lends
credibility and people believe in the product since it is in the news.
◆ Stimulates Salesforce:
● It becomes easier for the sales force to deal with the retailers and convince dealers if they have
already heard about the product in the news before it is launched.
● Retailers and dealers also feel it is easier to sell the product to the ultimate consumer.
◆ Lowers promotion costs:
● Maintaining good public relations costs much less than advertising and direct mail.
● However, it requires a lot of communication and interpersonal skills to convince the media to
give space or time for the organisation and its product.

Publicity
➔ Non-personal form of communication.
➔ Takes place when favourable news is presented in the mass media about a product or service.
➔ Features:
◆ Publicity is an unpaid form of communication. It does not involve any direct expenditure by the
marketing firm; and
◆ There is no identified sponsor for the communication as the message goes as a news item.
➔ However, a firm can’t use publicity to actively promote its products.
◆ As a medium of promotion, it is not within the control of a marketing firm.
◆ The media would cover only those pieces of information, which are news worthy and which symbolise
some achievement in the field.
 CONSUMER PROTECTION
➔ Consumers are said to be the king in a free market economy. The earlier approach of ‘caveat emptor’ (let the
buyer beware) has been changed to ‘caveat venditor’ (let the seller beware).
➔ With the growing competition and to push up the sales, businessmen indulge in exploitative and unfair trade
practices which include supply of defective and unsafe products, adulteration, false and misleading advertising,
hoarding, black marketing, etc. so there arises the need for providing protection to consumers.
➔ Consumer Protection is thus the protection of consumers from unscrupulous, exploitative and unfair trade
practices of manufacturers, sellers, traders, service providers, etc.

Consumer - Definition
➔ A consumer is generally understood as a person who uses or consumes goods or avails any service.
➔ Under the Consumer Protection Act, a consumer is defined as:
◆ Any person who buys any goods for a consideration.
◆ Any person who hires or avails any service for a consideration.

IMPORTANCE OF CONSUMER PROTECTION

➔ Consumer protection has a wide agenda. It not only includes educating consumers about their rights and
responsibilities, but also helps in getting their grievances redressed.
➔ It not only requires judicial machinery for protecting the interests of consumers but also requires the consumer
associations for protection and promotion of their interests.
➔ At the same time, consumer protection has a special significance for businesses too.

Importance from a Consumers’ Point of View

1. Consumers are ignorant about their rights and reliefs available to them and thus it becomes necessary to
educate them to achieve consumer awareness.
2. Consumers are typically unorganised, and thus need to be organised in the form of consumer organisations
which would take care of their interests.
3. Consumers need protection against unscrupulous, exploitative and unfair trade practices like defective and
unsafe products, adulteration, false and misleading advertisement, hoarding, black marketing, etc.

Importance from a Business’ Point of View

1. Enlightened businesses realise that satisfied customers lead to repeat sales and provide good feedback to
prospective customers, keeping a long-term interest in the business.
2. Since a business uses society’s resources, they have a responsibility to supply such products and render
such services which are in public interest and would not impair public confidence in them.
3. Business organisations make money by selling goods and providing services to consumers. Thus, consumers
form an important group among the many stakeholders of business and like other stakeholders, their interest
has to be well taken care of, and so a business must take care of its social responsibility.
4. It is the moral duty of any business to take care of consumer’s interest and avoid any form of their exploitation.
Thus, a business must avoid unscrupulous, exploitative and unfair trade practices.
5. A business engaging in any form of exploitative trade practices would risk the intervention of the government,
which can spoil the image of the business. Businessmen should be voluntarily involved in the activities which
protect the interest of consumer.
6. Businessmen can create and retain customers only by satisfying and protecting the interest of consumer. The
customer is the foundation of business.

DIFFERENT ACTS FOR CONSUMER SAFETY

Indian Contract Act of 1872
➔ This act lays down the conditions in which the promises made by parties to a contract will be binding to each
other.
➔ It specifies the remedies available to parties in case of breach of contract.

The Sale of Goods Act 1930

➔ This act provides some safeguards and reliefs to the buyers of goods, in case the goods purchased do not
comply with implied conditions or warranties.

Essential Commodities Act of 1955

➔ This act aims at controlling production, supply and distribution of essential commodities, checking their prices
and ensuring equal distribution.
➔ It takes action against anti-social activities, black marketing and hoarders.
Agricultural Produce Act of 1937
➔ This act prescribes the grading and marking standards for agricultural commodities and livestock products.
➔ The quality mark provided under this act is AGMARK (Agricultural Market).

The Prevention of Food Adulteration Act 1954

➔ This act checks the adulteration of food articles and ensures their purity to maintain public healthy.

The Standards of Weight and Measures Act 1976

➔ It provides protection to consumers against the malpractice of underweight or under measure and even
measure and even numbers.

The Trademark Act of 1999

➔ It replaced Trade and Merchandise Mark Act of 1958.
➔ It prevents fraudulent marks on products and thus provides protection to consumers against such products.

The Competition Act of 2002

➔ It replaced the Monopolies and Restrictive Trade Practices Act of 1969.
➔ It provides protection to the consumer in case of practices adopted by business firms which hamper competition
in the market.

The Bureau of Indian Standard Act of 1986

➔ It was set up for formulation of quality standards for goods and their certification through BIS certification
scheme (ISI scheme).

The Consumer Protection Act 1986

➔ Enactment of Consumer Protection Act 1986 was one of the most important steps taken to protect the interest
of consumer.
➔ The provision of the act came into force from July 1, 1987. The main features of this act are:
◆ This act has provided various rights and responsibilities to consumers.
◆ It provides safeguard to customers against defective goods, deficients, services, unfair trade practices
and other forms of their exploitation.
◆ The act has provided three tier redressal agencies where consumer can file complaints. These are
district forum, state commission and national commission.

Consumer Rights
According to the Consumer Protection Act, a customer has the following rights:
1. Right to safety
a. Right to be protected against goods and services which are hazardous for health.
b. This includes concern for customer’s long-term interest and present requirement.
c. These products should be ISI marked.
2. Right to information
a. Right to know about information about the product like ingredients price, directions to use etc.
b. The producer must supply all relevant information at a suitable place.
3. Right to make choice
a. Freedom to choose from wide variety
b. Producers provide a large range in terms of quality, size etc.
c. The producer should not force the customer to buy a particular brand only.
4. Right to be heard or Right to representation
a. Right to represent himself or to be heard or right to advocate has interest.
b. It includes right to representation in the government and other policy making bodies.
c. Companies must have complaint cells to attend to the complaint cells of customers.
5. Right to seek redressal
a. Right to get relief in case a product or service falls short of his/her expectations or against unfair trade
practices or any other exploitation.
b. Compensation can be in the form of money or replacement of goods or repair of the defect as per the
satisfaction of the customer.
6. Right to consumer education
a. It is the right of consumer to acquire the knowledge and skills to be informed about their rights and
remedies.
Other than these, there are two additional rights recommended by the UNO:
(i) Right to basic needs
(ii) Right to healthy environment

CONSUMERS’ RESPONSIBILITIES
1. Consumer must exercise his rights under the CPA.
2. The consumer must not blindly believe the words of the seller - he must insist on getting full information about
the goods or service.
3. Filing complaints for the redressal of genuine grievances will lead to producers being more conscious about
supplying quality products. However a consumer must not exaggerate the loss or defects of the good.
4. Consumer must be quality conscious and look for quality marks such as ISI, Agmark, ISO, etc.
5. Do not be carried away by advertisements - the consumer should compare the actual use of the product with
the use shown in the advertisement and incase of any discrepancy must bring it to the notice of the advertiser.
6. Insist on cash memo so that there is evidence of a purchase in case of any complaint.
7. Form consumer societies which could play an active part in educating consumers and safeguarding their
interest.
8. Respect the environment, avoid waste littering and contribution to pollution.
9. Discourage black marketing, hoarding and choose only legal goods and services.
10. Be aware of variety of goods and services available in market.

MARKS INDICATING QUALITY ON DIFFERENT PRODUCTS

Name Logo Brief

ISI (Mark of Bureau of Indian on consumer durable products,

Standards) electronic items, etc.

Agmark on agricultural commodities and

livestock product

BIS Mark (Hallmark) on gold jewellery

Woolmark signifies 100% pure wool

Eco Mark for environmental friendly products

FSSAI (Food Safety and Standards on food and edible items

Authority of India)

FPO on all processed fruit products

WHO CAN FILE A COMPLAINT?

➔ A complaint before the appropriate consumer forum can be made by:
◆ Any consumer can file a complaint on his/her own and does not need the services of advocate/
professionals;
◆ Any registered consumers’ association;
◆ The Central Government or any State Government;
 ◆ One or more consumers, on behalf of numerous consumers having the same interest; and
◆ A legal heir or representative of a deceased consumer.
◆ A complaint under Section 2 (b) of the Consumer Protection Act 1986

REMEDIES/RELIEFS AVAILABLE TO CONSUMER ON COMPLAINTS FILED BY HIM

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 pay punitive damages in appropriate circumstances.
6. To discontinue the unfair/ restrictive trade practice and not to repeat it in the future.
7. Not to offer hazardous goods for sale.
8. To withdraw the hazardous goods from sale.
9. To cease manufacture of hazardous goods and to desist from offering hazardous services.
10. 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 organisation/person, to be utilised in the prescribed
manner.
11. To issue corrective advertisement to neutralise the effect of a misleading advertisement.
12. To pay adequate costs to the appropriate party.

REDRESSAL AGENCIES UNDER CPA 1986

Basis District Forum State Commision National Commision

Composition It consists of a president and It consists of a president and not It consists of a president and
two other members; one of less than two other members; one of atleast four other members and
the members has to be a the members has to be a woman. one of the member has to be a
woman. woman.

Who can be a A working or retired Judge of A working or retired Judge of High A working or retired Judge of
president District Court. Court. Supreme Court.

Appointment The president is appointed by The president is appointed by the The president is appointed by the
of a president the state government on the state government after consultation central government after
recommendation of the with the Chief Justice of the High consultation with the Chief justice
selection committee Court. of India.

Jurisdiction Entertain complaints where Entertain complaints where the Vices exceeds ₹1 crore.
the value of goods or services value of goods or services exceed
does not exceed ₹20 lakhs. ₹20 lakhs upto ₹1 crore.

Appeal Any person who is aggrieved Any person who is aggrieved by the Any person who is aggrieved by
against orders by the order of the District order of State Commision can the order of the National
Forum can appeal against appeal against such order to Commission can appeal against
such order to State National Commission within 30 such order to Supreme Court
Commission within 30 days days. within 30 days. Only cases where
value of goods or services
exceeds ₹1 crore can file appeal
in Supreme Court.

ROLE OF CONSUMER ORGANISATIONS AND NGOs

➔ In India, there are about 500 consumer organisations working in the field of consumer protection.
◆ Consumer Guidance Society of India (Mumbai), Citizen Action Group (Mumbai), Consumer Education
and Research Centre (CERC) Ahmedabad, Common Cause (New Delhi), Consumer Unity and Trust
Society (CUTS), etc.
➔ These associations perform the following functions:
◆ Educating the villagers/general public about consumer rights by organising training programmes,
seminars and workshops.
◆ Publishing periodicals and other publications to impart knowledge about consumer problems, reliefs
available and other matters of interest.
◆ Carrying out comparative testing of consumer products in accredited laboratories to test relative
qualities of competing brands and publishing the test results for the benefit of consumers.
◆ Encouraging consumers to strongly protest and take an action against exploitative and unfair trade
practices of sellers.
◆ Providing legal assistance to consumers by way of providing aid, legal advice, etc., in seeking legal
remedy.
◆ Filing complaints in consumer courts on behalf of consumers.
◆ Taking an initiative in filing cases in consumer courts in the interest of the villagers/general public, not
for any individual.
◆ Helping government agencies to resolve cases of consumer exploitation and to carry on consumer
awareness programs.
◆ Motivating people to ask for quality marks such as ISI mark, Agmark, etc.